a) Suppose the Government of Canada buys $12 million worth of equipment from pri
ID: 2578573 • Letter: A
Question
a) Suppose the Government of Canada buys $12 million worth of equipment from private firms and pays for that purchase with cheques draw from its bank account at the Bank of Canada (BOC). After the private firms have deposited the government cheques in the commercial banking sector and the commercial banks have presented the cheques to the BOC, use a separate balance sheet for the BOC and the commercial banking sector to show the changes. (b) In a separate transaction suppose the commercial banks repay a loan to the BOC worth $15 million. Use a separate balance sheet for the BOC and the commercial banks to show the changes to their respective balance sheets as a result of this action. (c) As a result of the actions in part (a) and part (b) what is the combined effect on settlement balances held by Canadian commercial banks at the BOC? Show in a balance sheet for the Canadian commercial banks. a) Suppose the Government of Canada buys $12 million worth of equipment from private firms and pays for that purchase with cheques draw from its bank account at the Bank of Canada (BOC). After the private firms have deposited the government cheques in the commercial banking sector and the commercial banks have presented the cheques to the BOC, use a separate balance sheet for the BOC and the commercial banking sector to show the changes. (b) In a separate transaction suppose the commercial banks repay a loan to the BOC worth $15 million. Use a separate balance sheet for the BOC and the commercial banks to show the changes to their respective balance sheets as a result of this action. (c) As a result of the actions in part (a) and part (b) what is the combined effect on settlement balances held by Canadian commercial banks at the BOC? Show in a balance sheet for the Canadian commercial banks. a) Suppose the Government of Canada buys $12 million worth of equipment from private firms and pays for that purchase with cheques draw from its bank account at the Bank of Canada (BOC). After the private firms have deposited the government cheques in the commercial banking sector and the commercial banks have presented the cheques to the BOC, use a separate balance sheet for the BOC and the commercial banking sector to show the changes. (b) In a separate transaction suppose the commercial banks repay a loan to the BOC worth $15 million. Use a separate balance sheet for the BOC and the commercial banks to show the changes to their respective balance sheets as a result of this action. (c) As a result of the actions in part (a) and part (b) what is the combined effect on settlement balances held by Canadian commercial banks at the BOC? Show in a balance sheet for the Canadian commercial banks.Explanation / Answer
(A)
BANK OF CANADA
LIABILITIES
AMOUNT
ASSET
AMOUNT
(in millions)
(in millions)
Government deposits
Cash
-12
- Check issued
-12
-12
-12
Liability of Bank of Canada and cash reduced by 12 million
COMMERCIAL BANK
LIABILITIES
AMOUNT
ASSET
AMOUNT
(in millions)
(in millions)
Firms deposits
Cash
12
Check deposited
12
12
12
Liability of Commercial bank increased as customer's deposit
increased by 12 million simultaneously cash also increases.
(B)
BANK OF CANADA
LIABILITIES
AMOUNT
ASSET
AMOUNT
(in millions)
(in millions)
Cash
15
Loan to Commercial Banks
-Repayment received
-15
0
Repayment of 15 million of total loans given reduces asset of Bank of Canada
whereas repayment increases cash balance by same amount. Hence there is nil effect
COMMERCIAL BANK
LIABILITIES
AMOUNT
ASSET
AMOUNT
(in millions)
(in millions)
Loan from Bank of Canada
Cash
-15
-Repayment
-15
-15
-15
Repayment of 15 million of total loans taken reduces liability and cash balance of commercial bank
(C )
BANK OF CANADA
LIABILITIES
AMOUNT
ASSET
AMOUNT
(in millions)
(in millions)
Cash
3
(15-12)
Government deposits
Loan to Commercial Banks
- Check issued
-12
-Repayment received
-15
-12
-12
Cash received 15 million and cash paid 12 million will eventually have addition of
3 million cash.
COMMERCIAL BANK
LIABILITIES
AMOUNT
ASSET
AMOUNT
(in millions)
(in millions)
Loan from Bank of Canada
-Repayment
-15
Cash
-3
(-15+12)
Firms deposits
Check deposited
12
-3
-3
Cash received 12 million and cash paid 15 million will eventually have reduction of
3 million cash.
(A)
BANK OF CANADA
LIABILITIES
AMOUNT
ASSET
AMOUNT
(in millions)
(in millions)
Government deposits
Cash
-12
- Check issued
-12
-12
-12
Liability of Bank of Canada and cash reduced by 12 million
COMMERCIAL BANK
LIABILITIES
AMOUNT
ASSET
AMOUNT
(in millions)
(in millions)
Firms deposits
Cash
12
Check deposited
12
12
12
Liability of Commercial bank increased as customer's deposit
increased by 12 million simultaneously cash also increases.
(B)
BANK OF CANADA
LIABILITIES
AMOUNT
ASSET
AMOUNT
(in millions)
(in millions)
Cash
15
Loan to Commercial Banks
-Repayment received
-15
0
Repayment of 15 million of total loans given reduces asset of Bank of Canada
whereas repayment increases cash balance by same amount. Hence there is nil effect
COMMERCIAL BANK
LIABILITIES
AMOUNT
ASSET
AMOUNT
(in millions)
(in millions)
Loan from Bank of Canada
Cash
-15
-Repayment
-15
-15
-15
Repayment of 15 million of total loans taken reduces liability and cash balance of commercial bank
(C )
BANK OF CANADA
LIABILITIES
AMOUNT
ASSET
AMOUNT
(in millions)
(in millions)
Cash
3
(15-12)
Government deposits
Loan to Commercial Banks
- Check issued
-12
-Repayment received
-15
-12
-12
Cash received 15 million and cash paid 12 million will eventually have addition of
3 million cash.
COMMERCIAL BANK
LIABILITIES
AMOUNT
ASSET
AMOUNT
(in millions)
(in millions)
Loan from Bank of Canada
-Repayment
-15
Cash
-3
(-15+12)
Firms deposits
Check deposited
12
-3
-3
Cash received 12 million and cash paid 15 million will eventually have reduction of
3 million cash.
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