(a) The Central Bank (C.B) sells 3 million (M) of securities to the Non-Banking Public:
- Impact on Aggregate Bank Reserve: The sale of securities by the Central Bank to the Non-Banking Public results in a decrease in the Aggregate Bank Reserve. When the Non-Banking Public purchases the securities, they pay the Central Bank using their reserves, causing a reduction in the overall reserves held by banks.
- Impact on Monetary Base: The Monetary Base, which includes currency in circulation and reserves, decreases as a result of this transaction. The reduction in the Aggregate Bank Reserve leads to a decrease in the reserves component of the Monetary Base.
(b) A commercial bank sells 3 million (M) of securities to investors:
- Impact on Aggregate Bank Reserve: The sale of securities by a commercial bank to investors leads to a decrease in its own reserves. As the bank receives payment for the securities, its reserves decrease, affecting the Aggregate Bank Reserve.
- Impact on Monetary Base: The Monetary Base decreases due to this transaction. As the commercial bank's reserves decrease, the overall reserves in the banking system also decrease, causing a reduction in the Monetary Base.
(c) The Central Bank sells 1.2 million (M) of securities in an open market operation to a commercial bank:
- Impact on Aggregate Bank Reserve: The sale of securities by the Central Bank to a commercial bank results in a decrease in the commercial bank's reserves. The bank pays the Central Bank for the securities, leading to a reduction in its reserves.
- Impact on Monetary Base: The Monetary Base decreases due to this transaction. As the commercial bank's reserves decrease, the reserves in the banking system decrease, causing a reduction in the Monetary Base.
In summary, the impact of these events on Aggregate Bank Reserve and the Monetary Base is as follows:
- In all three cases, the sale of securities leads to a decrease in Aggregate Bank Reserve, as banks' reserves are affected.
- Similarly, the Monetary Base decreases in all three cases due to the reduction in the reserves component caused by the sale of securities.
These transactions are examples of how open market operations and securities sales can influence both the reserves held by banks (Aggregate Bank Reserve) and the broader monetary supply (Monetary Base).