Deck 8: Money and Banking

Question 1

In what way are the value of money and the price level related?

A)They are inversely related.
B)They vary directly during recessions,but inversely during inflation.
C)They vary directly and proportionately.
D)They vary directly,but not proportionately.
E)They are not related in any way.

Answer 1

They are inversely related.

Question 2

How is money functioning in the case of stock market price quotations?

A)As a store of wealth.
B)As a unit of account.
C)As a medium of exchange.
D)A medium of exchange,a store of wealth,and a unit of account.

Answer 2

As a unit of account.

Question 3

All of the following except one are kinds of money used at some point in history.Which is the exception?

A)Commodity money.
B)Gold and precious metals.
C)Paper money.
D)Government bonds.
E)Cheque book money.

Answer 3

Government bonds.

Question 4

Until what date were commercial banks in Canada empowered to issue their own bank notes?

A)1696.
B)1867.
C)1896.
D)1914.
E)1935.

Question 5

If you put some of your summer earnings into a safety deposit box at the bank,which function of money would you be using?

A)A medium of exchange.
B)A store of wealth.
C)A unit of account.
D)A medium of exchange,a store of wealth,and a unit of account.

Question 6

Money is often said to be "socially defined." What does this mean?

A)That parliament has defined what money is.
B)That society defines what money is in terms of what it deems acceptable.
C)That the money supply includes all public and private securities purchased by society.
D)That only the Bank of Canada can supply money and this bank is owned by the public.
E)That a nation's money supply must be backed by something socially acceptable such as gold.

Question 7

What is the result if banks maintain 100 percent reserves?

A)The money multiplier would have a value of zero.
B)Banks would be less profitable.
C)The money multiplier would be infinite.
D)The money supply would be larger.

Question 8

If a student takes some of her money out of her safety deposit box at a bank in order to buy a used Porsche,which function of money would she be using?

A)A medium of exchange.
B)A store of wealth.
C)A unit of account.
D)A medium of exchange,a store of wealth,and a unit of account.

Question 9

Debasing the coinage has which of the following effects?

A)It causes the price level to drop.
B)It increases the purchasing power of each coin.
C)It represents a loss to the person issuing the coins.
D)It causes inflation.

Question 10

What is the primary aspect of money?

A)It is widely acceptable.
B)It is backed by gold reserves at the Bank of Canada.
C)It is decreed by parliament as legal tender.
D)It is guaranteed by the banking system.
E)It is insured under the Canadian Deposit Insurance Act.

Question 11

What is meant by the term "fractional reserve banking"?

A)A system whereby banks keep only a fraction of their assets in the form of cash.
B)A system whereby banks keep only a fraction of their cash with the central bank.
C)A system whereby banks keep only a fraction of their total deposits in the form of cash.
D)A system whereby banks must maintain a minimum amount of loans in the form of cash reserves.

Question 12

How is the major portion of the Canadian money supply created?

A)By the actions of the Canadian mint.
B)By the actions of the commercial banks and the Bank of Canada.
C)Through the receipt of gold bullion via international trade.
D)By the actions of the Department of Finance.
E)Through loans from the International Monetary Fund.

Question 13

What is meant by the term commodity money?

A)The use of coins to purchase commodities.
B)A type of certificate of deposit that can be used to buy commodities.
C)A share invested in commodities.
D)A type of money that can also function as a commodity.

Question 14

Which of the following is a major function of money?

A)It acts as a store of wealth.
B)It acts as a unit of account.
C)It acts as a medium of exchange.
D)It acts as a store of wealth,a unit of account,and a medium of exchange.

Question 15

How is money functioning in the example of a $1,000 price tag on a used car at a car lot?

A)As a unit of account.
B)As a store of wealth.
C)As a medium of exchange.
D)A medium of exchange,a store of wealth,and a unit of account.

Question 16

What is the major component of the Canadian M1 money supply?

A)Gold certificates.
B)Demand deposits.
C)Paper money in circulation.
D)Coins.
E)Savings accounts.

