Chapter 16
MB=
MB = BR + MBn MB: Monetary Base BR: Borrowed Reserves MBn: Non-Borrowed Monetary Base
open market operations
Purchases and sales of government securities by the Bank of Canada
Who is the most important player in the money supply process
The bank of canada
Who are the three players in the money supply process
banks, depositors, and the central bank
c=
currency/deposits
A decrease in excess reserves holdings by banks will mean an () in the money multiplier, and consequently in the money supply.
increase
What are depositors
individuals or institutions that lend funds to a bank by opening a checking account
What are the two ways in which the Bank can lower the reserves held by the banking system
it can sell government bonds or it can cut advances to commercial banks.
What happens to the monetary base when the bank of canada sells securities
monetary base declines
What happens to the monetary base when the bank of canada buys securities
monetary base increases
If the proceeds are kept in currency, the open market purchase has what effect on reserves
no effect
What are the monetary liabilities of the Bank of Canada
notes in circulation and reserves
Suppose your payroll cheque is directly deposited to your chequing account. Total reserves in the banking system ________ and the monetary base ________?
remain unchanged; remains unchanged
Monetary base consists of
"borrowed reserves" and "non-borrowed monetary base":
A bank has excess reserves of $6,000 and demand deposit liabilities of $100,000 when the desired reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will be ________.
$1,000
If a bank has excess reserves of $10,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has actual reserves of ________.
$26,000
In the simple deposit expansion model, if the banking system has excess reserves of $75, and the desired reserve ratio is 20 percent, how much is the potential expansion of chequable deposits?
$375
If the desired reserve ratio is 10%, currency in circulation is $400 billion, chequable deposits are $800 billion, and excess reserves total $0.8 billion, how much is the currency ratio?
.50
If reserves in the banking system increase by $100, chequable deposits will increase by $500 in the simple model of deposit creation. Find the desired reserve ratio?
0.20
If reserves in the Bank of Canada increase by $100, how much should be the desired reserve ratio so that the chequable deposits will increase by $400?
0.25
Multiplier =
1+C/(c+rd+e)
What are government securities and advances on the bank of Canada's t chart
Assets
Explain why the simple deposit multiplier overstates the true deposit multiplier
The simple model ignores the role banks and their customers play in the creation process. The bank's customers can decide to hold currency (than keeping in bank accounts) given that an increase in the monetary base that goes into currency is not multiplied, while an increase that goes into reserves is multiplied. Besides, the bank can decide to hold excess reserves (rather than lending). Both of these will restrict the banking system's ability to create further deposits. Thus, the true multiplier is less than the prediction of the simple deposit multiplier.
What are borrowed reserves
When banks borrow money from the Bank of Canada
multiple deposit creation?
When the Bank of Canada supplies the banking system with an extra dollar of reserves, deposits increase by more than one dollar, and this process
rd=
desired reserve ratio
If however, the proceeds are kept as deposits, the open market purchase does what to reserves
increases
if a member of the nonbank public purchases a government bond from the Bank of Canada in exchange for currency, what will happen to the monetary base and reserves
the monetary base will fall, but reserves will remain unchanged.
If a member of the nonbank public sells a government bond to the Bank of Canada in exchange for currency, what will happen to the monetary base and reserves
the monetary base will rise, but reserves will remain unchanged.
When currency is equal to $100 billion and reserves are equal to $200 billion, and we know that the money multiplier is equal to 2.5, then the money supply will be equal to
750 billion
When the monetary base is equal to $200 billion, the desired reserve ratio is 0.10 and the currency ratio is equal to 0.20, the money supply is equal to ________?
800 billion
When a bank sells a government bond to the Bank of Canada, reserves in the banking system ________ and the monetary base ________. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases
A) increase; increases
A increase in currency holdings will mean an () in the money multiplier, and consequently in the money supply.
decrease
A increase in excess reserves holdings by banks will mean an () in the money multiplier, and consequently in the money supply.
decrease
A increase in the desired reserve ratio will mean an () in the money multiplier, and consequently in the money supply.
decrease
e=
excess reserves/deposits
What are the two ways the Bank can provide additional reserves to the banking system
it can purchase government bonds or it can extend advances to commercial banks.
