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Feb 28th Economics Lec.doc

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Commercial Bank and the MSSlide 6First National BankAssetsReserves 100LiabilitiesDeposits 100MS CurrencyDemand deposit0100100If banks hold all deposits in reserve banks do not influence MSSlide 7LiabilitiesDeposits 100 Total Liabilities 100Assets Reserves 10 and Loans 90Total Assets100What happens to the MSMSCurrencyDemand deposits90100190Slide 11AnsweriMoney Multiplier10110ii Change in Money SupplyChange in currencyChange in demand depositsChange in Demand DepositsChange in reserves x Money Multiplier100101000Change in Money Supply1001000900Slide 12Change in money supplyChange in demand depositsChange in CurrencyChange in Demand DepositsChange in reservesMoney MultiplierMoney Multiplier1R1110Change in reserve100initial change is 100 not the 10 percent100 101000Slide 13AssetsReservers25 Loans225LiabilitiesDeposits250aDeposits go down by 10 Deposits240cChange in money supplyChange in currencychange in demand deposit10100Demand DepositChange in reservesMoney Multiplier 10101100dBorrow from the bank of Canada Slide 14When Bank of Canada buys bondsMoney to the publicMS goes upWhen Bank of Canada Sells BondsMoney taken away from the public MS goes downSlide 15Buying Bonds Causes the MS to increase as it puts currency in the hands of public or increase bank depositsSelling bonds causes the MS to decrease as the public pays money is taken from the public MS goes downThese are examples of open market operationsSlide 17 Foreign Exchange Market operations If the bank of Canada thinks the value of Canadian dollar is lowBank of Canada buys 100 million Canadian with the use of foreign currency If it wants the value of the dollar to go up it buys if not and decides to lower the value of the currency it sellsHow does it affect MS Money Supply increases when the BofC buys foreign currency with Canadian currency more cash in the hands of the publicMoney supply decreases when the BofC sells foreign currency less cash in the hands of the publicSterilizationThis is the process of offsetting a foreign exchange market operation with an openmarket operation for example selling foreign currencies and using foreign currency received in exchange to buy govt of Canada bonds
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