Question
NEED ASAP WILL RATE HIGH Consider an open market purchase of $20,000 by the Bank of Canada. a. If the Bank purchases the bonds from
NEED ASAP WILL RATE HIGH
Consider an open market purchase of $20,000 by the Bank of Canada.
a. If the Bank purchases the bonds from a private bank (First Bank), show the T-accounts of the Bank of Canada and the First Bank. How do the monetary base and reserves change?
b. If the First Bank initially holds no excess reserves and its desired reserve ratio is 5%, how much of the $20,000 will the First Bank lend out (assume it lends out all excess reserves)?
c. The loan from First Bank eventually reaches a saver. If the saver puts half of the amount into deposit with Bank A and holds half as cash, show the T-account of Bank A.
d. If Bank A again initially holds no excess reserves and its desired reserve ratio is 5%, how much of Bank A lend out of the deposits it obtains (assume it lends out all excess reserves)?
e. Suppose the process goes on with Bank B, Bank C, ..., all having desired reserve ratio of 5% and all the savers put half the amount in deposit and hold half in cash. (Assume all banks lend out all excess reserves.) Show in a table the change in Deposits, change in loans and change in reserves in private banks for each round of deposit-creation (Show 4 rounds). Show in a table the change in deposits and change in currency for the general public for each round of deposit and currency creation. (Show 4 rounds)
f. Use the sum of a geometric series, find the change in deposits after infinite rounds of money creation. Find also the change in money supply and the change in cash in circulation.
g. Use the formula derived in class to verify your findings in (f).
h. After all (infinite) rounds of money creation, show the T-accounts of the banking system, the Bank of Canada and the general public
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