Question 1

Why is the actual money multiplier smaller than the simple money multiplier?

Accepted Answer

A)  because the actual multiplier involves M2 rather than M1 
B)  because cash withdrawals reduce the amount banks can lend out 
C)  because withdrawals from chequable deposits increase the amount of excess reserves each bank receives 
D)  because the actual multiplier uses a different measure of desired reserves 
A)  because the actual multiplier involves M2 rather than M1 
B)  because cash withdrawals reduce the amount banks can lend out 
C)  because withdrawals from chequable deposits increase the amount of excess reserves each bank receives 
D)  because the actual multiplier uses a different measure of desired reserves

Question 2

Until what point does the money expansion process continue?

Accepted Answer

A)  until there are no more desired reserves in the system 
B)  until there are no more demand deposits in the system 
C)  until there are no more excess reserves in the system that banks are willing to lend 
D)  until there are no more liabilities in the system 
A)  until there are no more desired reserves in the system 
B)  until there are no more demand deposits in the system 
C)  until there are no more excess reserves in the system that banks are willing to lend 
D)  until there are no more liabilities in the system

Question 3

When the Bank of Canada sells Canadian government securities to a chartered bank, what is the immediate effect on that bank's balance sheet?

Accepted Answer

A)  a decrease in assets, and an increase in liabilities 
B)  an increase in assets, and a decrease in liabilities 
C)  an increase in assets, and an increase in liabilities 
D)  a change in the type of assets the bank is holding, but no change in the type of liabilities 
A)  a decrease in assets, and an increase in liabilities 
B)  an increase in assets, and a decrease in liabilities 
C)  an increase in assets, and an increase in liabilities 
D)  a change in the type of assets the bank is holding, but no change in the type of liabilities

Question 4

Suppose the First National Bank acquires $500,000 in new deposits and the desired reserve ratio is 12 percent.By what amount can the First National Bank increase the money supply?

Accepted Answer

A)  by $400,000 
B)  by $440,000 
C)  by $500,000 
D)  by $560,000 
A)  by $400,000 
B)  by $440,000 
C)  by $500,000 
D)  by $560,000

Question 5

What is the immediate effect of a chartered bank's purchase of Canadian government securities from the Bank of Canada?

Accepted Answer

A)  an increase in the bank's desired reserves 
B)  a decrease in the bank's desired reserve ratio 
C)  an increase in the bank's actual reserves 
D)  a decrease in the bank's actual reserves 
A)  an increase in the bank's desired reserves 
B)  a decrease in the bank's desired reserve ratio 
C)  an increase in the bank's actual reserves 
D)  a decrease in the bank's actual reserves

Question 6

How will an increase in banks' desire for liquidity affect the extent of monetary expansion and the value of the multiplier?

Accepted Answer

A)  The extent of monetary expansion will decrease, but the value of the multiplier will NOT decrease. 
B)  The extent of monetary expansion will increase, but the value of the multiplier will NOT increase. 
C)  The extent of monetary expansion will decrease, and the value of the multiplier will decrease. 
D)  The extent of monetary expansion will increase, and the value of the multiplier will increase. 
A)  The extent of monetary expansion will decrease, but the value of the multiplier will NOT decrease. 
B)  The extent of monetary expansion will increase, but the value of the multiplier will NOT increase. 
C)  The extent of monetary expansion will decrease, and the value of the multiplier will decrease. 
D)  The extent of monetary expansion will increase, and the value of the multiplier will increase.

Question 7

Suppose a customer deposits $1,000 cash into her chequing account.How will this affect the bank's assets and liabilities?

Accepted Answer

A)  Assets fall by $1,000 and liabilities fall by $1,000. 
B)  Assets fall by $1,000 and liabilities rise by $1,000. 
C)  Assets rise by $1,000 and liabilities fall by $1,000. 
D)  Assets rise by $1,000 and liabilities rise by $1,000. 
A)  Assets fall by $1,000 and liabilities fall by $1,000. 
B)  Assets fall by $1,000 and liabilities rise by $1,000. 
C)  Assets rise by $1,000 and liabilities fall by $1,000. 
D)  Assets rise by $1,000 and liabilities rise by $1,000.

