Question

a) Explain the three key functions of the Bank of Canada.

b) In the Canadian banking system, the target reserve ratio is 20 per cent and the estimated value of the cash drain ratio is 5 per cent. What is the total value of new deposits from a new deposit in a bank of $500.00? (show your calculations).

Answer 1

a.

This is the central bank of the country. Functions are as below:

No.1) monetary policy: based on the current economic situation and necessities of the country, the central bank takes monetary policy like dropping down discount rate, open market operation, printing of notes, etc.

No.2) banker to the banks: it acts as the banker of all commercial banks of the country – proving loans, making reserves, etc.

No.3) banker to the central government: this is the bank of the government – keeping records of government deposits, expenses, etc.

b.

Money multiplier (MM) should be calculated first.

Reserve ratio = R = 0.20

Currency drain = C = 0.05

Hence,

MM = (1 + C) / (R + C)

        = (1 + 0.05) / (0.20 + 0.05)

        = 1.05 / 0.25

        = 4.2

It increases total value 4.2 times.

Total value = New deposit × MM

                   = 500 × 4.2

                   = $2,100 (Answer)