question 1:
Sara deposits $100,000 in Royal Bank and John borrows $80,000 from Royal Bank to buy a car from Oregan car dealer. Oregan car dealer deposits the $80,000 in CIBC.
Assume that there is no currency drain and desired reserve ratio is 20%.
a) Reflect the above transactions in T-accounts for both banks
b)The Central Bank noticed that commercial Banks are expanding money supply too much. Would the Central Bank Increase or decrease the desired reserve ratio? Explain
c)At the end of the day the manager of Royal Bank found that they have a surplus amount of $10,000 in the LVTS (Large Value Transfer System), and decided not to touch
it. If the target of the overnight rate is 0.25%. How much would Bank of Canada charge/pay to Royal bank?
Question2 :
a)If the Credit Rating Agencies downgraded Canada’s corporate bonds sighting high default risk due to COVID 19 high costs. Based on your understanding of default risk
what will happen to the risk premium? Is it going to tighten, widen, or stays the same? Explain using graphs and words
b)Would a bank with a positive duration gap experience a decrease or increase in the market value of net worth with rising interest rates? Explain.
c)A bank with $150 reserves, $850 loans, $1000 deposits, and 10% reserve ratio. Calculate the largest loan this bank can make.
question 3:
a)Before Covid 19 hit, the bank rate of the operating band of Bank of Canada was 1.75%. What was the lending rate?
b) Now suppose that, to tighten monetary policy, the Bank of Canada announces, at 9:00 a.m., that it is adjusting the operating band down by 25 basis points (0.25%).
What is the new bank rate? What is the target overnight rate?
c) If later in the day the settlement balances are trading below the target overnight rate. How would Bank of Canada use its instruments --- Open market operation
(SPRA – Special Sale and Resale Agreement, SRAs –Sale and Repurchase Agreements, and Government deposit shifting) to influence the overnight rate in a manner that
leaves aggregate settlement balances unchanged at the end of the day? You can use a hypothetical T-accounts to explain.
Sample Solution