Question

Consider an individual who immigrates to Canada and deposits $2,000 in Canadian currency into the Canadian banking system. Suppose all commercial banks have a target reserve ratio of 5 percent and individuals choose to hold cash equal to 10 percent of their bank deposits.

a. The eventual total change in deposits is equal to1/(v+c )times the new deposit, where v is the target reserve ratio and c is the ratio of cash to deposits. In this case, the eventual total change in deposits is $__________. (Round your response to the nearest dollar.)

Answer 1

The eventual total change in deposits is $13,340.

Step-by-step explanation:

To calculate the eventual total change in deposits, we can use the formula:

Eventual total change in deposits = 1 / (v + c) * new deposit

Given that the target reserve ratio (v) is 5% and the cash-to-deposit ratio (c) is 10%, we can substitute these values into the formula:

Eventual total change in deposits = 1 / (0.05 + 0.10) * $2,000

Simplifying the formula:

Eventual total change in deposits = 1 / 0.15 * $2,000

Eventual total change in deposits = 6.67 * $2,000

Eventual total change in deposits = $13,340