Question 17

Approximately what percentage of the Canadian M1 money supply does currency in circulation (paper money plus coins)constitute in 2016?

A)5% of the M1
B)18% of the M1
C)23% of the M1
D)50% of the M1
E)78% of the M1

Question 18

Why are notice deposits not included in the M1 definition of money?

A)Because the real value of notice deposits is zero.
B)Because the value of notice deposits is much less stable than that of demand deposits and currency.
C)Because they do not have direct or immediate access to goods and services.
D)Because they are not recognized in law as legal tender.
E)Because in terms of volume they are much less than demand deposits.

Question 19

Approximately what percentage of the M2 money supply does M1 money supply constitute in 2016?

A)5% of the M2
B)24% of the M2
C)40% of the M2
D)63% of the M2
E)80% of the M2

Question 20

Which of the following is true regarding the purchasing power of the dollar?

A)It varies directly with the cost-of-living index.
B)It has been increasing in recent years because of higher standards of living.
C)It varies inversely with the level of aggregate demand.
D)It varies inversely with the price level.
E)It varies directly with the price level.

Question 21

Which of the following describes the fundamental identity found in all balance sheets?

A)Equity plus Assets equal Liabilities.
B)Assets plus Liabilities equal Equity.
C)Assets equal Liabilities plus Equity.
D)Assets plus Reserves equal Equity.
E)Reserves plus Liabilities equals Assets plus Equity.

Question 22

Below is a list of financial assets:
1.Certificates of deposit
2.Notice deposits (savings accounts)
3.Currency (coins and paper money)
4.Demand deposits (chequing accounts)
5.Government securities
6.Gold certificates
Refer to the information above to answer this question.Which item(s)is included in the M2 definition of money?

A)Items 1,2,3 and 4.
B)Items 3,4 and 6.
C)Items 2,3 and 4.
D)Items 2,3,4 and 6.
E)Items 3,4,and 5.

Question 23

What is meant by the term "the spread"?

A)The method in which the nation's money supply is distributed through the economy.
B)The fact that Canada has five large banks each with coast to coast branches.
C)The fact that the Bank of Canada is independent from the commercial banks.
D)The difference between the rate of interest a bank charges borrowers and the rate it pays savers.

Question 24

Only one of the following is part of the money supply.Which is it?

A)Gold.
B)Currency in a bank's vault.
C)Demand deposits.
D)Available credit on people's credit cards.

Question 25

What is the approximate value of the 2016 M2 supply of money in Canada?

A)$33 billion.
B)$96 billion.
C)$230 billion.
D)$551 billion.
E)$1426 billion.

Question 26

Below is a list of financial assets:
1.Certificates of deposit
2.Notice deposits (savings accounts)
3.Currency (coins and paper money)
4.Demand deposits (chequing accounts)
5.Government securities
6.Gold certificates
Refer to the information above to answer this question.Which item(s)is included in the M1 definition of money?

A)6 only.
B)2,3 and 4.
C)3 and 4.
D)3,4 and 6.
E)3 only.

Question 27

Why are demand deposits (chequing accounts)classified as money?

A)Because they can be readily used in making purchases and for the payment of debts.
B)Because they earn interest income for the depositor.
C)Because they are ultimately the obligations of the government.
D)Because banks hold currency equal to the value of their outstanding deposits.
E)Because they are insured by the Canadian Deposit Insurance Company.

Question 28

Below is a list of financial assets:
1.Certificates of deposit
2.Notice deposits (savings accounts)
3.Currency (coins and paper money)
4.Demand deposits (chequing accounts)
5.Government securities
6.Gold certificates
Refer to the information above to answer this question.Most of the following items are included in the official definitions of money.Which is/are the exception?

A)Items 1 and 5.
B)Items 1 and 6.
C)Items 5 and 6.
D)Item 6.

Question 29

Below is a list of financial assets:
1.Certificates of deposit
2.Notice deposits (savings accounts)
3.Currency (coins and paper money)
4.Demand deposits (chequing accounts)
5.Government securities
6.Gold certificates
Refer to the information above to answer this question.Which item(s)is included in the M3 definition of money?

