Waec Model Questions Vol1 2023 Economics Question 8

The Central Bank of Nigeria (CBN) has the following monetary data for the current quarter (all values are in ₦ billions): - Reserve requirement (required reserve ratio) = 10 %. - Commercial banks are holding excess reserves equal to 2 % of total deposits. - Monetary base (MB) = 500. - The CBN decides to purchase government securities worth 100, crediting the sellers' bank reserves. Answer the following: a) Calculate the theoretical simple money multiplier and the actual money multiplier after accounting for excess reserves. b) Using the actual multiplier, determine the change in the total money supply (M1) that results from the open‑market purchase. c) Discuss two potential short‑run macro‑economic effects of this increase in the money supply on (i) inflation and (ii) interest rates, referring to the liquidity‑preference theory. d) Suppose the CBN later raises the reserve requirement to 12 % while all other conditions remain unchanged. Explain qualitatively how this change would affect the money multiplier and the transmission of monetary policy.