Deck 13: Banking and the Money Supply

Question 1

What comprises the money supply as it is most narrowly defined?  

A) coins and currency held by the nonbanking public, traveller's cheques, and savings deposits 
B) all coins and currency held by the nonbanking public 
C) coins and currency held by the nonbanking public, chequing deposits, and traveller's cheques 
D) coins and currency held by the nonbanking public, chequing deposits, and savings deposits

Answer 1

 coins and currency held by the nonbanking public, chequing deposits, and traveller's cheques 

Question 2

Why do retail stores have the option to accept cheques or NOT, but the acceptance of currency is required?  

A) because currency is backed by gold 
B) because cheques are NOT money but currency is 
C) because currency is legal tender but cheques are NOT 
D) because currency is a medium of exchange but cheques are NOT

Answer 2

 because currency is legal tender but cheques are NOT 

Question 3

Consider the following money supplies: currency and coins held by the nonbanking public; and traveller's cheques and chequable deposits held at chartered banks, trust and mortgage loan companies, credit unions, and caisses populaires.Which money aggregate do these supplies belong to?  

A) M3 
B) M2 
C) M1+ 
D) M1

Answer 3

 M1+ 

Question 4

What are demand deposits?  

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 5

How is M2 defined?  

A) as M1 plus savings accounts, small time deposits, and money market mutual funds 
B) as coins, currency, and chequable deposits 
C) as all near monies 
D) as M1 + time deposits

Question 6

Which of the following defines the M1+ money supply?  

A) one-dollar bills 
B) currency and coins held by the nonbanking public, chequable deposits, and traveller's cheques 
C) M3 - M2 
D) all currency and chequable deposits

Question 7

Suppose Sylvia returned a $5 Bank of Canada note to the Bank of Canada.What might she receive in return?  

A) $5 in silver 
B) $5 in gold 
C) 5 loonies 
D) 10 loonies

Question 8

Historically, what is the Bank of Canada's narrowest definition of money?  

A) M3 
B) M2 
C) M1+ 
D) M1

Question 9

Narrowly defined, which of the following represents most of the M1+ money supply?  

A) coins 
B) currency 
C) cash held by banks 
D) chequable deposits

Question 10

What is the largest component of M1+?  

A) currency 
B) chequable deposits 
C) traveller's cheques 
D) money market mutual fund accounts

Question 11

Which of the following is NOT included in M1+?  

A) currency in the hands of the public 
B) coins in the hands of the public 
C) currency in the bank 
D) chequable deposits

Question 12

Which of the following is included in the narrowest definition of the money supply?  

A) cash in bank vaults 
B) savings deposits 
C) negotiable certificates of deposit 
D) chequable deposits

Question 13

Which of the following best describes the use of credit cards?  

A) They have eliminated the use of money. 
B) They are included in the narrow definition of money, M1. 
C) They are near-money. 
D) They are a way of postponing the payment of money.

Question 14

Which of the following is NOT part of M2?  

A) money market deposit accounts 
B) coins 
C) traveller's cheques 
D) money market mutual funds accounts

Question 15

What is the composition of the M1+ money supply?  

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 16

Why has the distinction between M1 and M2 been blurred over time?  

A) M1 is now larger than M2. 
B) Depositors can transfer funds between accounts so easily. 
C) M1 is becoming less liquid. 
D) Banks are offering time deposits.

Question 17

Consider the following money supplies: currency and coins held by the nonbanking public; and traveller's cheques, personal and nonpersonal chequable deposits and savings deposits, and personal time deposits held at chartered banks.Which money aggregate do these supplies belong to?  

A) M1 
B) M1+ 
C) M2 
D) M2+

Question 18

Narrowly defined, what is the primary composition of the M1+ money supply?  

A) coins and currency 
B) chequable deposits 
C) gold and silver 
D) certificates of deposit

Question 19

Which of the following is NOT legal tender in Canada?  

