Solution to Problem Set 15-16 (ECO100)

# Solution to Problem - Prof Gustavo Indart Department of Economics University of Toronto ECO100Y INTRODUCTION TO ECONOMICS Solution to Problem Set

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Prof. Gustavo Indart Department of Economics University of Toronto ECO100Y INTRODUCTION TO ECONOMICS Solution to Problem Set 15-16 1. (a) CU P = CU – CU B = \$30 – \$5 = \$25 (million) Since CU B = RE – D CB = \$15 – \$10 = \$5 (million) (b) M = CU P + D = \$25 + \$300 = \$325 (million) (c) In the absence of any cash drain from the banking system, mm = 1/v and v = RE/D = 15/300 = 0.05, and then mm = 1/0.05 = 20. (d) Assets: D CB = \$10 Liabilities: D = \$300 Loans = \$285 CU B = \$5 2. If the Central Bank buys \$1 million in Government Bonds from the public, the stock of high-powered money (or monetary base) increases by this amount. Therefore, since mm = 20, deposits will increase by \$20 million once all excess reserves are eliminated. Assuming no cash drain from the banking system, the money supply will increase by this amount. The money supply increases by more than the value of the purchase of government bonds from the public because the chartered banks will try to eliminate any excess reserves, thus creating new money in the process. The changes in the balance sheets of the public, the chartered banks, and the Bank of Canada are as follows (in thousands): Public Chartered Bank Bank of Canada Assets Liabilities Assets Liabilities Assets Liabilities GB –1000 D +1000 D +19000 L +19000 D BC +1000 L +19000 D +1000 D +19000 GB +1000 D BC +1000

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