Consider the following situation in the Canadian banking system: • The Bank of Canada purchases $5 million worth of government securities
From an investment dealer with a cheque drawn on the Bank of Canada.
• The dealer deposits this cheque at Bank XYZ,a commercial bank.
• The target reserve ratio for all commercial banks is 25%.
• All commercial banks operate with no excess reserves.
• There is no cash drain.
TABLE 26-4
Refer to Table 26-4.Suppose the public decides to hold 5% of their deposits in cash - that is,there is now a cash drain of 5%.As a result of the new deposit,the money supply would eventually

Question

Quizplus · Accepted Answer

With a 25% reserve ratio and a 5% cash drain, the money multiplier is calculated as 1 / (Reserve Ratio + Cash Drain Ratio) = 1 / (0.25 + 0.05) = 1 / 0.30 = 3.33. Therefore, the initial $5 million deposit can increase the money supply by $5 million * 3.33 = $16.67 million.

Consider the Following Situation in the Canadian Banking System: •