A)Items 1,2,3 and 4.
B)Items 1,2,3,4 and 5.
C)Items 1,3,4 and 6.
D)All six of the items listed.

Question 30

What is the difference between the M1 and M2 definitions of money?

A)The M1 definition includes currency in circulation;the M2 definition does not.
B)The M2 definition includes notice deposits and personal term deposits.
C)The M2 definition includes government bonds.
D)The M2 definition includes cash held by commercial banks.
E)The M2 definition includes certificates of deposit

Question 31

What is the book value of a firm to its shareholders called?

A)Working capital.
B)Assets.
C)Equity.
D)Liabilities.
E)Reserves.

Question 32

The Canada Deposit Insurance Corporation insures each depositor of each commercial bank in Canada up to what maximum amount?

A)$10,000.
B)$25,000.
C)$60,000.
D)$100,000.

Question 33

What is one of the basic reasons for focusing on the M1 definition of money?

A)Only the components of M1 are regarded as liquid.
B)Statistics Canada is able to gather data for the components of M1,but cannot do so for M2 and M3.
C)Only the components of M1 can be used as a store of wealth.
D)Its components all have direct and immediate control over goods and services.
E)Only the components of M1 are regarded as secure and are able to retain their value.

Question 34

What are the coins and paper money held by the Bank of Canada considered to be?

A)Part of the M1 definition of the money supply.
B)Part of the M2 definition of the money supply.
C)Part of the M3 definition of the money supply.
D)Part of the M2+ definition of the money supply.
E)Not part of any definition of the money supply.

Question 35

All of the following statements,except one,are correct.Which is the exception?

A)A commercial bank's total reserves are equal to its excess reserves plus its target reserves.
B)A bank's assets plus its net worth equal its liabilities.
C)When a commercial bank gives a loan it creates demand deposits.
D)A single commercial bank can safely lend only an amount up to the value of its excess reserves.
E)If a bank transaction were to decrease the value of one of its assets,then either some other asset would increase in value or one of its liabilities would decrease in value.

Question 36

What are the reserves of a commercial bank?

A)The amount of money-market funds it holds.
B)Deposits at the Bank of Canada and vault cash.
C)Vault cash plus securities.
D)The bank's equity.
E)Vault cash plus securities plus deposits at the Bank of Canada.

Question 37

Which of the following does the M2 definition of money include?

A)Only currency in circulation and savings accounts.
B)Only coins,paper money,and demand deposits.
C)Only currency in circulation
D)Currency in circulation,demand deposits,personal term deposits,and personal and non-personal savings (notice)deposits.
E)Currency in circulation,demand deposits and personal and non-personal notice and term deposits.

Question 38

What ratio does the target reserve ratio refer to?

A)The bank's reserves to its liabilities and equity.
B)The bank's equity to its total assets.
C)The bank's reserves and securities to its demand deposits.
D)The bank's reserves to its demand deposits.
E)The bank's reserves to its total assets.

Question 39

How is security provided to depositors in the modern banking system?

A)By the target reserve requirement.
B)By the fractional reserve system.
C)By the gold standard.
D)By deposit insurance.

Question 40

What does it mean when a commercial bank has "excess reserves"?

A)It is in a position to make additional loans.
B)Its reserves exceed its loans.
C)It is making above-normal profits on its loans to customers.
D)Its actual reserves are less than its target reserves.
E)Its loans to customers exceeds its target reserves.

Question 41

Suppose that the customer of a bank writes a cheque payable to a tennis club who deposits the cheque at the same bank.Which of the following is correct?

A)The bank's loans to customers would increase and demand deposits would decrease.
B)The bank's reserves would increase but its demand deposits would decrease.
C)The bank's reserves would decrease but its demand deposits would increase.
D)The bank's loans to customers would decrease and reserves would increase.
E)The bank's reserves and demand deposits would not change.

Question 42

Assume the Trusty Bank's balance sheet is as follows:

Refer to the information above to answer this question.If the bank's target reserve ratio is 10%,which of the following is correct?

