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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. Suppose the public decides to hold 5% of their deposits in cash – that is, there is now a cash drain of 5%. As a result of the new deposit, the money supply would eventually (a) increase by $16.67 million (b) increase by $20 million

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. Suppose the public decides to hold 5% of their deposits in cash – that is, there is now a cash drain of 5%. As a result of the new deposit, the money supply would eventually (a) increase by $16.67 million (b) increase by $20 million

Economics: Private and Public Choice (MindTap Course List)
Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter13: Money And The Banking System
Section: Chapter Questions
Problem 8CQ
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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. Suppose the public decides to hold 5% of their deposits in cash – that is, there is now a cash drain of 5%. As a result of the new deposit, the money supply would eventually (a) increase by $16.67 million (b) increase by $20 million (c) decrease by $16.67 million (d) decrease by $8.33 million (e) decrease by $20 million
Transcribed Image Text: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. Suppose the public decides to hold 5% of their deposits in cash – that is, there is now a cash drain of 5%. As a result of the new deposit, the money supply would eventually (a) increase by $16.67 million (b) increase by $20 million (c) decrease by $16.67 million (d) decrease by $8.33 million (e) decrease by $20 million
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