Question

In reality, the reserve ratio for Canadian commercial banks is close to ________%, which means that the deposit creation process is ________.

A) 0.1; extremely powerful
B) 5; powerful
C) 20; similar to that discussed in the text
D) 50; weak
E) 100; very weak

Answer 1

The reserve ratio for Canadian commercial banks is currently at 0%, making the deposit creation process extremely powerful after the Federal Reserve eliminated reserve requirements in March 2020.

Step-by-step explanation:

In reality, the reserve ratio for Canadian commercial banks is close to 0%, which means that the deposit creation process is extremely powerful. This situation came to be as of March 2020 when the pandemic-induced recession hit, leading to a policy change where the Federal Reserve reduced the reserve requirements, that previously were at 10% and 3% for various levels of deposits, down to 0%. Effectively, this eliminated the reserve requirement for all depository institutions. Consequently, banks are now able to lend out almost all of their deposits, which can greatly amplify the money creation process and influence the economy.