Answer to Question #67073 in Economics for Jan

Question

4. (a) Suppose Canadian commercial banks withdraw $25 million in currency from their accounts at the Bank of Canada (BOC). Using T-Accounts show the resulting changes to the BOC’s balance sheet and balance sheet of the Canadian commercial banks.
(b ) If the BOC has a policy goal of keeping the level of settlement balance constant, what action will the BOC undertake to deal with the currency withdrawl? Using another set of T-accounts show the changes to the BOC’s balance sheet and the balance sheet of the Canadian commercial banks of this BOC action.
(c ) How has the Government of Canada benefitted financially as a result of the combined actions of the commercial banks and the BOC in part (a) and (b)? Briefly describe

Answer 1

4. (a) If Canadian commercial banks withdraw $25 million in currency from their accounts at the Bank of Canada (BOC), then the assets in the BOC’s balance sheet will decrease and assets in the balance sheet of the Canadian commercial banks will increase.
(b) If the BOC has a policy goal of keeping the level of settlement balance constant, than the BOC should increase the interest rate or increase the money supply by $25 million to deal with the currency withdrawal.
(c) The Government of Canada will not lose its reserves and the commercial banks will have more money for operations as a result of the combined actions of the commercial banks and the BOC.