2. The Bank of Canada and the money supply Suppose the money supply (as measured by chequable...
Question:
2. The Bank of Canada and the money supply
Suppose the money supply (as measured by chequable deposits) is currently $850 billion. The required reserve ratio is 20%. Banks hold $170 billion in reserves, so there are no excess reserves.
The Bank of Canada wants to decrease the money supply by $42.5 billion, to $807.5 billion. It could do this through open-market operations or by changing the required reserve ratio. Assume for this question that you can use the simple money multiplier.
If the Bank of Canada wants to decrease the money supply using open-market operations, it should________ billionworth of Canadian government bonds.
If the Bank of Canada wants to decrease the money supply by adjusting the required reserve ratio, it should_______ the required reserve ratio.