Lecture 15 - ECO100 - S2012

100 100 400 re cub dcb 100 desired reserves 100 excess

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Unformatted text preview: Reserves = +100 Excess Reserves = RE Desired Reserves = 0 M = CUP + D = 0 + 500 = +500 M = mm RE = 5 (+100) = +500 (+100) +500 © Gustavo Indart Slide 25 The The Overnight Rate The Bank of Canada can also affect the desired cash reserve ratio of the commercial banks by changing the target for the overnight rate the overnight rate The overnight rate is the rate at which commercial banks lend money to each other The Bank of Canada increases the target for the overnight rate by increasing the bank rate The bank rate is the rate the Bank of Canada charges for its loans to commercial banks Th The bank rate represents the upper limit of the overnight li rate The lower limit of the overnight rate is the interest the lower limit of the overnight rate the interest the Bank pays for the deposits of the commercial banks © Gustavo Indart Slide 26 The Overnight Rate and the Desired Cash Reserve Ratio When the Bank of Canada increases the target for the overnight rate (i.e, when it increases the bank rate), it becomes more expensive for commercial banks to borrow when they are short of reserves Therefore, banks will try to reduce the probability of being short of reserves by increasing their desired cash reserve ratio Banks increase their cash reserve ratio by recalling loans, thus decreasing the public’s deposits and reducing the money supply reducing the money supply © Gustavo Indart Slide 27 The Overnight Rate and the Desired Cash Reserve Ratio (cont’d) (cont’d) Wh When the Bank of Canada decreases the target for the overnight rate (i.e, when it decreases the bank rate), it beco...
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This note was uploaded on 03/28/2014 for the course ECON 100 taught by Professor Carr during the Summer '10 term at University of Toronto- Toronto.

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