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Econ 102 chpt 10 Re

Econ 102 chpt 10 Re - Supply 2 Foreign exchange market...

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Econ 102 chpt 10 Re-cap The influence of the financial sector financial institutions can influence the size of the money supply reserve ratio R= reserves/deposits money multiplier = 1/R the money multiplier tells us how much “new money” can be created from a new deposit and a reserve ratio in a fractional reserve banking system (R<100%), financial institutions have the opportunity to increase the money supply by creating new demand deposits amount of money generated by the banking system = deposit * multiplier Monetary policy instruments of the BOC 1. Open market operations BoC BUYS govt bonds/securities from the public to INCREASE the Money Supply BoC SELLS govt bonds/securities to the public to DECREASE the Money
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Unformatted text preview: Supply 2. Foreign exchange market operations • Boc BUYS foreign currency and SELLS $CAD to INCREASE the money supply • BoC SELLS foreign currency and BUYS $CAD to DECREASE the money supply • Sterilization – reversing the effects of a foreign exchange market operation by using an open market operation 3. Changing the overnight rate • INCREASING the overnight rate DECREASES the money supply • DECREASE the overnight rate INCREASE the money supply The BoC controls the money supply but cannot control it precisely because of the influence of individual’s saving decisions and bank’s lending decisions....
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