A)The bank's reserves are in equilibrium.
B)There are excess reserves of $9,000.
C)The bank is under-reserved by $9,000.
D)There are excess reserves of $3,500.

Question 43

Suppose that the Lions Bank has excess reserves of $10,000 and demand deposits of $100 000.If the target reserve ratio is 10 percent what is the size of the bank's actual reserves?

A)0.
B)$4,000.
C)$10,000.
D)$20,000.
E)$110,000.

Question 44

Assume the XYZ Company negotiates a loan for $100,000 from the Trusty Bank and takes out $10,000 in the form of cash,leaving the remainder in its account.What is the result?

A)The supply of money has increased by $100,000.
B)The supply of money has declined by $100,000.
C)The supply of money has increased by $10,000.
D)The supply of money has increased by $90,000.
E)The supply of money has not changed.

Question 45

If John and Todd both have chequing accounts in the same commercial bank and John writes a cheque for $5,000 payable to Todd,what will happen to the bank's accounts?

A)They will not be affected.
B)Assets and liabilities will both decrease by $5,000.
C)Liabilities will decrease by $1,000,and the bank's equity will increase by $5,000.
D)Reserves and demand deposits will both decrease by $5,000.
E)Demand deposits will increase by $5000 and loans to customers will decrease by $5,000.

Question 46

All of the following statements,except one,are correct.Which is the exception?

A)Target reserves equal actual reserves minus excess reserves.
B)Excess reserves plus target reserves equal actual reserves.
C)Actual reserves minus target reserves equal excess reserves.
D)Actual reserves equal target reserves minus excess reserves.

Question 47

Assume that a firm deposits in its bank a cheque for $1,000 drawn on another bank.If the target reserve ratio is 20 percent and excess reserves are initially zero,how much excess reserves does the bank now have?

A)$800.
B)$1,200.
C)$5,000.
D)$1,000.
E)$4,000.

Question 48

Assume that a commercial bank has no excess reserves initially and $20,000 cash is deposited in the bank.If the target reserve ratio is 20 percent,what is the maximum by which the bank can now increase its loans?

A)$4,000.
B)$20,000.
C)$100,000.
D)$16,000.
E)$80,000.

Question 49

Assume that Company XYZ deposits $500,000 in cash in the Bank of New Brunswick.If the bank had no excess reserves before the deposit was made and the target reserve ratio is 20 percent,what is the maximum amount of new loans that the bank can now offer?

A)$100,000.
B)$400,000.
C)$500,000.
D)$2,000.
E)$2,500,000.

Question 50

How does one calculate the amount of bank's actual reserves?

A)Add its target and excess reserves.
B)Subtract its target reserves from its excess reserves.
C)Multiply its excess reserves by the reserve ratio.
D)Multiply its demand deposits by the reserve ratio.
E)Subtract its excess reserves from its target reserves.

Question 51

Suppose that a bank calls in a customer's loan.Which of the following is correct?

A)The bank's loans to customers would increase and demand deposits would decrease.
B)The bank's loans to customers would increase and reserves would decrease.
C)The bank's loans to customers would increase and reserves would increase.
D)The bank's loans to customers would decrease and reserves would increase.

Question 52

The Manitoba Bank has $20,000 in excess reserves and the target reserve ratio is 15 percent.Which of the following statements is valid?

A)The bank has $100,000 in outstanding loans and $35,000 in actual reserves.
B)The bank has $200,000 in demand deposits and $50,000 in actual reserves.
C)The bank has $200,000 in demand deposits and $10,000 in actual reserves.
D)The bank has $100,000 in demand deposits and $5,000 in actual reserves.
E)The bank has $100,000 in outstanding loans and $5,000 in actual reserves.

Question 53

Assume the Trusty Bank's balance sheet is as follows:

Refer to the information above to answer this question.If the bank had $2500 in excess reserves what would be its target reserve ratio?

A)5%.
B)7.5%.
C)8%.
D)12.5%.
E)15%.

Question 54

Assume that Kim deposits $1,500 in currency in the Trusty Bank.Later that same day Akio negotiates a loan for $2,000 at the same bank.What has happened to the money supply as a result of these transactions?

