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Suppose the Bank of Canada Purchases $10,000 of Government Bonds

Question 135

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Suppose the Bank of Canada purchases $10,000 of government bonds from you and that you deposit the $10,000 into your chequing account deposit at Bank Y.Assume that Bank Y has no excess reserves at the time you make your deposit and that the desired reserve ratio is 20 percent.
a.Use a T-account to show the initial effect of this transaction on Bank Y's balance sheet.
b.Suppose that Bank Y makes the maximum loan they can from the funds you deposited.Use a T-account to show the initial effect on Bank Y's balance sheet from granting the loan.Also include in this T-account the transaction from question (a.).
c.Now suppose that whoever took out the loan in question (b)writes a cheque for this amount and that the person receiving the cheque deposits it in Bank Z.Show the effect of these transactions on the balance sheet of Bank Y and Bank Z, after the cheque has been cleared.On the T-account for Bank Y, include the transactions from questions (a)and (b).
d.What is the maximum increase in chequing account deposits that can result from your $10,000 deposit? What is the maximum increase in the money supply? Explain.

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a.Bank Y's chequing account deposits and...

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