Question 1

Which of the following lists contains only actions that increase the money supply?

Accepted Answer

A) make open market purchases; raise the reserve requirement ratio 
B) make open market purchases; lower the reserve requirement ratio 
C) make open market sales; raise the reserve requirement ratio 
D) make open market sales; lower the reserve requirement ratio

Question 2

How does the Bank of Canada conduct open market transactions?

Accepted Answer

A) It issues banknotes. 
B) It buys or sells government bonds from/to the public. 
C) It lowers the bank rate. 
D) It increases its lending to chartered banks.

Question 3

What is the reason behind the seven-year appointment for the governor of Bank of Canada?

Accepted Answer

A) It makes the system compatible with the ones in other countries. 
B) It confers stability to the financial system. 
C) It allows the governor to become better in doing his or her job. 
D) It insulates the governor from political pressure.

Question 4

Banks could not change the money supply if they were required to hold all deposits in reserve.

Accepted Answer

A) True 
 B)False

Question 5

How are demand deposits treated in M1 as compared to M2?

Accepted Answer

A) They are included in M1 but not M2. 
B) They are included in M2 but not M1. 
C) They are included in M1 and M2. 
D) They are included in neither M1 nor M2.

Question 6

Which of the following happened during the Great Depression in the early 1930s?

Accepted Answer

A) The Great Depression was as bad in Canada as it was in the United States. 
B) The Bank runs closed many banks in Canada. . 
C) The money supply rose sharply. 
D) The value of Canadian exports increased considerably.

Question 7

At one time, the country of Aquilonia had no banks, but had currency of $10 million. Then a banking system was established with a reserve requirement of 20 percent. The people of Aquilonia deposited half of their currency into the banking system. If banks do not hold excess reserves, what is Aquilonia's money supply now?

Accepted Answer

A) $10 million 
B) $12 million 
C) $25 million 
D) $30 million

Question 8

Mia puts money into a piggy bank so she can spend it later. Which of the following functions of money does this illustrate?

Accepted Answer

A) store of value 
B) medium of exchange 
C) unit of account 
D) wealth

Question 9

Which of the following happens in a 100-percent-reserve banking system?

Accepted Answer

A) Banks can create money by issuing currency. 
B) Banks can create money by lending out reserves. 
C) The Bank of Canada can increase the money supply with open market sales. 
D) Banks hold as many reserves as they hold deposits.

Question 10

Table 29-1
 
-Refer to Table 29-1. What is the M1 money supply?

Accepted Answer

A) $175 billion 
B) $215 billion 
C) $216 billion 
D) $226 billion

Question 11

Gary's wealth is $1 million. Economists would say that Gary has $1 million worth of money.

Accepted Answer

A) True 
 B)False

Question 12

If you deposit $5000 into First Hawkeye Bank, what will the bank most likely do?

Accepted Answer

A) It will eventually increase its required reserves by the reserve ratio times $5000. 
B) It will be able to lend out $5,000 times the reserve ratio. 
C) It will initially see reserves increase by $5000 divided by the reserve ratio. 
D) It will be able to lend out $5000.

Question 13

The banking system has $20 million in reserves and has a reserve requirement of 20 percent. The public holds $10 million in currency. Bankers previously did not hold any excess reserves, but difficult economic times make them decide that it is prudent to hold 25 percent of deposits as reserves. At the same time, the public decides to withdraw $10 million in currency from the banking system. Other things equal, by how much must the Bank of Canada increase bank reserves to keep the money supply the same?

Accepted Answer

A) $10 million 
B) $12.5 million 
C) $50 million 
D) No action by the Bank of Canada is necessary.

Question 14

Suppose the reserve ratio is 10 percent, and banks do not hold excess reserves. Suppose the Bank of Canada sells $10 million of bonds to the public. Which of the following best describes the effects of this open market operation?

Accepted Answer

A) Bank reserves increase by $1 million, and the money supply eventually increases by $10 million. 
B) Bank reserves increase by $10 million, and the money supply eventually increases by $100 million. 
C) Bank reserves decrease by $1 million, and the money supply eventually increases by $10 million. 
D) Bank reserves decrease by $10 million, and the money supply eventually decreases by $100 million.

Question 15

Suppose a bank has a 5 percent reserve ratio, $4000 in deposits, and it loans out all it can, given the reserve ratio. Which of the following describes the bank's assets?

Accepted Answer

A) It has $20 in reserves and $3980 in loans. 
B) It has $200 in reserves and $3800 in loans. 
C) It has $200 in reserves and $4000 in loans. 
D) It has $5 in reserves and $3995 in loans.

Question 16

If the reserve ratio is 7 percent and a bank receives a new deposit of $300, which of the following will this bank most likely do?

Accepted Answer

A) It will increase required reserves by $2100. 
B) It will initially see reserves increase by $279. 
C) It will be able to make new loans up to a maximum of $279. 
D) It will be able to increase its required reserves by $30.

Question 17

Which of the following best describes the consequences of a decrease in the bank rate?

Accepted Answer

A) Banks will borrow less from Bank of Canada so reserves increase. 
B) Banks will borrow less from Bank of Canada so reserves decrease. 
C) Banks will borrow more from Bank of Canada so reserves increase. 
D) Banks will borrow more from Bank of Canada so reserves decrease.

Question 18

Which of the following best defines the bank rate?

Accepted Answer

A) It is the interest rate the Bank of Canada charges banks. 
B) It is one divided by the difference between one and the reserve ratio. 
C) It is the interest rate banks receive on reserve deposits with Bank of Canada. 
D) It is the interest rate that banks charge on overnight loans to other banks.

Question 19

Draw a simple T-account for First National Bank of Me, which has $5000 of deposits, a reserve ratio of 10 percent, and excess reserves of $300.

Accepted Answer

The answer of Draw a simple T-account for First National...

Question 20

Assume that banks do not hold excess reserves. The banking system has $20 million in reserves and has a reserve requirement of 20 percent. The public holds $10 million in currency. Then the public decides to withdraw $5 million in currency from the banking system. If the Bank of Canada wants to keep the money supply stable by changing the reserve requirement, then what will the new reserve requirement be?

Accepted Answer

A) 20 percent 
B) 18.2 percent 
C) 15.8 percent 
D) 15 percent

Exam 10: The Monetary System