Question
[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
[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.
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