Money and Banking Chapter 15
If the desired reserve ratio is 15 percent, the simple deposit multiplier is ________. A) 15.0 B) 1.5 C) 6.67 D) 3.33
Answer: C
If the desired reserve ratio is 10 percent, the simple deposit multiplier is ________. A) 5.0 B) 2.5 C) 100.0 D) 10.0
Answer: D
In the simple deposit expansion model, if the banking system has excess reserves of $75, and the desired reserve ratio is 20 percent, the potential expansion of chequable deposits is ________. A) $75 B) $750 C) $37.50 D) $375
Answer: D
A bank has no excess reserves and demand deposit liabilities of $100,000 when the desired reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will now be ________. A) -$5000 B) -$1000 C) $1000 D) $5000
Answer: A
A simple deposit multiplier equal to one implies a desired reserve ratio equal to ________. A) 100 percent B) 50 percent C) 25 percent D) 0 percent
Answer: A
High-powered money minus currency in circulation equals ________. A) reserves B) the borrowed base C) the nonborrowed base D) advances to banks
Answer: A
If a bank has excess reserves of $4000 and demand deposit liabilities of $100,000, and if the reserve requirement is 10 percent, then the bank has actual reserves of ________. A) $14000 B) $19000 C) $24000 D) $29000
Answer: A
If the desired reserve ratio is 20 percent, the simple deposit multiplier is ________. A) 5.0 B) 2.5 C) 4.0 D) 10.0
Answer: A
If the desired reserve ratio is equal to 10 percent, a single bank can increase its loans up to a maximum amount equal to ________. A) its excess reserves B) 10 times its excess reserves C) 10 percent of its excess reserves D) its total reserves
Answer: A
In the simple deposit expansion model, a decline in chequable deposits of $1000 when the desired reserve ratio is equal to 20 percent implies that the Bank of Canada ________. A) sold $200 in government bonds B) sold $500 in government bonds C) purchased $200 in government bonds D) purchased $500 in government bonds
Answer: A
Of the three players in the money supply process, most observers agree that the most important player is ________. A) the Bank of Canada B) the Department of Finance C) the Canada Customs and Revenue Agency D) the House of Parliament
Answer: A
Suppose your payroll cheque is directly deposited to your chequing account. Everything else held constant, total reserves in the banking system ________ and the monetary base ________. A) remain unchanged; remains unchanged B) remain unchanged; increases C) decrease; increases D) decrease; decreases
Answer: A
The government agency that oversees the banking system and is responsible for the conduct of monetary policy in Canada is ________. A) the Bank of Canada B) the Department of Finance C) the Canada Customs and Revenue Agency D) the House of Parliament
Answer: A
The monetary base minus currency in circulation equals ________. A) reserves B) the borrowed base C) the nonborrowed base D) advances to banks
Answer: A
The monetary base minus reserves equals ________. A) currency in circulation B) the borrowed base C) the nonborrowed base D) advances to banks
Answer: A
The simple deposit multiplier can be expressed as the ratio of the ________. A) change in reserves in the banking system divided by the change in deposits B) change in deposits divided by the change in reserves in the banking system C) desired reserve ratio divided by the change in reserves in the banking system D) change in deposits divided by the desired reserve ratio
Answer: A
When a bank sells a government bond to the Bank of Canada, reserves in the banking system ________ and the monetary base ________, everything else held constant. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases
Answer: A
When the Bank extends a $100 loan to the First National Bank, reserves in the banking system ________. A) increase by $100 B) increase by more than $100 C) decrease by $100 D) decrease by more than $100
Answer: A
When the Bank of Canada buys $100 worth of bonds from First National Bank, reserves in the banking system ________. A) increase by $100 B) increase by more than $100 C) decrease by $100 D) decrease by more than $100
Answer: A
When the Bank of Canada purchases a government bond from a bank, reserves in the banking system ________ and the monetary base ________, everything else held constant. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases
Answer: A
A bank has excess reserves of $1000 and demand deposit liabilities of $80000 when the reserve requirement is 25 percent. If the reserve requirement is lowered to 20 percent, the bank's excess reserves will be ________. A) $1000 B) $5000 C) $8000 D) $9000
Answer: B
