Question
4 (a ) Suppose a Canadian commercial bank pays $15 million to the Bank of Canada (BOC) today to cover the principle and interest that
4 (a ) Suppose a Canadian commercial bank pays $15 million to the Bank of Canada (BOC) today to cover the principle and interest that it owes to the BOC fora loan that it obtained from the BOC the previous day. Show the impact of this payment on balance sheets of the commercial bank and the BOC.
(b) In a separate transaction suppose a tax payment of $25 million is made to the Government of Canada. Show the impact that this transaction would have on the balance sheets of the commercial bank and the BOC.
(c ) As a result of the transactions in part (a) and (b), what action would the BOC have to undertake in order to maintain the equilibrium overnight interest rate iONat the BOC's target level iT? Briefly explain with the aid of a diagram.
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