5. Suppose the Bank of Canada buys $5 million worth of government securities from BMO,

a commercial bank.

a) Using T-account analysis, show what happens to the balance sheets of the BoC and

BMO immediately.

b) If BMO does not want to hold any excess reserves, it will make more loans. Show the

change for its balance sheet reflecting this lending.

c) Using T-account analysis, show what happens to the balance sheet of the BMO when the

borrower withdraws cash from BMO.

d) What is the net change for the balance sheet of BMO after the withdrawal? Show the T-

account.

6. (This question follows Q5.) Use the following notation: C is currency in circulation

outside banks, R is bank reserves, D is deposits, L is loans, MB is the monetary base, M is

total money supply, r is the required reserve ratio, and c is the currency-to-deposit ratio.

Assume c = 0.05 and r = 0.2. Suppose all commercial banks hold zero excess reserves.

Following the $5 million open market purchase, what will be the change of C, R, D, L, MB

and M after the money supply process is completed? Calculate:

m = ________________________

C = _______________________

R = _______________________

D = _______________________

L = _______________________

MB = _____________________

M = ______________________