Assume the Bank of Canada sells $1000 worth of government bonds to Paul,who deposits the money in the First National Bank.If the desired reserve ratio is 25 percent,what effect will this transaction have?

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The sale of bonds by the Bank of Canada reduces the money supply by $1000. The deposit of the proceeds in the First National Bank increases the bank's reserves by $1000. The desired reserve ratio is 25%, so the bank must hold $250 in reserves against the new deposit. This leaves $750 in excess reserves, which can be used to make new loans. However, the new loans will eventually lead to an increase in the money supply by $4000, as the money is deposited in other banks and the process repeats itself.

Assume the Bank of Canada Sells $1000 Worth of Government