Suppose the desired reserve ratio is 10 percent.And suppose the Bank of Canada reduces excess reserves by $100,000.How could chequable deposits be affected, assuming no bank holds excess reserves and nobody withdraws cash?

Question

Quizplus · Accepted Answer

When the Bank of Canada reduces excess reserves by $100,000 and the reserve ratio is 10%, banks will have to reduce their lending by $1 million to maintain the required reserves, leading to a decrease in chequable deposits by $1 million. This is because, with a 10% reserve ratio, every dollar of reserves supports $10 of deposits. Reducing reserves by $100,000 thus reduces the potential for deposits by $1 million.

Suppose the Desired Reserve Ratio Is 10 Percent