Neco 2023 Economics Question 8

The Central Bank of Nigeria is reviewing its monetary stance. The following data are given for the current quarter: - Required reserve ratio (RRR) = 10% of demand deposits. - Currency‑to‑deposit ratio (c) = 0.25 (i.e., the public holds 25% of total money as cash). - The Central Bank injects a cash injection of ₦500 million into the banking system through open‑market purchase of government securities. - Commercial banks decide to hold excess reserves equal to 2% of total deposits. Answer the following: a) Calculate the theoretical money multiplier (m) for this economy. b) Determine the maximum possible increase in the money supply (ΔM) resulting from the cash injection, assuming the excess‑reserve behaviour described. c) Discuss briefly how the change in money supply is likely to affect (i) the prevailing interest rate and (ii) inflation, using the liquidity‑preference framework and the quantity‑theory of money respectively.