A) a toonie 
B) a cheque 
C) a $50 bill 
D) a $100 bill

Question 20

Consider M2 plus similar deposits at trust and mortgage loans companies, credit unions, and caisses populaires life insurance company individual annuities; personal deposits at government-owned saving institutions; and money market mutual fund accounts.Which money aggregate do these supplies belong to?  

A) M1 
B) M1+ 
C) M2 
D) M2+

Question 21

Which of the following is NOT a liability to a chartered bank?  

A) chequable deposits 
B) net worth 
C) borrowings from the Bank of Canada 
D) deposits with the Bank of Canada

Question 22

Suppose a bank borrows from the Bank of Canada at 3 percent annual interest.In order to make a profit, how much interest should the bank charge for loans it makes to the public?  

A) >3 percent annually 
B) 3 percent annually 
C) 0.01 to 2.99 percent annually 
D) 0 percent annually

Question 23

How do banks help to overcome the problem of asymmetric information?  

A) by lending only to students 
B) by acquiring expertise in evaluating the credit histories of borrowers 
C) by offering only one type of loan 
D) by providing statistics to lenders

Question 24

How do banks act as financial intermediaries?  

A) by bringing together car buyers and auto dealers 
B) by bringing together real estate brokers and home buyers 
C) by printing money for all to use 
D) by serving the credit needs of borrowers and the security needs of savers

Question 25

Which of the following best describes why banks are financial intermediaries?  

A) because banks bring together the two sides of the market, i.e., savers and borrowers 
B) because banks bring different savers into contact with each other 
C) because banks bring about the merger of smaller banks to make larger ones 
D) because banks resolve disputes between stockbrokers, mortgage companies, insurance agencies, and other financial institutions

Question 26

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

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

Question 27

What do chartered banks attempt to maximize?  

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

Question 28

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

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 29

How do banks minimize the risk of loss to depositors?  

A) by making many different loans to different borrowers 
B) by refusing to lend money to the Canadian government 
C) by putting all their eggs in one basket 
D) by making very-long-term loans

Question 30

Which of the following is NOT among the assets of a chartered bank?  

A) chequable deposits 
B) loans 
C) securities 
D) mortgages

Question 31

Which of the following is NOT money?  

A) demand deposits 
B) coins 
C) currency 
D) credit cards

Question 32

What difference makes up a bank's profit?  

A) the difference between interest charged to depositors and interest offered to borrowers 
B) the difference between interest charged on loans and interest paid on deposits 
C) the difference between deposit balances and loan balances 
D) the difference between liabilities and deposits

Question 33

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

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

Question 34

When does symmetric information in financial markets exist?  

A) when borrowers know more about their ability to repay loans than lenders do 
B) when lenders know more about borrowers than borrowers know about themselves 
C) when borrowers pay off a loan before it is due 
D) when borrowers and lenders know more about banking than banks do

Question 35

Which of the following is NOT a function of a depository institution?  

A) serving as a financial intermediary 
B) providing expertise on loans 
C) acting as a stockbroker 
D) linking savers and borrowers

Question 36

In financial markets, when does asymmetric information exist?  

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 37

How are deposits and loans recorded on a chartered bank's balance sheet?  

A) Deposits are noted as assets, and loans are noted as assets. 
B) Deposits are noted as assets, and loans are noted as liabilities. 
C) Deposits are noted as liabilities, and loans are noted as assets. 
D) Deposits are noted as assets, and loans are noted as liabilities.

Question 38

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

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

Question 39

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

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 40

Suppose a bank has $1 million in assets and $50,000 in net worth.What must its liabilities equal?  

A) $50,000 
B) $950,000 
C) $1,000,000 
D) $1,050,000

Question 41

Suppose a customer deposits $100 into her chequing account at the bank.What is the effect of the deposit on the bank?  

A) The bank's liabilities increase. 
B) The bank's liabilities decrease. 
C) The bank's assets increase. 
D) The bank's assets increase, and its liabilities increase.

