Question

Skills Check: Skills Check: Money & Banking Money & Banking 11. Why does a bank prefer to make loans rather than keep reserves? 14. Complete the statement with increase or decrease When the Bank of Canada buys bonds, it 12. If the reserve ratio is 0.2, the and a the money supply deposit of $100.00 is made into a bank, that bank will lend out 15. Complete the statement with sale or purchase 13. If the reserve ratio is 0.2, the simplified will lead to a An open market reduction of reserves in chartered banks. money multiplier will be Skills Check: Skills Check: Money& Banking Money& Banking 18.As the year 2000 approached, many industrial nations suggested that they should engage in 'Jubilee' an ancient Hebrew tradition of debt-forgiveness. 16. Describe how shifting government deposits from the CIBC to the Bank of Canada reduces the money supply. If Canada forgave the debt owned to it from many of the world's poorest nations, what would be the effect on the assets liabilities, and net worth of any Canadian banks holding these loans? 17. What is the bank rate?

Answer 1

1. A bank first borrows money from the lenders and then gives loans to the borrowers which increases both it's assets and liabilities. However, it is affected by the reserve requirements of the central bank. But in general commercial bank first gives loans and then look on the reserve requirements, but it is mandatory that they look for the reserves.

2. $ 80.00

3. Money multiplier =1/reserve ratio = 1/0.2= 5%

4. Increase (increase in bond demand =increase in bond price =reserves get added to banking system =increase in money supply and decrease in interest rate)

5. Sale

6. When deposits get shifted from CBIC to bank of Canada. The amount of money in the circulation of Canada reduces. It will further decrease money supply and increase interest rate in the country.

7. Bank rate is that minimal rate of a country at which the central bank of the country lends money to the commercial banks of that particular country. It is decided by the central bank of that country. 8. The 'Jubilee' is a well known approach in which the an approach was presented that developed countries should forgive debts held by developing countries. If Canada do so it's debtors will get reduced so that it's total assets will decrease. If the loans get collected then Canada could use that fund in it's own country which definitely increases its liability. As a result it's net worth which is total assets minus total liabilities decreases.