Question 1

Assume that no banks hold excess reserves, and the public holds no currency. If a bank sells a $100 security to the Bank of Canada, explain what happens to this bank and two additional steps in the deposit expansion process, assuming a 10 percent reserve requirement. How much do deposits and loans increase for the banking system when the process is completed?

Accepted Answer

The answer of Assume that no banks hold excess reserves,...

Question 2

In the model of the money supply process, the bank's role in influencing the money supply process is represented by ________.

Accepted Answer

A)  only the desired reserve ratio 
B)  both the desired reserve ratio and the market interest rate 
C)  only the currency ratio 
D)  only borrowed reserves

Question 3

When the Bank of Canada extends a loan to a bank, the monetary base ________ and reserves ________.

Accepted Answer

A)  remains unchanged; decrease 
B)  remains unchanged; increase 
C)  increases; increase 
D)  increases; remain unchanged

Question 4

Explain why the simple deposit multiplier overstates the true deposit multiplier.

Accepted Answer

The answer of Explain why the simple deposit multiplier overstates...

Question 5

If the desired reserve ratio is fifteen percent, currency in circulation is $400 billion, and chequable deposits are $1000 billion, then the money multiplier is approximately ________.

Accepted Answer

A)  2.55 
B)  2.67 
C)  2.35 
D)  0.551

Question 6

Explain two reasons why the Bank of Canada does not have complete control over the level of bank deposits and loans. Explain how a change in either factor affects the deposit expansion process.

Accepted Answer

The answer of Explain two reasons why the Bank of...

Question 7

If the desired reserve ratio is ten percent, currency in circulation is $400 billion, chequable deposits are $1000 billion, and excess reserves total $1 billion, then the excess reserves-chequable deposit ratio is ________.

Accepted Answer

A)  0.01 
B)  0.10 
C)  0.001 
D)  0.05

Question 8

All else the same, when the Bank calls in a $100 loan previously extended to the First National Bank, reserves in the banking system ________.

Accepted Answer

A)  increase by $100 
B)  increase by more than $100 
C)  decrease by $100 
D)  decrease by more than $100

Question 9

The monetary base increased by 20 percent during the contraction of 1929-1933, but the money supply fell by 25 percent. Explain why this occurred. How can the money supply fall when the base increases?

Accepted Answer

The answer of The monetary base increased by 20 percent...

Question 10

If the desired reserve ratio is one-third, currency in circulation is $300 billion, and chequable deposits are $900 billion, then the currency ratio is ________.

Accepted Answer

A)  .25 
B)  .33 
C)  .67 
D) .375

Question 11

The volume of loans that the Bank of Canada makes to banks is affected by the Bank's setting of the interest rate on these loans, called the ________.

Accepted Answer

A)  overnight rate 
B)  prime rate 
C)  bank rate 
D)  interbank rate

Question 12

If a member of the nonbank public purchases a government bond from the Bank of Canada in exchange for currency, the monetary base will ________, but reserves will ________.

Accepted Answer

A)  remain unchanged; rise 
B)  remain unchanged; fall 
C)  rise; remain unchanged 
D)  fall; remain unchanged

Question 13

Both ________ and ________ are Bank of Canada assets.

Accepted Answer

A)  notes in circulation; reserves 
B)  notes in circulation; government securities 
C)  government securities; advances to banks 
D)  government securities; reserves

Question 14

If the desired reserve ratio is ten percent, currency in circulation is $400 billion, chequable deposits are $800 billion, and excess reserves total $0.8 billion, then the money supply is ________.

Accepted Answer

A)  $8000 billion 
B)  $1200 billion 
C)  $120 billion 
D)  $8400 billion

Question 15

When the nonborrowed monetary base is equal to $200 billion, the borrowed reserves are equal to $100 billion, and the money supply is equal to $700 billion, the money multiplier is ________.

Accepted Answer

A)  2.33 
B)  2.67 
C)  2.23 
D)  2.16

Question 16

If a bank has excess reserves of $7000 and demand deposit liabilities of $100,000, and if the reserve requirement is 15 percent, then the bank has actual reserves of ________.

Accepted Answer

A)  $17000 
B)  $22000 
C)  $27000 
D)  $29000

Question 17

Decisions by depositors to increase their holdings of ________, or of banks to hold ________ will result in a smaller expansion of deposits than the simple model predicts.

Accepted Answer

A)  deposits; desired reserves 
B)  deposits; excess reserves 
C)  currency; desired reserves 
D)  currency; excess reserves

Question 18

Everything else held constant, an increase in the required reserve ratio will mean ________ in the M2+ money multiplier and ________ in the M2+ money supply.

Accepted Answer

A)  an increase; an increase 
B)  an increase; a decrease 
C)  a decrease; an increase 
D)  a decrease; a decrease

Question 19

The relationship between advances to banks, the nonborrowed monetary base, and the monetary base is ________.

Accepted Answer

A)  MB = MBn - BR 
B)  BR = MBn - MB 
C)  BR = MB - MBn 
D)  MB = BR - MBn

Question 20

Which of the following are not liabilities on the Bank's balance sheet?

Accepted Answer

A)  Advances to banks 
B)  Members of the CPA deposits 
C)  Bank notes in circulation 
D)  Government of Canada deposits

Exam 15: The Money Supply Process