Assume that households do not hold currency, so the only form of money is demand deposits

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Assume that households do not hold currency, so the only form of money is demand deposits. Because there is no reserve requirement in Canada, banks are free to choose the percentage of demand deposits they will keep as reserves, which will henceforth be called the reserve percentage. (Note: This is just the reserve ratio expressed as a percentage.) Suppose the banking system has total reserves of $200 billion. Find the money multiplier and the money supply for each reserve percentage listed in the following table.

 

Percentage Held as Reserves	Money multiplier	Money Supply (Demand Deposits)
10%
20%

For a given level of reserves, a higher reserve percentage is associated with a _____ (larger/smaller) money supply.

Suppose the Bank of Canada wants to increase the money supply by $100 billion. Again, you can assume that household do not hold currency. If the reserve percentage is 20%, the Bank of Canada will use open-market operations to _____ (buy/sell) _____ (5 billion/ 100 billion/ 40 billion/ 50 billion/ 20 billion ) worth of Canadian government bonds.

Now, suppose that-due to uncertain conditions-Canadian banks increase the percentage of deposits held for reserves from 20% to 25%. This increase in the reserve ratio causes the money multiplier to _____ ( fall/ rise) to _____(5/ 10/ 12/ 4/ 8 ). Under these conditions the Bank of Canada would need to _____ (sell/ buy) _____ (100 billion/ 200 billion/ 50 billion/ 25 billion/ 20 billion)worth of Canadian government bonds in order to increase money supply by $100 billion.

Which following statements help to explain why, in the real world, the Bank of Canada's control of the money supply is only of the imprecise? Check all that apply

(i) The Bank of Canada can require a particular percentage of demand deposits be held as reserves.

(ii) The Bank of Canada cannot control the amount of money that households choose to hold as currency.

(iii) The Bank of Canada cannot control the amount of reserves Canadian banks hold.