Suppose someone decides to deposit $1000 previously held as cash into a bank in the Canadian banking system. Suppose all banks in the system have a target reserve ratio (rr) of 5 percent but business and household holdings of cash are independent of their deposit holdings.
a) Explain how and by how much total bank deposits in the system will change as a result of this new cash deposit.
b) Explain how and by how much total bank loans will change.
c) Define the money supply.
d) What is the eventual change in the money supply as a result of this new cash deposit?
e) Explain how and by how much total deposits in the system would have changed as a result of the new $1,000 deposit if business and households held a ratio of cash to deposits of 10 percent.

Question

Quizplus · Accepted Answer

The Answer of Suppose someone decides to deposit $1000 previously held as cash into a bank in the Canadian banking system. Suppose all banks in the system have a target reserve ratio (rr) of 5 percent but business and household holdings of cash are independent of their deposit holdings.
a) Explain how and by how much total bank deposits in the system will change as a result of this new cash deposit.
b) Explain how and by how much total bank loans will change.
c) Define the money supply.
d) What is the eventual change in the money supply as a result of this new cash deposit?
e) Explain how and by how much total deposits in the system would have changed as a result of the new $1,000 deposit if business and households held a ratio of cash to deposits of 10 percent.

Suppose Someone Decides to Deposit $1000 Previously Held as Cash