Consider the following situation in the Canadian banking system:
∙ An investment dealer withdraws $10 million from its account at Bank XYZ to
purchase government securities from the Bank of Canada.
∙ As a result,$10 million has been withdrawn from the Canadian banking system.
∙ The target reserve ratio for all banks is 10%.
∙ All commercial banks operate with no excess reserves.
∙ There is no cash drain.
TABLE 26-5
-Refer to Table 26-5.Bank XYZ is immediately in a position to

Question

Quizplus · Accepted Answer

When the investment dealer withdraws $10 million from Bank XYZ, the bank loses $10 million in reserves. The target reserve ratio is 10%, so the bank needs to hold $1 million in reserves for every $10 million in deposits. Since Bank XYZ operates with no excess reserves, it must decrease its loans by the amount of the lost reserves ($10 million x 0.10 = $1 million), which is $9 million. Therefore, choice C is the correct answer.

Consider the Following Situation in the Canadian Banking System