Suppose a person cashes his payroll cheque and holds all the funds in the form of currency. Then what happens to reserves and the monetary base
total reserves in the banking system decreases while the monetary base remains unchanged considering that both currency and reserves are part of the monetary base. if the payroll cheque is deposited in his/her account, then neither reserves nor monetary bases change.
If the desired reserve ratio is 10%, currency in circulation is $400 billion, chequable deposits are $800 billion, and excess reserves total $0.8 billion, then how much is the excess reserves-chequable deposits ratio?
0.001
simple deposit multiplier formula
1/rd rd : Desired Reserve Ratio
If the desired reserve ratio is 10%, currency in circulation is $400 billion, chequable deposits are $800 billion, and excess reserves total $0.8 billion, how much is the money supply?
1200 billion
f the desired reserve ratio is 10%, currency in circulation is $400 billion, and chequable deposits are $800 billion, then how much is the money multiplier (approximately)? A) 2.0
2.5
What is assumed in the simple model of multiple deposit creation
a) banks do not hold excess reserves, rather, lend the entire excess reserves; b) nonbank public do not hold currency, rather, keep their assets in their chequable deposits.
If the desired reserve ratio is 10%, currency in circulation is $400 billion, chequable deposits are $800 billion, and excess reserves total $0.8 billion, how much is the monetary base?
480.8 billion
If the desired reserve ratio is 15 percent, how much is the simple deposit multiplier?
6.67
Assume that no banks hold excess reserves, and the public holds no currency. If a bank sells a $100 security to the Bank of Canada, explain what happens to this bank and two additional steps in the deposit expansion process, assuming a 10% reserve requirement. How much do deposits and loans increase for the banking system when the process is completed?
Bank "A" first changes a security for reserves, and then lends the reserves, creating loans. It receives $100 in reserves from the sale of securities. Since all of these reserve will be excess reserves (there was no change in chequable deposits), the bank will loan out all $100. The $100 will then be deposited into Bank "B". This bank now has a change in reserves of $100, of which $90 is excess reserves. Bank "B" will loan out this $90, which will be deposited into Bank "C". Bank "C" now has an increase in reserves of $90, $81 of which is excess reserves. Bank "C" will loan out this $81 dollars and the process will continue until there are no more excess reserves in the banking system. So eventually, the money supply will increase as much as multiplier times the initial sale of securities for $100 which in this case will be $1,000.
Monetary base?
bank notes and reserves
A decrease in currency holdings will mean an () in the money multiplier, and consequently in the money supply.
increase
A decrease in the desired reserve ratio will mean an () in the money multiplier, and consequently in the money supply.
increase
When the Bank extends a $100 loan to CIBC, reserves in the banking system
increase by $100
when the Bank of Canada purchases a government bond from a bank, reserves in the banking system
increase, so does the monetary base, everything else held constant.
Bank rate?
interest rate the bank of Canada charges major banks on loans
When the Bank of Canada buys $100 worth of bonds from RBC, reserves in the banking system
C) increase by $100
When the Bank of Canada calls in a loan from a bank, the monetary base () and reserves ()
decreases and reserves decrease.
when the Bank of Canada sells a government bond to a bank, reserves in the banking system
decreases, so does the monetary base, everything else held constant.
When a member of nonbank public withdraws currency from her bank account, bank reserves (), but the monetary base ()
fall, but the monetary base remains unchanged because currency decreases by the same amount.
What does the bank of Canada do
government agency that oversees the banking system in Canada, and is responsible for the conduct of monetary policy
As such, the increase in chequable deposits equals
he product of the change in excess reserves and the simple deposit multiplier: Change in D = (1/rd) * change in r
When the Bank of Canada extends a loan to a bank, the monetary base () and reserves ()
increases and reserves increase.
n the simple deposit expansion model, an expansion in chequable deposits of $1,000 when the desired reserve ratio is equal to 20 percent implies that the Bank of Canada ________.
purchased $200 in government bonds
The monetary base minus currency in circulation equals ________? A) reserves B) the borrowed base C) the non-borrowed base D) advances to banks
reserves
Subtracting borrowed reserves from the monetary base obtains
the nonborrowed monetary base