A bank has excess reserves of $4000 and demand deposit liabilities of $100,000 when the desired reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will be ________. A) -$5000 B) -$1000 C) $1000 D) $5000
Answer: B
A decrease in ________ leads to an equal ________ in the monetary base in the short run. A) float; increase B) float; decrease C) deposits at the Bank; decrease D) advances to banks; increase
Answer: B
A simple deposit multiplier equal to two implies a desired reserve ratio equal to ________. A) 100 percent B) 50 percent C) 25 percent D) 0 percent
Answer: B
An increase in ________ leads to an equal ________ in the monetary base in the short run. A) float; decrease B) float; increase C) advances to banks; decrease D) deposits at the Bank; increase
Answer: B
An increase in the nonborrowed monetary base, everything else held constant, will cause ________. A) the money supply to fall B) the money supply to rise C) no change in the money supply D) demand deposits to fall
Answer: B
Both ________ and ________ are monetary liabilities of the Bank. A) government securities; advances to banks B) notes in circulation; reserves C) government securities; reserves D) notes in circulation; advances to banks
Answer: B
High-powered money minus reserves equals ________. A) reserves B) currency in circulation C) the monetary base D) the nonborrowed base
Answer: B
If a bank has excess reserves of $4000 and demand deposit liabilities of $100,000, and if the reserve requirement is 15 percent, then the bank has actual reserves of ________. A) $17000 B) $19000 C) $24000 D) $29000
Answer: B
If a bank has excess reserves of $7000 and demand deposit liabilities of $100,000, and if the reserve requirement is 10 percent, then the bank has actual reserves of ________. A) $14000 B) $17000 C) $22000 D) $27000
Answer: B
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 ________. A) $17000 B) $22000 C) $27000 D) $29000
Answer: B
If a person selling bonds to the Bank of Canada cashes the Bank's cheque, then reserves ________ and currency in circulation ________, everything else held constant. A) remain unchanged; declines B) remain unchanged; increases C) decline; remains unchanged D) increase; remains unchanged
Answer: B
If reserves in the banking system increase by $100, then chequable deposits will increase by $1000 in the simple model of deposit creation when the desired reserve ratio is ________. A) 0.01 B) 0.10 C) 0.05 D) 0.20
Answer: B
If reserves in the banking system increase by $100, then chequable deposits will increase by $2000 in the simple model of deposit creation when the desired reserve ratio is ________. A) 0.01 B) 0.05 C) 0.10 D) 0.20
Answer: B
In the simple deposit expansion model, a decline in chequable deposits of $1000 when the desired reserve ratio is equal to 10 percent implies that the Bank of Canada ________. A) sold $1000 in government bonds B) sold $100 in government bonds C) purchased $1000 in government bonds D) purchased $100 in government bonds
Answer: B
In the simple deposit expansion model, a decline in chequable deposits of $500 when the desired reserve ratio is equal to 10 percent implies that the Bank of Canada ________. A) sold $500 in government bonds B) sold $50 in government bonds C) purchased $50 in government bonds D) purchased $500 in government bonds
Answer: B
In the simple deposit expansion model, a decline in chequable deposits of $500 when the desired reserve ratio is equal to 20 percent implies that the Bank of Canada ________. A) sold $250 in government bonds B) sold $100 in government bonds C) sold $50 in government bonds D) purchased $100 in government bonds
Answer: B
In the simple deposit expansion model, if the Bank of Canada purchases $100 worth of bonds from a bank that previously had no excess reserves, the bank can now increase its loans by ________. A) $10 B) $100 C) $100 times the reciprocal of the desired reserve ratio D) $100 times the desired reserve ratio
Answer: B
In the simple model of multiple deposit creation in which banks do not hold excess reserves, the increase in chequable deposits equals the product of the change in excess reserves and the ________. A) reciprocal of the excess reserve ratio B) simple deposit multiplier C) reciprocal of the simple deposit multiplier D) bank rate
Answer: B
The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in currency, the open market purchase ________ reserves; if the proceeds are kept as deposits, the open market purchase ________ reserves. A) has no effect on; has no effect on B) has no effect on; increases C) increases; has no effect on D) decreases; increases
Answer: B
