4i suppose the bank of canada sells a member bank a 3000...

4i) Suppose the Bank of Canada sells a member bank a $3,000 security, the desired reserve ratio is 20 percent, banks hold no excess reserves, and all loans are redeposited. How is the money supply affected? a. The money supply increases by less than $15,000. b. The money supply decreases by less than $15,000. c. The money supply increases by $15,000. d. The money supply decreases by $15,000. 4ii) If the reserve ratio is 10 percent and a bank receives a new deposit of $20, what happens to the bank's reserves in the longer term? a. Reserves increase by $2. b. Reserves increase by $18. c. Reserves increase by $20. d. Reserves increase by $200.

Transcript

00:01 So the way to tackle these problems is to make sure that you can draw a t -account for the financial sector, right? so a t -account is a depiction of the banking sector's assets and liabilities.

00:14 And these usually look something like this, right? so we have reserves and we have, let's say, loans.

00:23 And these are counterbalanced by deposits, right, in the easiest way.

00:29 So let's just come up with a simple bank, right? deposits are 100, reserves are 20%, so reserves are 20, and loans are 80, right? so the deposits have been used to make loans and hold cash in reserve.

00:42 Now, this is going to be in thousands.

00:44 So the bank of canada is going to sell a security.

00:49 So the security has to be bought with cash.

00:51 So the reserves here go to 17 and you end up with a security worth three on the balance sheet instead.

00:59 This is how the bank of canada is affecting things.

01:02 But you can see that this here is not compatible.

01:05 Right in this case the deposits need to shrink considerably and that means the loans need to shrink considerably as well so now we have 85 and 85 right this is what happens to the balance sheet and you see that this has been the change in the money supply right so the money supply is equal to currency plus plus deposits, right, as opposed to the monetary base.

01:39 And this now here has gone down by 15.

01:43 So my answer here is d, decreases by 15 ,000, right? in general, right, the money multiplier is going to be 1 over 1 minus the reserve ratio here, which is going to be 5, and that's multiplying the original 3.

02:08 So that's question for one.

02:11 If i do for two, we're going to do something very, very similar...

Question

Please give Ace some feedback