10. Consider the following situation in the Canadian banking system:•The Bank of Canada purchases $5 million worth of government securities from an investment dealer with a cheque drawn on the Bank of Canada. •The dealer deposits this cheque at Bank XYZ, a commercial bank.•The target reserve ratio for all commercial banks is 20%.•All commercial banks operate with no excess reserves.•There is no cash drain.The maximum creation of new deposits by the banking system, including the dealer's original deposit at Bank XYZ, is $25 million. $15 million. $22.5 million. $5 million. $20 million.

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Answered: Consider the following situation in the…

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter25: Money, Banking, And The Federal Reserve System

Section: Chapter Questions

Problem 16P

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10. Consider the following situation in the Canadian banking system:

•	The Bank of Canada purchases $5 million worth of government securities

from an investment dealer with a cheque drawn on the Bank of Canada.

•	The dealer deposits this cheque at Bank XYZ, a commercial bank.

•	The target reserve ratio for all commercial banks is 20%.

•	All commercial banks operate with no excess reserves.

•	There is no cash drain.

The maximum creation of new deposits by the banking system, including the dealer's original deposit at Bank XYZ, is

		$25 million.
		$15 million.
		$22.5 million.
		$5 million.
		$20 million.

Definition Definition Capital reserves held by banks or financial institutions over and above the reserves that are required to be maintained by the regulator toward its liabilities and for internal controls. For commercial banks, excess reserve is the amount over the standard reserve as decided by the central bank. These excess reserve funds are available in the form of cash and cash equivalents.

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