Question

Hello,

I need help with #4

Thanks

7 3.0 10.0 8 2.0 a) Calculat b) if c) If government deficit is $1 illion instead, explain the change in the real interest rate and investments. ethe equilibrium real interest rate, investment, and private saving nment surplus is $1 billion, explain the change in the real interest rate and investments. you deposit $2000 in currency into your chequing account at a branch of Bank of eposit. Also 4. Suppose that Montreal, which we will assume has no excess reserves at the time you make your d assume that the desired reserve ratio is 0.20, or 20 percent. a) Use a balance sheet to show the initial impact of this transaction on BMO's balance sheet b) Suppose that BMO makes the maximum loan it can from the funds you deposited. Using a balance sheet, show the initial impact of granting the loan on BMO's balance sheet. Now suppose that whoever took out the loan in part (b) writes a cheque for this amount and that the person receiving the cheque deposits it in a branch of CIBC. Show the effect of these transactions on the balance sheets of BMO and CIBC after the cheque has been cleared. What is the maximum increase in chequing account deposits that can result deposit? What deposits that can result from your $2000 deposit? What is the maximum increase in the money supply? Explain. c) from your $2000 d) 5. Columbia is the world's biggest producer of roses. The global demand for roses increases and the same time, the central bank in Columbia increases the interest rate. Answer the following questions: a) Use a properly labelled diagram to show the effects of above events on the demand and/or ht of nesos in the foreign exchange market. Will the peso appreciates, depreciate or remain

Answer 1

4a.

BMO's balance sheet
Assets			Liabilities
Reserves	+$2000		Deposits	+$2000

b.  

BMO's balance sheet
Assets			Liabilities
Reserves	+$2000		Deposits	+$2000
Loans	+1600		Deposits	+1600

Explanation: Loans = (100%-20%)*2000 = 1600

c.

BMO's balance sheet
Assets			Liabilities
Reserves	+400		Deposits	+2000
Loans	+1600

CIBC's balance sheet
Assets			Liabilities
Reserves	+1600		Deposits	+1600

D. Change in cheque account deposits = 2000*(1/0.20) = 2000*5 = $10,000

Cheque account deposits are part of the money supply but money supply will not increase by $10,000.

The $2000 in currency was counted as part of the money supply. Thus net change in money supply = increase in cheque account deposits - decline in currency in circulation

= 10000-2000

= $8,000