Question 1

Assume that Johnson deposits $350 of his currency in his account in the XYZ bank.Later the same day Swanson negotiates a loan for $2,000 at the same bank.In what direction and by what amount has this single transaction changed the supply of money?

Accepted Answer

A) increased by $2,350 
B) increased by $2,000 
C) decreased by $350 
D) decreased by $1,650

Question 2

Mortgage-backed securities are bonds backed by mortgage payments.

Accepted Answer

A) True 
 B)False

Question 3

Purchasing common stock by writing a cheque best exemplifies money serving as a:

Accepted Answer

A) store of value. 
B) unit of account. 
C) medium of exchange. 
D) index of satisfaction.

Question 4

Chartered bank reserves are an asset to chartered banks but a liability to the Bank of Canada holding them.

Accepted Answer

A) True 
 B)False

Question 5

If a bank has liabilities exceeding its net worth:

Accepted Answer

A) it will not be able to meet its desired reserve ratio. 
B) it is considered to be insolvent. 
C) it most likely is a heavy borrower from the Bank of Canada. 
D) none of the above is necessarily true.

Question 6

A chartered bank sells a $10,000 government securities to a securities dealer.The dealer pays for the bond in cash, which the bank adds to its vault cash.As the result of this single transaction the money supply has:

Accepted Answer

A) decreased by $10,000 multiplied by the reciprocal of the desired reserve ratio. 
B) decreased by $10,000. 
C) increased by $10,000. 
D) not been affected.

Question 7

The purchasing power of the dollar:

Accepted Answer

A) has been increasing in recent years because of economic growth. 
B) varies directly with the cost-of-living index. 
C) is inversely related to the level of aggregate demand. 
D) is the reciprocal of the price level.

Question 8

Suppose the ABC bank has excess reserves of $4,000 and outstanding demand deposits of $80,000.If the desired reserve ratio is 25 percent, what is the size of the bank's actual cash reserves?

Accepted Answer

A) $16,000 
B) $84,000 
C) $24,000 
D) $20,000

Question 9

Actual cash reserves equal desired reserves plus excess reserves.

Accepted Answer

A) True 
 B)False

Question 10

Subprime mortgage loans refer to:

Accepted Answer

A) low-interest rate loans by financial institutions to home buyers with higher-than -average credit risk. 
B) high-interest rate loans by financial institutions to home buyers with higher-than -average credit risk. 
C) high-interest rate loans by financial institutions to home buyers with no credit risk. 
D) high-interest rate loans by financial institutions to home buyers with lower-than -average credit risk.

Question 11

The banking system can lend by a multiple of its excess reserves because lending does not result in a loss of reserves to the banking system as a whole.

Accepted Answer

A) True 
 B)False

Question 12

The greater the desired reserve ratio, the:

Accepted Answer

A) higher is the income multiplier. 
B) lower is the income multiplier. 
C) lower is the monetary multiplier. 
D) higher is the monetary multiplier.

Question 13

A chartered bank's demand-deposit liabilities can be calculated by:

Accepted Answer

A) dividing its desired reserve by its excess reserves. 
B) dividing its desired reserve by the reserve ratio. 
C) multiplying its desired reserve by its excess reserves. 
D) multiplying its desired reserve by the reserve ratio.

Question 14

Which of the following is correct?

Accepted Answer

A) Both the granting and repaying of bank loans expand the aggregate money supply. 
B) Granting and repaying bank loans do not affect the money supply. 
C) Granting a bank loan destroys money; repaying a bank loan creates money. 
D) Granting a bank loan creates money; repaying a bank loan destroys money.

Question 15

Refer to the information below.The maximum amount by which the chartered banking system can expand the supply of money by lending is about: Consolidated balance sheet for the chartered banking system.Assume the desired reserve ratio is 30 percent.All figures are in billions.

Accepted Answer

A) $27 billion. 
B) $23.1 billion. 
C) $30 billion. 
D) $15 billion.

Question 16

Token money is:

Accepted Answer

A) minted by the Bank of Canada. 
B) minted by the Royal Canadian mint. 
C) minted by the Treasury of Canada. 
D) not considered to be part of the money supply.

Question 17

Currency and demand deposits are money because:

Accepted Answer

A) they are backed by a precious metal. 
B) the government asserts that they are. 
C) they are "resting" in a chartered bank vault. 
D) they can be redeemed for an intrinsically valuable commodity such as gold.

Question 18

A basic argument for using the M1 concept of money is that:

Accepted Answer

A) it includes all of the important financial assets that have any degree of liquidity. 
B) the government collects data for the components of M1, but does not do so for M2 and M2+. 
C) its components are superior to other financial assets as a store of value. 
D) its components are directly and immediately spendable.

Question 19

If the monetary authorities want to lower the size of the money multiplier, they should:

Accepted Answer

A) ask chartered banks to lower their desired reserve ratio. 
B) ask chartered banks to raise their desired reserve ratio. 
C) take actions to increase bank reserves. 
D) do none of the above.

Question 20

Refer to the above information.The value of the dollar in year 3 is:

Accepted Answer

A) $1.00. 
B) $1.25. 
C) $.80. 
D) $.50.

Exam 14: B: Money, Banking, and Money Creation

Assume that Johnson deposits $350 of his currency in his account in the XYZ bank.Later the same day Swanson negotiates a loan for $2,000 at the same bank.In what direction and by what amount has this single transaction changed the supply of money?

Mortgage-backed securities are bonds backed by mortgage payments.

Purchasing common stock by writing a cheque best exemplifies money serving as a:

Chartered bank reserves are an asset to chartered banks but a liability to the Bank of Canada holding them.

If a bank has liabilities exceeding its net worth:

A chartered bank sells a $10,000 government securities to a securities dealer.The dealer pays for the bond in cash, which the bank adds to its vault cash.As the result of this single transaction the money supply has:

The purchasing power of the dollar:

Suppose the ABC bank has excess reserves of $4,000 and outstanding demand deposits of $80,000.If the desired reserve ratio is 25 percent, what is the size of the bank's actual cash reserves?

Actual cash reserves equal desired reserves plus excess reserves.

Subprime mortgage loans refer to:

The banking system can lend by a multiple of its excess reserves because lending does not result in a loss of reserves to the banking system as a whole.

The greater the desired reserve ratio, the:

A chartered bank's demand-deposit liabilities can be calculated by:

Which of the following is correct?

Refer to the information below.The maximum amount by which the chartered banking system can expand the supply of money by lending is about: Consolidated balance sheet for the chartered banking system.Assume the desired reserve ratio is 30 percent.All figures are in billions.

Token money is:

Currency and demand deposits are money because:

A basic argument for using the M1 concept of money is that:

If the monetary authorities want to lower the size of the money multiplier, they should:

Refer to the above information.The value of the dollar in year 3 is: