Question: The Bank of Montreal (BMO)'s assets include cash in the vault which is one third of it's deposits at the Bank of Canada. BMO has $700,000 in loans, $1.1 million in securities as well as $2.0 million in chequing account balances on behalf of households and businesses. BMO has zero excess reserves. The public holds $400,000 in cash. The Bank of Canada has $600,000 in total liabilities which includes $50,000 of Federal Government's Deposit.
1. Bank's Deposits held at the Bank of Canada. = 150,000
2 . Desired Reserves (DR) = 200,000
3. Desired Reserve Ratio (R/D) = 10%
4. Currency Drain Ratio (C/D) = 20%
5. Money Multiplier (MM) = 10
Given the information above, it the Bank of Canada wants to increase the Money Supply by $1 Million, then:
6. (a) Should the Bank of Canada Buy or Sell securities?
(b) How Much? Calculate and Show your Work.
7. (a) Will the Bank of Canada increase or decrease BMO's Reserves?
(b) How much will the Monetary Base change? Calculate and Show your work.
8. (a) What will be the New amount of Excess Reserves at BMO?
(b) What will be the amount BMO loans out in the Banking System?
9. How much will be RE-Deposited into the next Bank? Calculate and Show your work.
10. How much will the public hold back and not re-deposit into the Banking System? Calculate and Show your work.