Question 42

What does the liquidity of an asset indicate?  

A) its buying power 
B) the ease with which it can be converted into the medium of exchange without a significant loss of value 
C) the ease with which it can be converted into another asset 
D) how likely people are to convert it into the medium of exchange without a significant loss of value

Question 43

Which of the following is an accounting identity related to assets and liabilities on a bank's balance sheet?  

A) Assets are always less than liabilities. 
B) Assets equal liabilities plus net worth. 
C) Assets equal liabilities minus net worth. 
D) Liabilities equal assets plus net worth.

Question 44

Suppose a bank has $100 million in chequable deposits and the desired reserve ratio is 0.1.And suppose the bank has $5 million in excess reserves.What are the bank's actual reserves?  

A) $0 
B) $5 million 
C) $10 million 
D) $15 million

Question 45

What is the term for the ability to convert a store of value into a medium of exchange with little loss of value?  

A) arbitrage 
B) solvency 
C) liquidity 
D) liability

Question 46

Suppose the First National Bank acquires $500,000 in new deposits and the desired reserve ratio is 12 percent.What are the desired reserves of this bank?  

A) $12,000 
B) $60,000 
C) $440000 
D) $500,000

Question 47

Suppose a bank has $100 million in chequable deposits and the desired reserve ratio is 0.1.And suppose the bank has $5 million in excess reserves.What is the maximum amount the bank can lend?  

A) $0 
B) $5 million 
C) $10 million 
D) $15 million

Question 48

Suppose a chartered bank's reserves increase by $3,000 and the bank, which holds no excess reserves, makes a loan of $2,400.What is the desired reserve ratio?  

A) 0.10 
B) 0.20 
C) 0.25 
D) 0.75

Question 49

Suppose the desired reserve ratio is 0.1, and Linda deposits $4,000 in cash at the Dominion National Bank.And suppose the bank held no excess reserves before Linda's deposit, and the bank now increases its reserves by $500.How much excess reserve does this bank have?  

A) $50 
B) $100 
C) $400 
D) $500

Question 50

Which of the following is a liability for a bank?  

A) government securities 
B) chequable deposits 
C) consumer and business loans 
D) building and furniture

Question 51

Suppose a bank has $100 million in chequable deposits and the desired reserve ratio is 0.1.What are the desired reserves?  

A) $1 million 
B) $5 million 
C) $10 million 
D) $50 million

Question 52

Suppose the desired reserve ratio is 20 percent and a bank has $100,000 in chequable deposits.What are the bank's desired reserves?  

A) $500,000 
B) $100,000 
C) $80,000 
D) $20,000

Question 53

Suppose a bank has $100 million in chequable deposits, and the desired reserve ratio is 0.1.The bank has $5 million in actual reserves.What are the excess reserves?  

A) ?$10 million 
B) ?$5 million 
C) 0 
D) $5 million

Question 54

In what form can bank reserves be held?  

A) as loans and cash in the bank's vault 
B) as loans and deposits with the Bank of Canada 
C) as loans and chequing accounts 
D) as deposits with the Bank of Canada and cash in the bank's vault

Question 55

Suppose a bank has $6,000 in chequable deposits and the desired reserve ratio is 0.2.And suppose the bank wishes to hold no excess reserves.What are the bank's actual reserves?  

A) <$1,000 
B) $1,200 
C) $3,000 
D) $4,000

Question 56

Suppose a chartered bank has $6,000 in chequable deposits and the desired reserve ratio is 0.2.What is the maximum amount of money this single bank can lend?  

A) $1,200 
B) $4,800 
C) $6,000 
D) $30,000

Question 57

Suppose a bank has $8,000 in chequable deposits and the desired reserve ratio is 0.2.And suppose actual reserves equal $3,000.What do excess reserves equal?  

