[8 marks] The chartered banks want to hold 5% of deposits as reserves. There are no leakages from the monetary system (no cash drain, c = 0) 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 (T-bills) on the bond market as part of an open market operation. Indicate the changes in the following balance sheets which result from this open market operation (A) [3 marks] after cheques have cleared but before the chartered banks have had an opportunity to adjust their loans to maximize profits and (B) [3 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 = a4 =

a2 = a5 =

a3 = a6 =

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 = b6 = b11 =

b2 = b7 = b12 =

b3 = b8 = b13 =

b4 = b9 = b14 =

b5 = b10 =

C. [2 marks] Calculate the change in money supply resulting from this open market operation.