The State Bank of Pakistan is worried that COVID-19 is creating an aggregate demand (spending by firms and households) shock due to negative consumer sentiments. It wants to inject liquidity into the market.

a.Explain what it means to inject liquidity into the market [3]

b.How could the SBP achieve this objective using open market operations? [2]

c.If the reserve ratio is currently 15%, and the SBP wants to change money supply by Rs. 75 million, what quantity of bonds would be required to achieve this target? [3]

d.Explain the difference between the SBP open market operation required in part c and the target money supply of Rs.75 million. [4]

e.Explain the channel (variable) that is affected by this open market operation which causes this increase in aggregate demand to increase [4]

f.Why would the SBP want to raise aggregate demand anyway? [4]