ECO100Y1 Lecture Notes - Bank Reserves, Reserve Requirement, Excess Reserves
Document Summary
Overnight interest rate (determined by back of canada) March 3, 2009: bank of canada lowers key interest rate from 1% to 0. 5% The outlook for the global economy has continued to deteriorate the nature of the u. s. recession . Transmission mechanism (mechanism through which the actions of bank of canada are transmitted into the world economic system). Money supply and money demand determine interest rates. Banking system: centeral bank (bank of canada) Uses control of money supply and interest rates to influence aggregate. Money (canada: currency + bank deposits: purposes. Unit of account: alternative to money: barter (very inefficient) Simplifying assumptions (in order to answer question: all banks have same desired/target reserve ratio, no cash drain (amount of cash held by public is fixed, bank capital is zero (for numerical examples) Reserves = vault cash + deposits at bank of canada. Reserves earn low or zero interest (cash, doesn"t earn any interest, therefore no profit)