a) 3 points

Let the desired reserve ratio be 5%. Assume Jessica received $900 from her grandparents and she deposited the cash into her chequing account at Bank XYZ.What is the effect on:

i)Bank XYZ's excess reserves immediately after the deposit,

ii)money supply and monetary baseif Bank XYZ does not hold any excess reserves.

b) 4 points

Assume Bank of Canada wants to decrease the money supply through open market operations. It knowschartered banks hold only 7% of their deposits as desired reserves.

i. Bank of Canada will conduct an Open Market Sale or Open Market Purchase of securities?

ii. Assume the open market operation you chose in i)is worth $500 million of securities. Explain the effect of this operation onsecuritiesheld by Bank of Canada and the participating bank (Bank XYZ).

iii. Explain the effect onReservesand theMonetary Base

iv. What is the effect on Money Supply?