Suppose the central bank of Narnia purchases $10 million of government securities from the people what is the amount and direction of change in Narnia's money supply?

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justaguide eNotes educator| Certified Educator

There are many options available with the Central Bank of a nation that can be used to influence the money supply. One of these is referred to as open market operations that involve the Central Bank buying or selling government securities. When a sale of government securities is made the money supply in the nation decreases as cash moves from those buying the securities to the Central bank. On the other hand money supply can be increased by a reverse operation of buying back government securities from the public.

If the Central bank of Narnia buys $10 million of government securities from the Narnian people there is an increase in the money supply equal to $10 million. Cash moves from the Central bank to the people for them to spend.