A)It has not changed.
B)It has decreased by $1,000.
C)It has increased by $500.
D)It has decreased by $500.
E)It has increased by $2,000.

Question 55

What are a bank's target reserves equal to?

A)Its demand deposits divided by the target reserve ratio.
B)The amount of outstanding loans multiplied by the target reserve ratio.
C)Its demand deposits multiplied by the target reserve ratio.
D)The amount of its demand deposits.
E)The sum of its demand deposits and notice deposits.

Question 56

The Vancouver Bank has demand deposits of $300,000 and the target reserve ratio is 6 percent.If the bank's target reserves are equal to its excess reserves,then what must its actual reserves be?

A)0.
B)$18,000.
C)$36,000.
D)$108,000.
E)That cannot be determined from the information.

Question 57

Which of the following transactions by a bank would increase the money supply?

A)The bank calls in a loan.
B)A customer deposits cash with the bank.
C)A customer withdraws cash from the bank.
D)The bank grants a loan to a customer.

Question 58

Assume the Trusty Bank's balance sheet is as follows:

Refer to the information above to answer this question.Assuming a target reserve ratio of 8 percent how much excess reserves would this bank have after a cheque for $10,000 was cleared against it?

A)0.
B)$4,200.
C)$5,000.
D)$14,200.
E)$15,000.

Question 59

If someone deposits a $100 bill in a commercial bank which has a 5 percent target reserve ratio,which of the following is true?

A)The bank will have $95 of additional excess reserves.
B)The bank will have $100 of required reserves.
C)The bank will have $100 of additional excess reserves.
D)The bank will be capable of lending an additional $2,000.
E)The bank will be capable of lending an additional $100.

Question 60

All of the following,except one,are examples of a bank's assets.Which is the exception?

A)Reserves.
B)Demand Deposits.
C)Loans to customers.
D)Securities.
E)Fixed assets.

Question 61

Assume a commercial bank has demand deposits of $2,000,000 and excess reserves of $50,000.If the target reserve ratio is 10 percent,then what are the bank's actual reserves?

A)$150,000.
B)$200,000.
C)$250,000.
D)$50,000.
E)$500,000.

Question 62

What would be the result if the target reserve ratio was lowered?

A)The actual reserves of banks would increase.
B)The size of the money multiplier would increase.
C)Banks would be forced to call in loans.
D)The actual reserves of banks would decrease.
E)The size of the money multiplier would decrease.

Question 63

The following is the balance sheet of the Regina Bank.(All figures are in $millions)

Refer to the information above to answer this question.If this bank has excess reserves of $4 then what must be the target reserve ratio?

A)9%.
B)18%.
C)7%.
D)10%.
E)20%.

Question 64

The following represents the consolidated balance sheet for a hypothetical banking system.The target reserve ratio is 8 percent.

Refer to the information above to answer this question.Which of the following is true of this banking system?

A)It is under-reserved by $4,000.
B)It is under-reserved by $50,000.
C)It is over-reserved by $4,000.
D)It is over-reserved by $50,000.
E)It is under-reserved by $9,333.

Question 65

The following is the balance sheet of the Leafs Bank

Refer to the information above to answer this question.Assume the target reserve ratio is 8 percent.What are the excess reserves of this commercial bank?

A)$0.
B)$60,000.
C)$43,200.
D)$4,800.
E)$52,000.

Question 66

The following is the balance sheet of the whole banking system (all figures are in $billions)which has a target reserve ratio of 20 percent:

Refer to the information above to answer this question.At present,what is the amount of excess reserves of the commercial banking system?

A)$0.
B)$120.
C)$240.
D)$20.

Question 67

The following is the balance sheet of the Regina Bank.(All figures are in $millions)

Refer to the information above to answer this question.Assume that the target reserve ratio is 5 percent.Suppose that one of the bank's customers writes out a cheque for $4 which clears against this bank.As a result,what will the bank's excess reserves now be?

A)$0.
B)$0.9.
C)$4.
D)$4.2.
E)$8.

