Question 1

A bank run is unlikely to occur in Canada today because

Accepted Answer

A) if necessary,the central bank can provide all the reserves that are necessary to avoid this situation. 
B) the commercial banks are required by law to maintain 100% of their deposits in cash. 
C) there is relatively little demand for cash at present. 
D) banking is done mostly electronically. 
E) the commercial banks hold enough government securities that are convertible into cash. 
A) if necessary,the central bank can provide all the reserves that are necessary to avoid this situation. 
B) the commercial banks are required by law to maintain 100% of their deposits in cash. 
C) there is relatively little demand for cash at present. 
D) banking is done mostly electronically. 
E) the commercial banks hold enough government securities that are convertible into cash. A

Question 2

If most individuals accept paper currency in transactions,and paper currency is convertible into gold,then banks can safely issue

Accepted Answer

A) no more paper currency than the value of the gold they hold. 
B) more paper currency than the value of the gold they hold. 
C) as much paper currency as they please. 
D) paper currency equal to a fraction of the gold they hold. 
E) paper currency equal to the bankʹs commercial debt divided by their gold reserves. 
A) no more paper currency than the value of the gold they hold. 
B) more paper currency than the value of the gold they hold. 
C) as much paper currency as they please. 
D) paper currency equal to a fraction of the gold they hold. 
E) paper currency equal to the bankʹs commercial debt divided by their gold reserves. B

Question 3

A commercial bankʹs target reserve ratio is the

Accepted Answer

A) fraction of its deposit liabilities that it wishes to holds as reserves,either as cash or as deposits with the Bank of Canada. 
B) fraction of its deposit liabilities that it actually holds as cash in its own vaults. 
C) fraction of its deposit liabilities that are backed by gold. 
D) ratio of Canadian dollars to foreign currencies that the bank holds on its books. 
E) ratio of chequable deposits to term deposits that the bank holds on its books. 
A) fraction of its deposit liabilities that it wishes to holds as reserves,either as cash or as deposits with the Bank of Canada. 
B) fraction of its deposit liabilities that it actually holds as cash in its own vaults. 
C) fraction of its deposit liabilities that are backed by gold. 
D) ratio of Canadian dollars to foreign currencies that the bank holds on its books. 
E) ratio of chequable deposits to term deposits that the bank holds on its books. A

Question 4

Greshamʹs law predicts that

Accepted Answer

A) good money drives out bad money. 
B) debased money will circulate with undebased money. 
C) undebased money will be driven from circulation. 
D) debased money will be driven from circulation. 
E) money is neutral in the long run. 
A) good money drives out bad money. 
B) debased money will circulate with undebased money. 
C) undebased money will be driven from circulation. 
D) debased money will be driven from circulation. 
E) money is neutral in the long run.

Question 5

Until recently,and for many years,the common definition of the money supply used by the Bank of Canada was M1,which included currency in circulation plus

Accepted Answer

A) chequable deposits at the chartered banks. 
B) chequable deposits and savings accounts at the chartered banks. 
C) savings accounts and demand loans. 
D) term deposits and money market funds. 
E) chequable deposits at all financial institutions. 
A) chequable deposits at the chartered banks. 
B) chequable deposits and savings accounts at the chartered banks. 
C) savings accounts and demand loans. 
D) term deposits and money market funds. 
E) chequable deposits at all financial institutions.

Question 6

Suppose the excess reserves in Toronto Dominion Bank increase by $700.Given a desired reserve ratio of 2.5% and no cash drain,the maximum change in deposits for the entire banking system would be

Accepted Answer

A) $682.50. 
B) $700.00. 
C) $17 500.00. 
D) $28 000.00. 
E) $70 000.00. 
A) $682.50. 
B) $700.00. 
C) $17 500.00. 
D) $28 000.00. 
E) $70 000.00.

Question 7

Which of the following illustrates the use of fiat money?

Accepted Answer

A) exchanging Canadian dollars for a T-shirt 
B) exchanging money-market funds for gold 
C) exchanging money-market funds for insurance 
D) keeping gold as a hedge against inflation 
E) bartering goods for services 
A) exchanging Canadian dollars for a T-shirt 
B) exchanging money-market funds for gold 
C) exchanging money-market funds for insurance 
D) keeping gold as a hedge against inflation 
E) bartering goods for services

Question 8

Consider a new deposit of $100 000 to the Canadian banking system.The commercial bank that initially receives this deposit will find itself with

Accepted Answer

A) no excess reserves if there is no reserve requirement. 
B) $1000 of excess cash reserves if its target reserve ratio is 10%. 
C) $2000 of excess cash reserves if its target reserve ratio is 2%. 
D) $10 000 of excess cash reserves if its target reserve ratio is 10%. 
E) $98 000 of excess cash reserves if its target reserve ratio is 2%. 
A) no excess reserves if there is no reserve requirement. 
B) $1000 of excess cash reserves if its target reserve ratio is 10%. 
C) $2000 of excess cash reserves if its target reserve ratio is 2%. 
D) $10 000 of excess cash reserves if its target reserve ratio is 10%. 
E) $98 000 of excess cash reserves if its target reserve ratio is 2%.

