In: Economics
True or False. In Canada, if a commercial bank has no “excess reserves” to lend out and a creditworthy customer asks the bank for a loan, then the bank must refuse the customer’s request for a loan. Briefly explain.
When the Bank of Canada lowers its target for the overnight interest rate (policy rate) the result is a lowering of the nominal interest rate on money market instruments. Under what circumstances will a reduction in the BOC policy rate lead to a reduction of the real interest rate on money market instruments. Briefly explain. No diagram is needed.
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This holds false, as per the money multiplier the central bank cannot refuse or would be unable to control the monetary base, as there is a less likeliness to control and hold a capacity to control the money. It even helps to control the money supply. The central bank of any country, have to ensure a consistent money supply which would adjust per the inflation that could help to balance home as per the “government” (the central bank in this case). Depending on the bank availability of the funds, the customers can be allowed or not to be allowed of the funds.
The central bank has no excess reserves, which means that the bank reserves above and beyond would be obligate inline to the reserve requirement that could be set by the central bank. If they do not have the excess reserves, they cannot refuse depending on the high credibility worth of the customers. But if the customers have lower credibility, then it would lead to refusal of the loan, as the bank would not like the loaners to default.
To further understand if the central bank would not have adequate capacity, it would further lead to the control of the money supply. The creditor's worthiness to control and even that could represent that would allow the world to live in, Depending on the bank loans the importance of the deposits and interpretation of the reserve positions of the banks, needs to be legally compliant and be inline to the process to obligate per the reserves from the central bank.