This Question: 1 pt 13 of 40 (0 complete) Consider the following situation in th

Question

This Question: 1 pt 13 of 40 (0 complete) Consider the following situation in the Canadian banking system The Bank of Canada purchases $5 million worth of government securities from an investment dealer with a cheque drawn on the Bank of Canada. .The dealer deposits this cheque at Bank XYZ, a commercial bank. ·The target reserve ratio for all commercial banks is 25%. .All commercial banks operate with no excess reserves. There is no cash drain. TABLE 27-3 Refer to Table 27-3. If Bank XYZ increases its loans to the maximum extent possible with its new excess reserves, the second-generation banks will be able to expand their loans by OA. $2.81 million. OB. $1.00 million. OB. $100 million C. $1.50 milion. D. $0.94 million. OE. $3.75 million.

Explanation / Answer

(1) (A)

Bank XYZ can lend out $5 million x (1 - 0.25) = $5 million x 0.75 = $3.75 million

Second generation banks can expand loans to $3.75 million x (1 - 0.25) = $3.75 million x 0.75 = $2.81 million

(2) (C)

Lower money supply reduces aggregate demand.

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