Question

Question #7 (Chapter 10) Suppose that the Bank of Canada implements an open market purchase of $100 of government bonds from the Royal Canadian Bank. (a) Illustrate with a T-Account the initial effect of the open market purchase on the Royal Canadian Bank's assets and liabilities Assets Liabilities + (b) Illustrate with a T-Account the effect of the open market purchase on the Bank of Canada's assets and liabilities Assets Liabilities (c) What is the initial change in the Monetary Base that results from the open market purchase? (d) If the desired reserve ratio is equal to 20% and the public does not hold physical currency such that the currency drain is equal to 0, calculate the level of the Money Multiplier (e) If the desired reserve ratio is equal to 20% and the public does not hold physical currency such that the currency drain is equal to 0, calculate the overall change in the Money Supply that results from the open market purchase. Hint: You will require the solutions to part (c) and part (d) to answer this question

Answer 1

a) Royal Canadian Bank ASSETS HABILITIES Reserves +$100 G-bonds -$100 b) Bank of Canada LABILITIES G-bonds +$100 Reserwes too ASSETS c) Initial change in MB = $100 increase d) multiplier = 2 - 1 - 5 u e) Overall morease in money, supply mulleplier X AMB - 5 X 100 $500