Question 9

The expansion of deposits resulting from an injection of new cash to the banking system can be calculated as follows.The change in deposits is equal to

Accepted Answer

A) the change in loans divided by the sum of the target reserve ratio. 
B) the change in reserves divided by the cash-deposit ratio. 
C) the change in reserves divided by the target reserve ratio. 
D) the change in reserves divided by the sum of the target reserve ratio and the cash-deposit ratio. 
E) the change in reserves divided by the sum of excess reserves and cash drain. 
A) the change in loans divided by the sum of the target reserve ratio. 
B) the change in reserves divided by the cash-deposit ratio. 
C) the change in reserves divided by the target reserve ratio. 
D) the change in reserves divided by the sum of the target reserve ratio and the cash-deposit ratio. 
E) the change in reserves divided by the sum of excess reserves and cash drain.

Question 10

The financial crisis that occurred in 2007 and 2008 highlighted one of the crucial functions of commercial banks and other financial institutions in developed economies.A crucial function that ceased to work smoothly during this time,and contributed to the global recession that began in 2008,was

Accepted Answer

A) the acceptance of deposits from firms and households. 
B) the joint regulation of financial markets. 
C) the provision of credit to firms,households and other banks. 
D) cheque clearing and collection. 
E) the clearing of electronic transfers. 
A) the acceptance of deposits from firms and households. 
B) the joint regulation of financial markets. 
C) the provision of credit to firms,households and other banks. 
D) cheque clearing and collection. 
E) the clearing of electronic transfers.

Question 11

If all the banks in the banking system collectively have $500 million in cash reserves,and have a target reserve ratio of 5%,the maximum amount of deposits the banking system can support is

Accepted Answer

A) $10 million. 
B) $100 million. 
C) $25 billion. 
D) $100 billion. 
E) $10 billion. 
A) $10 million. 
B) $100 million. 
C) $25 billion. 
D) $100 billion. 
E) $10 billion.

Question 12

Which of the following entries would appear on the liabilities side of the Bank of Canadaʹs balance sheet?

Accepted Answer

A) deposit money held in accounts at Canadaʹs commercial banks 
B) Government of Canada securities 
C) foreign currency reserves 
D) paper notes in circulation 
E) Canadian corporate securities 
A) deposit money held in accounts at Canadaʹs commercial banks 
B) Government of Canada securities 
C) foreign currency reserves 
D) paper notes in circulation 
E) Canadian corporate securities

Question 13

The Canada Deposit Insurance Corporation (CDIC)was set up to protect

Accepted Answer

A) member financial institutions in case of non-payment of loans from borrowers. 
B) member financial institutions in case of non payment of loans from the government. 
C) depositors with Canadian dollar accounts in member institutions for up to a maximum of $100 000 per eligible deposit. 
D) depositors with Canadian dollar accounts in any Canadian financial institution for up to a maximum of $100 000 per institution. 
E) depositors of any currency in any Canadian financial institution for up to a maximum of $100 000 per institution. 
A) member financial institutions in case of non-payment of loans from borrowers. 
B) member financial institutions in case of non payment of loans from the government. 
C) depositors with Canadian dollar accounts in member institutions for up to a maximum of $100 000 per eligible deposit. 
D) depositors with Canadian dollar accounts in any Canadian financial institution for up to a maximum of $100 000 per institution. 
E) depositors of any currency in any Canadian financial institution for up to a maximum of $100 000 per institution.

Question 14

The largest component of the liabilities of the Bank of Canada is

Accepted Answer

A) Government of Canada securities. 
B) Government of Canada deposits. 
C) Canadian currency in circulation. 
D) deposits of commercial banks and other financial institutions. 
E) loans to private individuals. 
A) Government of Canada securities. 
B) Government of Canada deposits. 
C) Canadian currency in circulation. 
D) deposits of commercial banks and other financial institutions. 
E) loans to private individuals.

