Chartered Financial Analyst Level 1

Chartered Financial Analyst Level 1

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When a central bank sells government bonds to commercial banks, the effect on broad money growth is:



Explanation:

When a central bank sells government bonds to commercial banks, the reserves of the commercial banks decline. This reduction in reserves diminishes their ability to extend loans (i.e., create credit) to households and corporations. Consequently, broad money growth decreases due to the money multiplier mechanism. This aligns with the tools used to implement monetary policy and the monetary transmission mechanism, illustrating the relationship between monetary policy and economic variables such as growth, inflation, interest, and exchange rates.