Question
[6 marks] The chartered banks want to hold 5% of deposits as reserves. There are no leakages from the monetary system and the only type
[6 marks] The chartered banks want to hold 5% of deposits as reserves. There are no leakages from the monetary system and the only type of bank account in the economy is a demand deposit with a chartered bank.
The Bank of Canada purchases $5,000,000 worth Treasury Bills on the bond market as part of an open market operation. Indicate the changesin the following balance sheets which result from this open market operation (A) [2 marks] after cheques have cleared but before the chartered banks have had an opportunity to adjust their loans to maximize profits and (B) [2 marks] after the chartered banks have fully adjusted to maximize their profits. Explicitly note all changes in assets and liabilities with a number and a description, for example: x3 = +$5 million in T-Bills.
Table for Part A. After cheques have cleared but before the chartered banks have had an opportunity to adjust their loans to maximize profits:
Bank of Canada |
| Chartered Banks |
| Public | |||
Assets | Liabilities |
| Assets | Liabilities |
| Assets | Liabilities |
|
|
|
|
|
|
|
|
a1 | a2 |
| a3 | a4 |
| a5 |
|
|
|
|
|
|
| a6 |
|
a1 = ? ; a2 = ?; a3 = ? etc.
Table for Part B. After the chartered banks have fully adjusted to maximize their profits:
Bank of Canada |
| Chartered Banks |
| Public | |||
Assets | Liabilities |
| Assets | Liabilities |
| Assets | Liabilities |
|
|
|
|
|
|
|
|
b1 | b2 |
| b3 | b4 |
| b9 |
|
|
|
|
|
|
| b10 |
|
|
|
| b5 | b6 |
|
|
|
|
|
|
|
|
| b11 | b12 |
|
|
| TOTALS: |
| TOTALS: | ||
|
|
| b7 | b8 |
| b13 | b14 |
b1 = ?; b2 = ?; b3 = ? etc.
Part C. [2 marks] Calculate the change in money supply resulting from this open market operation.
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