Task 1: How does the money supply change as a result of (a) an increase in the discount

rate, (b) an open market purchase, (c) an increase in the required reserve ratio?
Answer: In macroeconomics, the money supply refers to the total volume of money held by
the public at a particular point in time in an economy. There are several ways to define
"money", but standard measures usually include currency in circulation and demand deposits.
The relationship between money and prices has historically been associated with the quantity
theory of money. There is strong empirical evidence of a direct relationship between the
growth of the money supply and long-term price inflation, at least for rapid increases in the
amount of money in the economy.

a) An increase in the discount rate

The discount rate (base rate) is an interest rate charged by a central bank to banks for short-
term loans. For example, if a central bank increases the discount rate, the cost of borrowing
for the banks increases. Subsequently, the banks will increase the interest rate they charge
their customers. Thus, the cost of borrowing in the economy will increase, and the money
supply will decrease.

 (b) An open market purchase,

The central bank can either purchase or sell securities issued by the government to affect the
money supply. For example, central banks can purchase government bonds. As a result,
banks will obtain more money to increase the lending and money supply in the economy.
When the central bank engages in open market operations, it buys or sells government
securities, bonds. Open market purchases expand the monetary base, thereby raising the
money supply.

(c) An increase in the required reserve ratio:

Central banks usually set up the minimum amount of reserves that must be held by a
commercial bank. By changing the required amount, the central bank can influence the
money supply in the economy. If monetary authorities increase the required reserve amount,
commercial banks find less money available to lend to their clients and thus, money supply
decreases.

Task 2: What does it mean to say that the Bangladesh Bank (central bank of Bangladesh)
acts as “lender of last resort?

Answer: Bangladesh Bank, as a central bank, or monetary authority, is the banking institution
granted the exclusive privilege to lend the government its currency. Like a normal
commercial bank, Bangladesh Bank charges interest on the loans made to borrowers,
primarily the government, and to other commercial banks, typically as a 'lender of last resort'.
The role of the central bank as lender of last resort makes the creation of credit easier by
boosting confidence in the banking system. However, a central bank is distinguished from a
normal commercial bank because it has the monopoly on creating the currency, which is
loaned to the government in the form of legal tender. It is a bank that can lend money to other
banks in times of need. Its primary function is to provide the nation's money supply, but more
active duties include controlling subsidized-loan interest rates, and acting as a lender of last
resort to the banking sector during times of financial crisis.