Question 15

Consider a new deposit of $10 000 to the Canadian banking system.The commercial bank that initially receives this deposit will find itself with

Accepted Answer

A) no excess reserves if there is no reserve requirement. 
B) $1000 of excess cash reserves if its target reserve ratio is 10%. 
C) $2000 of excess cash reserves if its target reserve ratio is 2%. 
D) $9000 of excess cash reserves if its target reserve ratio is 10%. 
E) $98 000 of excess cash reserves if its target reserve ratio is 2%. 
A) no excess reserves if there is no reserve requirement. 
B) $1000 of excess cash reserves if its target reserve ratio is 10%. 
C) $2000 of excess cash reserves if its target reserve ratio is 2%. 
D) $9000 of excess cash reserves if its target reserve ratio is 10%. 
E) $98 000 of excess cash reserves if its target reserve ratio is 2%.

Question 16

Commercial banks hold a fraction of their deposits in cash in their vaults (or as deposits with the central bank).This fraction is known as

Accepted Answer

A) the required reserve. 
B) the excess reserve ratio. 
C) the fractional reserve. 
D) the reserve ratio. 
E) the target reserve. 
A) the required reserve. 
B) the excess reserve ratio. 
C) the fractional reserve. 
D) the reserve ratio. 
E) the target reserve.

Question 17

The use of money in an economy does which of the following?

Accepted Answer

A) creates the necessity for a double coincidence of wants 
B) solves the problem of inflation 
C) creates a problem of trading a portion of indivisible commodities such as a ship 
D) promote specialization and the division of labour 
E) promotes the use of barter 
A) creates the necessity for a double coincidence of wants 
B) solves the problem of inflation 
C) creates a problem of trading a portion of indivisible commodities such as a ship 
D) promote specialization and the division of labour 
E) promotes the use of barter

Question 18

Suppose you found a $100 bill that was lost for many years under your grandmotherʹs mattress.If the banking system has a cash drain of 5%,its target reserve ratio is 20%,and all excess reserves were lent out,your new deposit of the $100 bill would lead to an eventual expansion of the money supply of

Accepted Answer

A) $20. 
B) $25. 
C) $200. 
D) $400. 
E) $500. 
A) $20. 
B) $25. 
C) $200. 
D) $400. 
E) $500.

Question 19

The main distinction between M2 and M2+ is that M2+ also includes

Accepted Answer

A) deposits at trust companies,caisse populaires and foreign -currency accounts. 
B) coins in circulation. 
C) money market mutual funds held by the Bank of Canada. 
D) paper currency. 
E) deposits at financial institutions other than the chartered banks. 
A) deposits at trust companies,caisse populaires and foreign -currency accounts. 
B) coins in circulation. 
C) money market mutual funds held by the Bank of Canada. 
D) paper currency. 
E) deposits at financial institutions other than the chartered banks.

Question 20

Doug compares the unit price of chocolate bars in order to get the ʺbest buy.ʺ This represents using money as

Accepted Answer

A) a medium of exchange. 
B) a store of value. 
C) a unit of account. 
D) a unit of deferred payment. 
E) a money substitute. 
A) a medium of exchange. 
B) a store of value. 
C) a unit of account. 
D) a unit of deferred payment. 
E) a money substitute.

Exam 26: Money and Banking

A bank run is unlikely to occur in Canada today because

If most individuals accept paper currency in transactions,and paper currency is convertible into gold,then banks can safely issue

A commercial bankʹs target reserve ratio is the

Greshamʹs law predicts that

Until recently,and for many years,the common definition of the money supply used by the Bank of Canada was M1,which included currency in circulation plus

Suppose the excess reserves in Toronto Dominion Bank increase by $700.Given a desired reserve ratio of 2.5% and no cash drain,the maximum change in deposits for the entire banking system would be

Which of the following illustrates the use of fiat money?

Consider a new deposit of $100 000 to the Canadian banking system.The commercial bank that initially receives this deposit will find itself with

The expansion of deposits resulting from an injection of new cash to the banking system can be calculated as follows.The change in deposits is equal to

The financial crisis that occurred in 2007 and 2008 highlighted one of the crucial functions of commercial banks and other financial institutions in developed economies.A crucial function that ceased to work smoothly during this time,and contributed to the global recession that began in 2008,was

If all the banks in the banking system collectively have $500 million in cash reserves,and have a target reserve ratio of 5%,the maximum amount of deposits the banking system can support is

Which of the following entries would appear on the liabilities side of the Bank of Canadaʹs balance sheet?

The Canada Deposit Insurance Corporation (CDIC)was set up to protect

The largest component of the liabilities of the Bank of Canada is

Consider a new deposit of $10 000 to the Canadian banking system.The commercial bank that initially receives this deposit will find itself with

Commercial banks hold a fraction of their deposits in cash in their vaults (or as deposits with the central bank).This fraction is known as

The use of money in an economy does which of the following?

The main distinction between M2 and M2+ is that M2+ also includes

Doug compares the unit price of chocolate bars in order to get the ʺbest buy.ʺ This represents using money as

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