Question
In the table below you will find simplified consolidated balance sheets for the chartered banking system and the Bank of Canada. Use columns 1-3 to
In the table below you will find simplified consolidated balance sheets for the chartered banking system and the Bank of Canada. Use columns 1-3 to indicate how the balance sheets would read after each of transactions in parts (a) to (c) is completed. Do not cumulate your answers; that is, analyze each transaction separately, starting in each case from the numbers provided. All accounts are in billions of dollars. a. A decline in the bank rate prompts chartered banks to borrow an additional $3 billion from the Bank of Canada. Show the new balance-sheet figures in column 1 of each table. b. The Bank of Canada sells $5 billion in securities to the public, who pay for the bonds with cheques. Show the new balance sheet figures in column 2 of each table. c. The Bank of Canada buys $4 billion of securities from chartered banks. Show the new balance sheet numbers in column 3 of each table. Instructions: All answers below are to be entered as whole numbers.
Consolidated Balance Sheet: All chartered banks (billions of dollars) | ||||
(1) | (2) | (3) | ||
Assets: | ||||
Cash reserves | $33 | $ | $ | $ |
Securities | 60 | |||
Loans | 60 | |||
Liabilities: | ||||
Demand deposits | $150 | $ | $ | |
Advances from Bank of Canada | 3 |
Balance Sheet: Bank of Canada (billions of dollars) | ||||
(1) | (2) | (3) | ||
Assets: | ||||
Securities | $60 | $ | $ | $ |
Advances to chartered banks | 3 | |||
Liabilities: | ||||
Reserves of chartered banks | $33 | $ | $ | $ |
Government of Canada deposits | 3 | |||
Notes in circulation | 27 |
d. Now review all of the above 3 transactions, asking yourself these three questions: (1) What change, if any, took place in the money supply as a direct and immediate result of each transaction? (2) What increase or decrease in chartered banks cash reserves took place in each transaction? (3) Assuming a desired reserve ratio of 20 percent, what change in the money-creating potential of the chartered banking system occurred as a result of each transaction? Transaction a: 1. The money supply: _____ (decreased, did not change, increased) 2. Reserves: _____ (increased, decreased) from $33 to $___ billion. 3. Money-creating potential (decreased, increased) by $___ billion. Transaction b: 1. The money supply _____ (increased, did not change, increased) by $___ billion. 2. Reserves _____ (decreased, increased) from $33 to $___ billion. 3. Money-creating potential (increased, decreased) by $___ billion. Transaction c: 1. The money supply _____ (decreased, did not change, increased) 2. Reserves _____ (decreased, increased) from $33 to $___ billion. 3. Money-creating potential (increased, decreased) by $___ billion.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started