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-(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 sells $11 000 worth of Canadian Treasury bills to the banking system.If the banking system does NOT have any excess reserves,_____ will be _____ the money supply.

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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 sells $11 000 worth of Canadian Treasury bills to the banking system.If the banking system does NOT have any excess reserves,_____ will be _____ the money supply.

Quizplus · Accepted Answer

If the Bank of Canada sells $11 000 worth of Canadian Treasury bills to the banking system, the banking system's reserves will decrease by $11 000 x 0.10 (reserve ratio) = $1 100. Since the banking system does not have any excess reserves, the decrease in reserves will cause a multiple contraction of the money supply. Using the money multiplier formula, the change in the money supply will be:
Change in money supply = (1/reserve ratio) x change in reserves
= (1/0.10) x (-$1 100)
= -$11 000
Thus, the money supply will be subtracted by $11 000 when the Bank of Canada sells $11 000 worth of Canadian Treasury bills to the banking system.

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