The chartered banks want to hold 5% of deposits as reserves. There are no leakages from the
Question:
The chartered banks want to hold 5% of deposits as reserves. There are no leakages from the monetary system and the only type of bank account in the economy is a demand deposit with a chartered bank.
The Bank of Canada purchases $5,000,000 worth Treasury Bills on the bond market as part of an open market operation. Indicate the changes in the following balance sheets which result from this open market operation (A) [2 marks] after cheques have cleared but before the chartered banks have had an opportunity to adjust their loans to maximize profits and (B) [2 marks] after the chartered banks have fully adjusted to maximize their profits. Explicitly note all changes in assets and liabilities with a number and a description, for example: x3 = +$5 million in T-Bills.
Table for Part A. After cheques have cleared but before the chartered banks have had an opportunity to adjust their loans to maximize profits:
Bank of Canada | Chartered Banks | Public | |||||
Assets | Liabilities | Assets | Liabilities | Assets | Liabilities | ||
a1 | a2 | a3 | a4 | a5 | |||
a6 |
a1 = ? ; a2 = ?; a3 = ? etc.
Table for Part B. After the chartered banks have fully adjusted to maximize their profits:
Bank of Canada | Chartered Banks | Public | |||||
Assets | Liabilities | Assets | Liabilities | Assets | Liabilities | ||
b1 | b2 | b3 | b4 | b9 | |||
b10 | |||||||
b5 | b6 | ||||||
b11 | b12 | ||||||
TOTALS: | TOTALS: | ||||||
b7 | b8 | b13 | b14 |
b1 = ?; b2 = ?; b3 = ? etc.
Part C. Calculate the change in money supply resulting from this open market operation.
Financial Markets And Institutions
ISBN: 978-0132136839
7th Edition
Authors: Frederic S. Mishkin, Stanley G. Eakins