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Monetary policy calculation with currency drain

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If the Bank of Canada sell $100 million worth of bonds to the public in an open market operation, what is the change in quantity of money that will eventually result? Assume that the currency drain is 0.15 and the desired reserve ratio is 0.05. Show your calculations.

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Solution Preview

The Reserve Ratio (RR) is the ratio of assets that banks must hold as cash. The Currency Drain Ratio (CDR) is the ratio of assets that people want to ...

Solution Summary

How to calculate the effect on the money supply of an open market transaction by the central bank, accounting for the reserve ratio (RR), currency drain ratio (CDR) and money multiplier (MM).

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