Neco Model Questions Vol1 2022 Economics Question 8

Country Y’s central bank is attempting to curb rising inflation. The following monetary‑policy actions have been taken in the current quarter: - The statutory reserve requirement was increased from 8% to 10%. - Commercial banks held excess reserves of 200 billion naira before the change. - The central bank sold 150 billion naira of government securities in an open‑market operation. - The discount (policy) rate was raised from 5% to 6%. Assume that the money multiplier is given by the reciprocal of the reserve‑requirement ratio and that the only source of reserves is the excess reserves mentioned above. Answer the following: a) Calculate the theoretical change in the money supply resulting from the increase in the reserve‑requirement ratio. b) Determine the immediate change in the money supply caused by the open‑market sale of securities. c) Explain how the increase in the discount rate reinforces the other measures in controlling inflation, and evaluate which of the three tools (reserve‑requirement change, open‑market sale, discount‑rate increase) is likely to have the greatest short‑run impact on the money supply.