A) $1,400 
B) $1,600 
C) $2,400 
D) $5,000

Question 58

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?  

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

Question 59

Suppose the desired reserve ratio is 10 percent and a bank receives a new deposit for $100,000.By what amount do the bank's liabilities initially increase?  

A) by $10,000 
B) by $90,000 
C) by $100,000 
D) by $1,000,000

Question 60

Suppose a bank's desired reserve ratio is 15 percent, and the bank acquires new deposits of $100,000.What is the maximum amount the bank can lend from these new deposits?  

A) $15,000 
B) $85,000 
C) $100,000 
D) $150,000

Question 61

What is the overnight rate?  

A) the interest rate paid when taxpayers pay overdue taxes 
B) the interest rate paid when one bank borrows reserves from another bank 
C) the interest rate paid when banks make loans to the federal government 
D) the interest rate paid when the federal debt is refinanced

Question 62

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?  

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 63

Which of the following is a reason why banks differ from other types of businesses?  

A) because banks earn profits 
B) because banks combine economic resources to produce services 
C) because banks can go out of business 
D) because banks can create money

Question 64

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?  

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 65

What is the main purpose of the overnight money market?  

A) for banks to make loans to the Bank of Canada 
B) for banks to make short-term loans to other banks 
C) for banks to make long-term loans to other banks 
D) for the Bank of Canada to make short-term loans to chartered banks

Question 66

Which of the following does liquidity NOT contribute to?  

A) the confidence of the bank's depositors 
B) the bank's income 
C) the bank's ability to pay funds out to depositors on demand 
D) the bank's flexibility in responding to investment opportunities

Question 67

Liquidity refers to the ease with which an asset can be converted into the medium of exchange without a significant loss of value.Which of the following assets is the least liquid?  

A) real estate 
B) currency 
C) traveller's cheques 
D) chequable deposits

Question 68

Suppose at the end of the business day a bank has $50,000 in excess reserves, and the desired reserve ratio is 20 percent.How can the bank maximize its profits?  

A) if it keeps the excess reserves 
B) if it loans out $40,000 
C) if it loans $50,000 to another bank 
D) if it borrows $50,000 to remove the excess reserves

Question 69

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

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 70

A bank finds itself short of desired reserves and therefore borrows from another chartered bank.What is the term for the interest rate on this loan?  

A) the liquidity rate 
B) the prime rate 
C) the discount rate 
D) the overnight rate

Question 71

In which market do banks borrow excess reserves from each other on a day-to-day basis?  

A) in the liquidity market 
B) in the stock market 
C) in the bond market 
D) in the overnight money market

Question 72

When a chartered bank sells Canadian government securities to the Bank of Canada, what is the immediate effect on reserves?  

A) The bank's desired reserves increase. 
B) The bank's desired reserves decrease. 
C) The bank's excess reserves increase. 
D) The bank's excess reserves decrease.

Question 73

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

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 74

Suppose Gloria borrows $1,000 to purchase a car.Which of the following represents the changes in Gloria's personal balance sheet after the bank lends her the money but before she spends it?  

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

Question 75

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

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

Question 76

Suppose Emma banks at Bank A and she writes a cheque to her friend Davis, who banks at Bank B.What happens after the cheque clears?  

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

Question 77

When the Bank of Canada buys Canadian government securities from a chartered bank, what is the immediate effect on that chartered bank's balance sheet assets and liabilities?  

A) Assets decrease and liabilities decrease. 
B) Assets increase and liabilities increase. 
C) Assets increase and liabilities decrease. 
D) The total amount of assets or liabilities remain the same.

Question 78

Which of the following best describes liquidity of an asset?  

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 79

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

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 80

Which of the following is a strategy a bank might use in order to meet a deficiency of excess reserves?  

A) buy securities 
B) deposit vault cash with the Bank of Canada 
C) convert some of its deposit at the Bank of Canada into cash 
D) borrow from another bank in the overnight money market