Question 8

Suppose each bank in Canada had to keep 100 percent of chequable deposits as reserves.For each $1 the Bank of Canada injects into new reserves, by what amount does the money supply increase?

Accepted Answer

A)  by as much as $1 
B)  by as much as $2 
C)  by as much as $100 
D)  by as much as $200 
A)  by as much as $1 
B)  by as much as $2 
C)  by as much as $100 
D)  by as much as $200

Question 9

Sometimes banks hold highly liquid assets to guard against sudden large withdrawals.What do banks sacrifice when they do this?

Accepted Answer

A)  safety 
B)  profitability 
C)  cash 
D)  security 
A)  safety 
B)  profitability 
C)  cash 
D)  security

Question 10

Exhibit 13-1
  
-Refer to the table in the exhibit.Assume the desired reserve ratio is 10 percent.Suppose Stu Dent deposits $10,000 in cash into his chequable deposit account.How much will EuBank have in excess reserves?

Accepted Answer

A)  $1,000 
B)  $6,000 
C)  $9,000 
D)  $60,000 
A)  $1,000 
B)  $6,000 
C)  $9,000 
D)  $60,000

Question 11

Which of the following best describes liquidity of an asset?

Accepted Answer

A)  the ease of conversion of an asset to cash without significant loss of value 
B)  cash value of an asset relative to other liquid assets 
C)  how much interest would flow from the asset if it were a financial instrument 
D)  the rise of liquidity along with the asset's rate of return 
A)  the ease of conversion of an asset to cash without significant loss of value 
B)  cash value of an asset relative to other liquid assets 
C)  how much interest would flow from the asset if it were a financial instrument 
D)  the rise of liquidity along with the asset's rate of return

Question 12

Suppose a bank sells a $1,000 security to the Bank of Canada and the desired reserve ratio is 20 percent.How much does the bank have in additional excess reserves and how much can it lend out?

Accepted Answer

A)  The bank has $1,000 in additional excess reserves, of which it can lend $800. 
B)  The bank has $1,000 in additional excess reserves, all of which it can lend. 
C)  The bank has $200 in excess reserves, all of which it can lend. 
D)  The bank has $200 in excess reserves, of which it can lend $160. 
A)  The bank has $1,000 in additional excess reserves, of which it can lend $800. 
B)  The bank has $1,000 in additional excess reserves, all of which it can lend. 
C)  The bank has $200 in excess reserves, all of which it can lend. 
D)  The bank has $200 in excess reserves, of which it can lend $160.

Question 13

Consider the money and credit expansion process.When r = the desired reserve ratio, what is the total change in chequable deposits equal to?

Accepted Answer

A)  The total change in chequable deposits equals the initial change in excess reserves multiplied by r. 
B)  The total change in chequable deposits equals the initial change in excess reserves plus the change in desired reserves. 
C)  The total change in chequable deposits equals the initial change in excess reserves divided by 1/r. 
D)  The total change in chequable deposits equals the initial change in excess reserves multiplied by 1/r. 
A)  The total change in chequable deposits equals the initial change in excess reserves multiplied by r. 
B)  The total change in chequable deposits equals the initial change in excess reserves plus the change in desired reserves. 
C)  The total change in chequable deposits equals the initial change in excess reserves divided by 1/r. 
D)  The total change in chequable deposits equals the initial change in excess reserves multiplied by 1/r.

Question 14

What is the composition of the M1+ money supply?

Accepted Answer

A)  coins and currency held by the nonbanking public 
B)  coins and currency held by the nonbanking public and currency held in banks 
C)  coins and currency held by the nonbanking public, chequable deposits, and traveller's cheques 
D)  coins and currency held in banks and chequable deposits 
A)  coins and currency held by the nonbanking public 
B)  coins and currency held by the nonbanking public and currency held in banks 
C)  coins and currency held by the nonbanking public, chequable deposits, and traveller's cheques 
D)  coins and currency held in banks and chequable deposits

Question 15

Consider a policy that decreases the required reserve ratio in a country such as the United States.What type of policy is this?

