Suppose the Bank of Canada sells $10 million in government securities to a chartered bank.And suppose the desired reserve ratio is 0.2.What is the maximum amount by which chequable deposits in the banking system could change?

Question

Quizplus · Accepted Answer

When the Bank of Canada sells $10 million in securities, it reduces the reserves of the banking system by $10 million. With a reserve ratio of 0.2, the money multiplier is 1/0.2 = 5. Therefore, the maximum decrease in chequable deposits is $10 million * 5 = $50 million.

Suppose the Bank of Canada Sells $10 Million in Government