In the simple deposit expansion model, a decline in chequable deposits of $500 when the desired reserve ratio is equal to 20 percent implies that the Bank of Canada ________.

Question

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According to the simple deposit expansion model, the change in deposits is determined by the desired reserve ratio and the initial injection of funds. Since the deposits have declined by $500 and the desired reserve ratio is 20%, this implies that the initial injection of funds was $2,500 (500/0.2). To bring the reserves back up to the desired reserve ratio, the Bank of Canada would need to sell government bonds. The amount of bonds that needs to be sold is equal to the excess reserves held by the banks, which is $500 (2,500 - 2,000). Since the Bank of Canada sells bonds to remove reserves from the banking system, the correct answer is B, meaning it sold $100 in government bonds.

In the Simple Deposit Expansion Model, a Decline in Chequable