Accepted Answer

A)  It is a contractionary policy because it lowers the amount of total reserves in the banking system. 
B)  It is a contractionary policy because it lowers the amount of excess reserves in the banking system. 
C)  It is an expansionary policy because it raises the amount of total reserves in the banking system. 
D)  It is an expansionary policy because it raises the amount of excess reserves in the banking system. 
A)  It is a contractionary policy because it lowers the amount of total reserves in the banking system. 
B)  It is a contractionary policy because it lowers the amount of excess reserves in the banking system. 
C)  It is an expansionary policy because it raises the amount of total reserves in the banking system. 
D)  It is an expansionary policy because it raises the amount of excess reserves in the banking system.

Question 16

Under which of the following circumstances will the simple money multiplier most overstate the change in chequable deposits that arises from a change in excess reserves?

Accepted Answer

A)  The public withdraws no cash, and banks hold no excess reserves. 
B)  The public withdraws no cash, and banks hold excess reserves. 
C)  The public withdraws cash, and banks hold no excess reserves. 
D)  The public withdraws cash, and banks hold excess reserves. 
A)  The public withdraws no cash, and banks hold no excess reserves. 
B)  The public withdraws no cash, and banks hold excess reserves. 
C)  The public withdraws cash, and banks hold no excess reserves. 
D)  The public withdraws cash, and banks hold excess reserves.

Question 17

Suppose the bank manager wants to increase the bank's profitability.Which of the following strategies is the bank manager likely to use?

Accepted Answer

A)  hold more of the bank's assets in required reserves 
B)  hold more of the bank's assets in excess reserves 
C)  reduce the liquidity of a bank's assets 
D)  meet all depositors' requests for funds with little trouble 
A)  hold more of the bank's assets in required reserves 
B)  hold more of the bank's assets in excess reserves 
C)  reduce the liquidity of a bank's assets 
D)  meet all depositors' requests for funds with little trouble

Question 18

In financial markets, when does asymmetric information exist?

Accepted Answer

A)  when one party to a transaction has more knowledge of relevant details than the other party 
B)  when lenders know more about the borrowers than the borrowers know about themselves 
C)  when all parties to a transaction have exactly the same information 
D)  when all the information held by the parties is inaccurate 
A)  when one party to a transaction has more knowledge of relevant details than the other party 
B)  when lenders know more about the borrowers than the borrowers know about themselves 
C)  when all parties to a transaction have exactly the same information 
D)  when all the information held by the parties is inaccurate

Question 19

Suppose the desired reserve ratio is 0.2, and the Bank of Canada buys $3,000 of Canadian government securities.What is the maximum amount by which the money supply can increase?

Accepted Answer

A)  $200 
B)  $600 
C)  $3,000 
D)  $15,000 
A)  $200 
B)  $600 
C)  $3,000 
D)  $15,000

Question 20

What is the appropriate open market operation for reducing the money supply?

Accepted Answer

A)  buy Canadian government securities 
B)  limit the amount loaned to banks 
C)  increase desired reserves 
D)  sell Canadian government securities 
A)  buy Canadian government securities 
B)  limit the amount loaned to banks 
C)  increase desired reserves 
D)  sell Canadian government securities

Why is the actual money multiplier smaller than the simple money multiplier?

Until what point does the money expansion process continue?

When the Bank of Canada sells Canadian government securities to a chartered bank, what is the immediate effect on that bank's balance sheet?

Suppose the First National Bank acquires $500,000 in new deposits and the desired reserve ratio is 12 percent.By what amount can the First National Bank increase the money supply?

What is the immediate effect of a chartered bank's purchase of Canadian government securities from the Bank of Canada?

How will an increase in banks' desire for liquidity affect the extent of monetary expansion and the value of the multiplier?

Suppose a customer deposits $1,000 cash into her chequing account.How will this affect the bank's assets and liabilities?

Suppose each bank in Canada had to keep 100 percent of chequable deposits as reserves.For each $1 the Bank of Canada injects into new reserves, by what amount does the money supply increase?

Sometimes banks hold highly liquid assets to guard against sudden large withdrawals.What do banks sacrifice when they do this?

Exhibit 13-1 -Refer to the table in the exhibit.Assume the desired reserve ratio is 10 percent.Suppose Stu Dent deposits $10,000 in cash into his chequable deposit account.How much will EuBank have in excess reserves?

Which of the following best describes liquidity of an asset?

