Question 1

What phrase can sum up the practice of reducing risk through diversification?

Accepted Answer

A)  A penny saved is a penny earned. 
B)  Neither a borrower nor a lender be. 
C)  Buy low, sell high. 
D)  Do NOT put all your eggs in one basket.

Question 2

Suppose a cheque is cleared against Bank A after being deposited at Bank B.How are the banks' liabilities affected?

Accepted Answer

A)  Bank A's liabilities increase, and Bank B's liabilities increase. 
B)  Bank A's liabilities decrease, and Bank B's liabilities decrease. 
C)  Bank A's liabilities increase, and Bank B's liabilities decrease. 
D)  Bank A's liabilities decrease, and Bank B's liabilities increase.

Question 3

Suppose the Bank of Canada purchases $5,000 in Canadian government securities from the Last National Bank, and the Last National Bank's account at the Bank of Canada increases by $5,000.How does this transaction affect the Last National Bank's balance sheet?

Accepted Answer

A)  The Last National Bank's balance sheet shows a change in the composition of its assets. 
B)  The Last National Bank's assets rise by $5,000 and its liabilities rise by $5,000. 
C)  The National Bank's assets fall by $5,000 and its liabilities fall by $5,000. 
D)  The National Bank's assets rise by $5,000 and its liabilities fall by $5000.

Question 4

Suppose the Bank of Canada wishes to make only a small change in the money supply.Which of its policy tools is it most likely to use?

Accepted Answer

A)  the prime interest rate 
B)  loans made to the public 
C)  influence over the desired reserve ratio 
D)  open-market operations

Question 5

Suppose a bank lends Henry $1,000 to purchase a car.Which of the following represents the changes in the bank's balance sheet before Henry spends the money?

Accepted Answer

A)  Assets: loans +$1,000. Liabilities and net worth: chequing deposits +$1,000. 
B)  Assets: loans -$1,000, chequing deposits +$1,000. Liabilities and net worth: no change. 
C)  Assets: chequing deposits +$1,000. Liabilities and net worth: loans +$1,000. 
D)  Assets: chequing deposits +$1,000. Liabilities and net worth: loans -$1,000.

Question 6

How do banks create new deposits?

Accepted Answer

A)  by lending out excess reserves 
B)  by lending out desired reserves 
C)  by raising interest rates on loans 
D)  by calling in loans

Question 7

Which of the following best describes a bank's balance sheet?

Accepted Answer

A)  assets = liabilities - net worth 
B)  assets = liabilities + net worth 
C)  assets = liabilities 
D)  assets = net worth

Question 8

How does the banking system create money?

Accepted Answer

A)  It prints notes. 
B)  It creates excess reserves from loans. 
C)  It creates loans from excess reserves. 
D)  It creates desired reserves from loans.

Question 9

Suppose there is an increase in excess reserves of $10 million and the banking system's chequable deposits increase by a maximum of $200 million.What is the desired reserve ratio?

Accepted Answer

A)  0 
B)  5 percent 
C)  10 percent 
D)  20 percent

Question 10

Why do banks want to minimize their holdings of excess reserves?

Accepted Answer

A)  because excess bank reserves earn no interest 
B)  because desired bank reserves will also be minimized 
C)  because the money multiplier will be larger, thus leading to a greater money supply 
D)  because banks want to borrow more on the overnight money market

Question 11

In order to increase the money supply, what must the banking system have?

Accepted Answer

A)  desired reserves 
B)  the authority to buy corporate stocks 
C)  the authority to print currency 
D)  excess reserves

Question 12

What is the simple money multiplier equal to?

Accepted Answer

A)  the reciprocal of the desired reserve ratio 
B)  a multiple of the desired reserve ratio 
C)  desired reserves plus excess reserves 
D)  total reserves minus required reserves

Question 13

Exhibit 13-2
 
-Refer to the table in the exhibit.What kind of transaction just took place at CountyBank?

Accepted Answer

A)  A customer withdrew $1,000 from her chequing account. 
B)  A customer deposited a $1,000 cheque in her savings account. 
C)  A customer deposited $1,000 in her chequing account. 
D)  The bank purchased a security with $1,000 cash.

Question 14

What is another term for the net worth on a bank's balance sheet?

Accepted Answer

A)  assets plus liabilities 
B)  owners' equity 
C)  assets minus reserves 
D)  net profits

Question 15

What are demand deposits?

Accepted Answer

A)  long-term, high-interest savings accounts 
B)  accounts to which depositors are required to make regular deposits 
C)  chequable deposits held by chartered banks 
D)  negotiable order of withdrawal accounts

Question 16

What do chartered banks attempt to maximize?

Accepted Answer

A)  assets 
B)  deposits 
C)  loans 
D)  profits

Question 17

Suppose the banking system has no excess reserves and the desired reserves are equal to 20 percent of chequable deposits.And suppose the Bank of Canada sells $10,000 in securities to Joe Bank Customer.What is the maximum amount that chequable deposits in the banking system could fall?

Accepted Answer

A)  $2,000 
B)  $10,000 
C)  $20,000 
D)  $50,000

Question 18

Exhibit 13-1
 
-Refer to the table in the exhibit.Suppose EuBank is holding no excess reserves.What must the desired reserve ratio be?

Accepted Answer

A)  4 percent 
B)  5 percent 
C)  10 percent 
D)  20 percent

Question 19

On a bank's balance sheet, what must the value of its assets equal?

Accepted Answer

A)  net worth 
B)  liabilities 
C)  owner's equity 
D)  liabilities plus net worth

Question 20

Suppose banks allow some of their excess reserves to remain in the vault.How will this affect the simple money multiplier and the actual money multiplier?

Accepted Answer

A)  The simple money multiplier will exceed the actual money multiplier. 
B)  The simple money multiplier will understate the actual money multiplier. 
C)  The actual money multiplier and the simple money multiplier will be equal. 
D)  The simple money multiplier and the actual money multiplier will be unrelated.

Exam 14: Banking and the Money Supply