26. Consider the following situation in the Canadian banking system:•The Bank of Canada purchases $5 million worth of government securities from an investment dealer with a cheque drawn on the Bank of Canada. •The dealer deposits this cheque at Bank XYZ, a commercial bank.•The target reserve ratio for all commercial banks is 20%.•All commercial banks operate with no excess reserves.•There is no cash drain.Bank XYZ is immediately in a position to expand its loans by $1 million. $5 million. $25 million. $4 million. $3.75 million.

The given information: The Bank purchases $5 million The reserve ratio is 25%

Answered: Consider the following situation in the…

Economics For Today

10th Edition

ISBN:9781337613040

Author:Tucker

Publisher:Tucker

Chapter25: Money Creation

Section: Chapter Questions

Problem 6SQ

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26. Consider the following situation in the Canadian banking system:

•	The Bank of Canada purchases $5 million worth of government securities

from an investment dealer with a cheque drawn on the Bank of Canada.

•	The dealer deposits this cheque at Bank XYZ, a commercial bank.

•	The target reserve ratio for all commercial banks is 20%.

•	All commercial banks operate with no excess reserves.

•	There is no cash drain.

Bank XYZ is immediately in a position to expand its loans by

		$1 million.
		$5 million.
		$25 million.
		$4 million.
		$3.75 million.

Definition Definition Capital reserves held by banks or financial institutions over and above the reserves that are required to be maintained by the regulator toward its liabilities and for internal controls. For commercial banks, excess reserve is the amount over the standard reserve as decided by the central bank. These excess reserve funds are available in the form of cash and cash equivalents.

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