question archive 1) Consider an economy with one commercial bank, First Canada Bank, whose balance sheet is described in Table 1
1) Consider an economy with one commercial bank, First Canada Bank, whose balance sheet is described in Table 1
Subject:EconomicsPrice: Bought3
1) Consider an economy with one commercial bank, First Canada Bank, whose balance sheet is described in Table 1.
(a) Determine the reserve ratio of First Canada Bank and the initial money supply in the economy.
(b) Suppose that 1000 in loans from First Canada Bank are found to be toxic (ie, they will not be paid back.) Explain carefully why this could cause a run on the bank.
(c) Now suppose that all of the bank's loans are in good condition. The Bank of Canada (the central bank that oversees First Canada Bank) purchases $100 in government bonds using newly created money. After the money multiplier process is completed, what will be the new level of the money supply in the economy and what will be the total amount of loans on First Canada Bank's balance sheet?
(d) Finally suppose that instead of purchasing government bonds, the Bank of Canada sells 50 in government bonds to First Canada Bank. After the money multiplier process is completed, what will be the new level of the money supply in the economy and what will be the total amount of loans on First Canada Bank's balance sheet?
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Table 1: First Canada Bank |
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Total Assets |
|
Total Liabilities and Capital |
|
|
Reserves |
400 |
Deposit |
8000 |
|
Gov’t Bonds |
1000 |
|
|
|
Loans |
7400 |
Capital |
800 |
|
Total |
8800 |
Total |
8800 |
