Writers Den

Econ345 Assignment 2

Q1.The Bank of Canada buys $1 million of bonds from the First National Bank. In addition to 10%desired reserve ratio, 10% of any deposit is held as excess reserves. What is the total increase inchequable deposits? Note that no holding of currency. (Hint: Use T-accounts to show whathappens at each step of the multiple expansion process.)

 2.5p 

Q2.Suppose that currency in circulation is $600 billion, the amount of chequable deposits is
$900 billion, and holding of excess reserves are $15 billion. rD =.10 

a. Calculate the money supply (M1+), the currency deposit ratio, the excess reserve holding
ratio (e), and the money multiplier. You must show all of your work. 

b. Suppose the central bank conducts an unusually large open market purchase of bonds held by
banks of $1400 billion due to a sharp contraction in the economy. Assume all other things (the
ratios and the numbers for the other money market components) that you have found for part (a)
remain the same. What are the amounts of monetary base and money supply now? You must
show all of your work. 

c. Suppose the central bank conducts the same open market purchase as in part (b), except that
banks choose to hold all of these proceeds as excess reserves rather than loan them out, due to
fear of a financial crisis. Assuming that currency and deposits still remain the same as you used
for part (a), what happens to the amount of excess reserves, the excess reserve ratio, the money
supply, and the money multiplier? You must show all of your work.