Lecture 15 - ECO100 - S2012

Required reserves gustavo indart slide 12 reserve

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Unformatted text preview: (or desired) reserves vs. required reserves © Gustavo Indart Slide 12 Reserve Reserve Ratio Target or desired reserve ratio (v) v = RE / D No longer determined by regulation Minimum safety level as determined by commercial banks The Bank of Canada can affect the level of the desired Bank of Canada can affect the level of the desired reserve ratio by changing the interest rate it charges on loans to commercial banks This rate is called the bank rate The overnight rate is the rate at which commercial banks lend money to each other © Gustavo Indart Slide 13 Money Creation by Banking System M = CUP + D Banks cannot affect CUP but can affect D by making loans to their customers Whenever banks have excess reserves, they are able to create money by lending out the excess reserves Note that excess reserves implies that the reserve ratio (v) is above the desired or target level Assumptions: Fixed desired reserve ratio (v) No cash drain from the banking system © Gustavo Indart Slide 14 Example: Exam Only one commercial bank Desired reserve ratio of 20 percent (v = 0.2) No excess (or insufficient) reserves Disturbance to initial equilibrium deposit of a $100 bill New cash That is, CUP decreases by $100 and D increases by $100 © Gustavo Indart Slide 15 Changes in Balance Sheets (Step (Step 1) Public Assets CUP D Liabilities Commercial Bank Bank Assets Liabilities CUB +100 D 100 Bank of Canada of Canada Assets Liabilities +100 +100 M = CUP + D M = CUP + D = –100 + 100 = 0 RE = CUB + DCB RE = CUB + DCB = +100 Desired Reserves = +20 Excess Reserves = RE © Gustavo Indart Desired Reserves = 80 Slide 16 Changes in Balance Sheet...
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