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The federal government raises 400 million by selling bonds to the general public in order to pay for a construction program. The program cost 440 million so the government withdraws 25 million from its Royal Bank deposits and 15 million from its Bank of Canada deposits. If the target reserve ration of the private banks if 10%, what is the change in private bank reserve?

I not sure what's going on. The answer is private bank reserve rise by 15 million, but all I see is that the money all cancels out. There might be a change in money supply because of the decreased deposits, but those still would not give a rise in 15 million. What am I not understanding?

EDIT: After some thought, I think it's because the 15 that was in the Bank of Canada in now deposited in private banks by the public, hence the 15 million increase.

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  • $\begingroup$ For those not Canadian, the "Bank of Canada" is the central bank, while the "Royal Bank of Canada" is the largest commercial bank $\endgroup$ – Henry Aug 15 '16 at 23:47

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