Use the following to answer questions:
-(Table: Assets and Liabilities of the Banking System)Refer to Table: Assets and Liabilities of the Banking System.Suppose that the reserve ratio is 10% and the Bank of Canada buys $25 000 worth of Canadian Treasury bills from the banking system.If the banking system does NOT want to hold any excess reserves,_____ will be added to the money supply.

Question

Use the following to answer questions: 
-(Table: Assets and Liabilities of the Banking System)Refer to Table: Assets and Liabilities of the Banking System.Suppose that the reserve ratio is 10% and the Bank of Canada buys $25 000 worth of Canadian Treasury bills from the banking system.If the banking system does NOT want to hold any excess reserves,_____ will be added to the money supply.

Quizplus · Accepted Answer

If the Bank of Canada buys $25,000 worth of Canadian Treasury bills, the banking system gains $25,000 in reserves. However, the banking system must hold 10% of these new reserves as required reserves. Therefore, the banking system can loan out $22,500 of the $25,000 gained in reserves. The money multiplier in this economy is 1/0.1 = 10, so $22,500 in excess reserves can create $225,000 in new money. Thus, the total increase in the money supply is $225,000 + $25,000 = $250,000.

Use the Following to Answer Questions