Suppose a bank sells a $1,000 security to the Bank of Canada and the desired reserve ratio is 20 percent.How much does the bank have in additional excess reserves and how much can it lend out?

Consider the money and credit expansion process.When r = the desired reserve ratio, what is the total change in chequable deposits equal to?

What is the composition of the M1+ money supply?

Consider a policy that decreases the required reserve ratio in a country such as the United States.What type of policy is this?

Under which of the following circumstances will the simple money multiplier most overstate the change in chequable deposits that arises from a change in excess reserves?

Suppose the bank manager wants to increase the bank's profitability.Which of the following strategies is the bank manager likely to use?

In financial markets, when does asymmetric information exist?

Suppose the desired reserve ratio is 0.2, and the Bank of Canada buys $3,000 of Canadian government securities.What is the maximum amount by which the money supply can increase?

What is the appropriate open market operation for reducing the money supply?

The Art and Science of Economic Analysis

Economic Tools and Economic Systems

Economic Decision Makers

Demand, Supply, and Markets

Algebraic Approach to Demand, Supply, and Equilibrium

Introduction to Macroeconomics

Tracking the Canadian Economy

Unemployment and Inflation

Productivity and Growth

Aggregate Expenditure and Aggregate Demand

Aggregate Supply

Fiscal Policy

Money and the Financial System

Monetary Theory and Policy in an Open Economy

Macro Policy Debate: Active or Passive

International Finance

International Trade

Economic Development

Understanding Graphs

Filters

Exam 14: Banking and the Money Supply

Why is the actual money multiplier smaller than the simple money multiplier?

Until what point does the money expansion process continue?

When the Bank of Canada sells Canadian government securities to a chartered bank, what is the immediate effect on that bank's balance sheet?

Suppose the First National Bank acquires $500,000 in new deposits and the desired reserve ratio is 12 percent.By what amount can the First National Bank increase the money supply?

What is the immediate effect of a chartered bank's purchase of Canadian government securities from the Bank of Canada?

How will an increase in banks' desire for liquidity affect the extent of monetary expansion and the value of the multiplier?

Suppose a customer deposits $1,000 cash into her chequing account.How will this affect the bank's assets and liabilities?

Suppose each bank in Canada had to keep 100 percent of chequable deposits as reserves.For each $1 the Bank of Canada injects into new reserves, by what amount does the money supply increase?

Sometimes banks hold highly liquid assets to guard against sudden large withdrawals.What do banks sacrifice when they do this?

Exhibit 13-1 -Refer to the table in the exhibit.Assume the desired reserve ratio is 10 percent.Suppose Stu Dent deposits $10,000 in cash into his chequable deposit account.How much will EuBank have in excess reserves?

Which of the following best describes liquidity of an asset?

Suppose a bank sells a $1,000 security to the Bank of Canada and the desired reserve ratio is 20 percent.How much does the bank have in additional excess reserves and how much can it lend out?

Consider the money and credit expansion process.When r = the desired reserve ratio, what is the total change in chequable deposits equal to?

What is the composition of the M1+ money supply?

Consider a policy that decreases the required reserve ratio in a country such as the United States.What type of policy is this?

Under which of the following circumstances will the simple money multiplier most overstate the change in chequable deposits that arises from a change in excess reserves?

Suppose the bank manager wants to increase the bank's profitability.Which of the following strategies is the bank manager likely to use?

In financial markets, when does asymmetric information exist?

Suppose the desired reserve ratio is 0.2, and the Bank of Canada buys $3,000 of Canadian government securities.What is the maximum amount by which the money supply can increase?

What is the appropriate open market operation for reducing the money supply?

The Art and Science of Economic Analysis

Economic Tools and Economic Systems

Economic Decision Makers

Demand, Supply, and Markets

Algebraic Approach to Demand, Supply, and Equilibrium

Introduction to Macroeconomics

Tracking the Canadian Economy

Unemployment and Inflation

Productivity and Growth

Aggregate Expenditure and Aggregate Demand

Aggregate Supply

Fiscal Policy

Money and the Financial System

Monetary Theory and Policy in an Open Economy

Macro Policy Debate: Active or Passive

International Finance

International Trade

Economic Development

Understanding Graphs

Filters