Question 68

The following is the balance sheet of the Leafs Bank

Refer to the information above to answer this question.Assume the target reserve ratio is 8 percent.By how much can this bank safely expand its loans?

A)$43,200.
B)$60,000.
C)$6,000.
D)$4,800.
E)$75,000.

Question 69

The following is the balance sheet of the whole banking system (all figures are in $billions)which has a target reserve ratio of 20 percent:

Refer to the information above to answer this question.Assume that a cash deposit of $20 is made into a chequing account in the banking system.As a result,what will be the amount of excess reserves?

A)$0.
B)$20.
C)$16.
D)$80.
E)$100.

Question 70

The following is the balance sheet of the whole banking system (all figures are in $billions):

Refer to the information above to answer this question.Assume that the target reserve ratio is 5 percent.If the commercial banking system were to actually lend the maximum amount that it is able to lend,what would be the result?

A)Reserves and deposits will increase by that amount.
B)Excess reserves will drop to $38 billion.
C)Excess reserves will drop to $2 billion.
D)Excess reserves will be reduced to zero.
E)Reserves and deposits will decrease by that amount.

Question 71

If at the end of the business day a commercial bank is short of cash reserves,what will it do?

A)Borrow cash from the Bank of Canada.
B)Increase its demand deposits.
C)Impose notice requirements on future withdrawals.
D)Borrow cash from the Bank of Canada,Increase its demand deposits,and Impose notice requirements on future withdrawals.

Question 72

The following is the balance sheet of the whole banking system (all figures are in $billions):

Refer to the information above to answer this question.Assume that the target reserve ratio is 5 percent.What is the maximum amount by which the commercial banking system can expand the supply of money?

A)$40.
B)$25.
C)$10.
D)$2.
E)$38.

Question 73

Which of the following is true regarding the money multiplier?

A)It is larger,if the target reserve ratio is smaller.
B)It will be zero when the target reserve ratio is 100 percent.
C)It is the reciprocal of the bank's excess reserves.
D)It is the reciprocal of the bank's actual reserves.
E)It is larger,if the target reserve ratio is larger.

Question 74

If the target reserve ratio were 100 percent,what would be the value of the money multiplier?

A)100.
B)1.
C)0.
D)10.
E)Infinite.

Question 75

The following is the balance sheet of the Leafs Bank

Refer to the information above to answer this question.Assume the target reserve ratio is 8 percent.If the bank lends out its excess reserves,and a cheque clears against the bank for this amount,what will be the amount of the bank's excess reserves?

A)$0.
B)$4,800.
C)$24,000.
D)$19,200.
E)$7,000.

Question 76

The following is the balance sheet of the Leafs Bank

Refer to the information above to answer this question.Assume the target reserve ratio is 8 percent.If the original balance sheet was for the commercial banking system rather than a single bank,what is the maximum amount by which loans and deposits can be expanded?

A)$4,800.
B)$19,200.
C)$240,000.
D)$60,000.
E)$35,000.

Question 77

The following is the balance sheet of the whole banking system (all figures are in $billions):

Refer to the information above to answer this question.Assume that the target reserve ratio is 5 percent.At present,what is the amount of excess reserves of the commercial banking system?

A)$2.
B)$7.
C)$70.
D)$18.
E)$40.

Question 78

The money multiplier can be defined as the reciprocal of what?

A)The bank's actual reserves.
B)The MPC.
C)The bank's excess reserves.
D)The target reserve ratio.
E)The bank's demand deposits.

Question 79

What happens when a bank has a cheque cleared against it?

A)The amount of its reserves will fall.
B)The amount of outstanding loans will fall.
C)The excess reserves of the banking system will fall.
D)The bank's balance sheet does not change.
E)The total supply of money will fall.

Question 80

The following is the balance sheet of the whole banking system (all figures are in $billions)which has a target reserve ratio of 20 percent:

Refer to the information above to answer this question.After the deposit of $20,what is the maximum amount by which this commercial banking system can expand the supply of money?

A)$0.
B)$16.
C)$320.
D)$80.
E)$100.