Question
Consider a one-time open market sales of $10000 values of bonds by the Bank of Canada to the First Bank. Suppose banks hold no excess
Consider a one-time open market sales of $10000 values of bonds by the Bank of Canada to the First Bank. Suppose banks hold no excess reserves and the desired reserve ratio is 5% and non-bank general public holds no cash such that the cash-to-deposit ratio is 0.
a. Show the Balance Sheets of the Bank of Canada and the First Bank immediately after such open market operation.
b. Find the money multiplier numerically. How will the monetary base and money supply change after all (infinite) rounds of "money creation/destruction"? How will the amount of reserves held by banks changed?
c. Show the changes in the Balance Sheets of the banking system, the Bank of Canada and the (non-bank) general public after all (infinite) rounds of "money creation/destruction".
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