Suppose that currency in circulation is $600B, demand deposits are $900B, and excess reserves
are $15B. The required reserve ratio is 10%.
a. Calculate the M1 money supply, the currency-deposit ratio, the excess reserve ratio, and
the money multiplier.
b. Suppose the Bank of Canada conducts an unusually large open market purchase of
bonds from its bond dealers of $1,400B due to a sharp contraction in the economy.
Assume the ratios you calculated in part (a) remain unchanged, what do you predict will
be the effect on the M1 money supply.
c. Suppose the Bank of Canada 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 chequable
deposits remain the same, what happens to the amount of excess reserves, the excess
reserve ratio, the money supply, and the money multiplier?
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