2. Accounting for an open-market operation Aa Aa Assume that the following balan

Question

2. Accounting for an open-market operation Aa Aa Assume that the following balance sheet portrays the state of the banking system. The banks currently have no excess reserves Assets Total reserves Loans Securities Total Liabilities and Capital Demand deposits $5 billion 25 billion 20 billion $50 billion $50 billion Total $50 billion What is the desired reserve ratio? o 25% o 5% 40% 1096 Suppose the Bank of Canada sells $4 million of bonds to a bond dealer, who pays the Bank of Canada by writing a cheque against the funds in her chequing account. What is the initial impact of this transaction? O Demand deposits fall by $4 million, and the banking system's total reserves fall by $4 million. The banking system's holdings of securities fall by $4 million, and the banking system's total reserves rise by $4 million. O The banking system's holdings of securities rise by $4 million, and the banking system's total reserves fall by $4 million. O Demand deposits fall by $4 million, and the banking system's holdings of securities fall by $4 million. As a result of the Bank of Canada's sale of $4 million of securities, demand deposits in the banking system can potentially by as much as

Explanation / Answer

1. Required reserve ratio x deposits = Total reserves

x % x 50 billion = 5 billion

x/100 = 1/10

x = 10%

2. The banking system's holdings of securities rise by $ 4 million, and the banking system's total reserves fall by $ 4 million.

3. Decrease; $ 4 million

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.