The following are simplified consolidated balance sheets for the chartered banking system and the Bank of Canada.Do not cumulate your answers;that is,do return to the data given in the original balance sheets in answering each question.Assume a desired reserve ratio of 5 percent for the chartered banks.All figures are in billions of dollars.
CONSOLIDATED BALANCE SHEET: CHARTERED BANKING SYSTEM
BALANCE SHEET: BANK OF CANADA

-Refer to the above information.Suppose the Bank of Canada buys $2 in securities from the public.As a result of this transaction,the supply of money will:
A) directly increase by $2 and the money-creating potential of the chartered banking system will increase by $38.
B) directly increase by $40 and the money-creating potential of the chartered banking system will increase by $800.
C) directly increase by $2 and the money-creating potential of the chartered banking system will be unaffected.
D) be unaffected but the money-creating potential of the chartered banking system will increase by $40.

Question

The following are simplified consolidated balance sheets for the chartered banking system and the Bank of Canada.Do not cumulate your answers;that is,do return to the data given in the original balance sheets in answering each question.Assume a desired reserve ratio of 5 percent for the chartered banks.All figures are in billions of dollars.
CONSOLIDATED BALANCE SHEET: CHARTERED BANKING SYSTEM
  BALANCE SHEET: BANK OF CANADA
 
-Refer to the above information.Suppose the Bank of Canada buys $2 in securities from the public.As a result of this transaction,the supply of money will:
A) directly increase by $2 and the money-creating potential of the chartered banking system will increase by $38. 
B) directly increase by $40 and the money-creating potential of the chartered banking system will increase by $800. 
C) directly increase by $2 and the money-creating potential of the chartered banking system will be unaffected. 
D) be unaffected but the money-creating potential of the chartered banking system will increase by $40.

Quizplus · Accepted Answer

When the Bank of Canada buys securities, it directly increases the money supply by the amount of the purchase, $2. The money-creating potential of the banking system increases by a multiple of the initial increase, depending on the reserve ratio. If the reserve ratio is 5%, the potential increase is $38.

The Following Are Simplified Consolidated Balance Sheets for the Chartered