Answer to Question #211748 in Marketing for saleemaslam

Question

1.     Explain two reasons why the Bank of Canada does not have complete control over the level of bank deposits and loans. Explain how a change in either factor affects the deposit expansion process.

 

 

2.     Explain why the simple deposit multiplier overstates the true deposit multiplier.

 

 

Answer 1

Q211748

1. The Bank of Canada does not have complete control over deposits and loans because there are private commercial banks that influence the general money supply, whether through deposits or by issuing loans. First, these private banks have different interest rates. If the bank has a high interest rate it may benefit from high income but customers may reduce their spending or may opt to have reduced financial assets so that they do not have to pay the high interest. On the other hand, if the interest rate is low, the debt level may become too high. Secondly, there is a need to maintain a money reserve at the Bank of Canada and in the private banks. Consequently, the private banks are at liberty to determine how they will balance their money supply so that they maintain these reserves, without interference from the Bank of Canada. if the money reserve is not maintained, the buying power of money may increase to the point of deflation.
2. The simple deposit multiplier is necessary to help banks maintain a reserve that will satisfy the customers' money withdrawals. The true deposit multiplier is lower than the simple deposit multipliers because there already exists an excess of reserves, or savings, or cash conversions(assets to cash) done by consumers to maintain the money supply.