Suppose that the Bank of Canada buys $100,000 of bonds and the required reserve

Question

Suppose that the Bank of Canada buys $100,000 of bonds and the required reserve ratio is 0.25. If the O Banks have perfect information about the creditworthiness of all borrowers The Fed has set the required reserve ratio to between 5% and 10%. If the correct assumption did not hold, the change in the money supply would be found. Which of the following describes why this holds true? The multiplier only holds as long as the required reserve ratio is less than 15%, O If banks held excess reserves, they would make fewer loans.

Explanation / Answer

1. increase money supply by $100,000/0.25 = $400,000

2. Correct option: (a) Banks hold no excess reserves

3. Less

4. Correct option: (c) If banks held excess reseves, they would make fewer loans

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