Show the changes to the balance sheets of both RBC and the Bank of Canada. Consider the following deposit expansion process.

Subject: Economics    / General Economics

Assignment 3

Econ 305 assignment

The assignment is out of 20. If you work with others, please indicate their names in the top right-hand corner of your assignment (you will not be penalized). In any event, write up the work on your own. Copying/paraphrasing will be considered cheating.

(20 marks) The Bank of Canada makes an Advance to RBC of $300 million.

(a) (2 marks) Show the changes to the balance sheets of both RBC and the Bank of Canada. Consider the following deposit expansion process.

(i) RBC lends the $300 million to Research in Motion Ltd. (RIM) by issuing a chequable deposit. RIM withdraws the money and spends it.

(ii) The money RIM spends is deposited the next firm at TD Trust Canada.

(iii) TD Trust Canada’s loan goes to BRIM Ltd.; BRIM spends it and proceeds are deposited by the next firm at BMO.

(b) (5 marks) Show the changes in two stages to the balance sheets of both RBC and TD Trust Canada. If TD and BMO wants to maintain a 10% reserve ratio how much will they lend out? Show the changes to TD and BMO’s balance sheets in two steps.

(c) (5 marks) Recreate Table 15.1 (in the Chapter 15 slides) but for this scenario. Assume that every bank wishes to hold 10% of deposits in reserve.

The money multiplier process is analyzed in the standard way where banks maintain a large positive required reserve ratio (e.g. 10% in this exercise). This analysis fits the US. However, in some countries there is no required reserve ratio! Suppose that all excess reserves are lent so that the desired reserves would be zero. That is, rD = 0!

(d) (8 marks) Repeat (b)[ii-iii] – (c), assuming all excess reserves are lent. What is the implied money multiplier? Name two considerations/extensions which would give a more reasonable answer.

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