The formula for the simple deposit multiplier can be expressed as ________. A) △R = 1/r × △T B) △D = 1/r × △R C) △r = 1/r × △T D) △R =1/r × △D
Answer: B
The monetary liabilities of the Bank of Canada include ________. A) government securities and advances to banks B) notes in circulation C) government securities and reserves D) notes in circulation and advances to banks
Answer: B
When an individual sells a $100 bond to the Bank, she may either deposit the cheque she receives or cash it for currency. In both cases ________. A) reserves increase B) high-powered money increases C) reserves decrease D) high-powered money decreases
Answer: B
When banks borrow money from the Bank of Canada, these funds are called ________. A) Bank funds B) borrowed reserves C) Bank loans D) overnight funds
Answer: B
When the Bank of Canada supplies the banking system with an extra dollar of reserves, deposits ________ by ________ than one dollar—a process called multiple deposit creation. A) increase; less B) increase; more C) decrease; less D) decrease; more
Answer: B
When the Bank of Canada supplies the banking system with an extra dollar of reserves, deposits increase by more than one dollar - a process called ________. A) extra deposit creation B) multiple deposit creation C) expansionary deposit creation D) stimulative deposit creation
Answer: B
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?
Answer: Bank A first changes a security for reserves, and then lends the reserves, creating loans. It receives $100 in reserves from the sale of securities. Since all of these reserve will be excess reserves (there was no change in chequable deposits), the bank will loan out all $100. The $100 will then be deposited into Bank B. This bank now has a change in reserves of $100, of which $90 is excess reserves. Bank B will loan out this $90, which will be deposited into Bank C. Bank C now has an increase in reserves of $90, $81 of which is excess reserves. Bank C will loan out this $81 dollars and the process will continue until there are no more excess reserves in the banking system. For the banking system, both loans and deposits increase by $1000.
A bank has excess reserves of $1000 and demand deposit liabilities of $80000 when the reserve requirement is 20 percent. If the reserve requirement is lowered to 10 percent, the bank's excess reserves will be ________. A) $1000 B) $8000 C) $9000 D) $17000
Answer: C
A bank has excess reserves of $6000 and demand deposit liabilities of $100,000 when the desired reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will be ________. A) -$5000 B) -$1000 C) $1000 D) $5000
Answer: C
A simple deposit multiplier equal to four implies a desired reserve ratio equal to ________. A) 100 percent B) 50 percent C) 25 percent D) 0 percent
Answer: C
All else the same, when the Bank calls in a $100 loan previously extended to the First National Bank, reserves in the banking system ________. A) increase by $100 B) increase by more than $100 C) decrease by $100 D) decrease by more than $100
Answer: C
An increase in ________ leads to an equal ________ in the monetary base in the long run. A) float; increase B) float; decrease C) securities; increase D) securities; decrease
Answer: C
Both ________ and ________ are Bank of Canada assets. A) notes in circulation; reserves B) notes in circulation; government securities C) government securities; advances to banks D) government securities; reserves
Answer: C
Decisions by depositors to increase their holdings of ________, or of banks to hold excess reserves will result in a ________ expansion of deposits than the simple model predicts. A) deposits; smaller B) deposits; larger C) currency; smaller D) currency; larger
Answer: C
For which of the following is the change in reserves necessarily different from the change in the monetary base? A) Open market purchases from a bank B) Open market purchases from an individual who deposits the cheque in a bank C) Open market purchases from an individual who cashes the cheque D) Open market sale to a bank
Answer: C
If a bank has excess reserves of $10000 and demand deposit liabilities of $80000, and if the reserve requirement is 20 percent, then the bank has actual reserves of ________. A) $16000 B) $20000 C) $26000 D) $36000
Answer: C
If a bank has excess reserves of $15000 and demand deposit liabilities of $80000, and if the reserve requirement is 20 percent, then the bank has total reserves of ________. A) $11000 B) $21000 C) $31000 D) $41000
Answer: C
If a bank has excess reserves of $5000 and demand deposit liabilities of $80000, and if the reserve requirement is 20 percent, then the bank has actual reserves of ________. A) $11000 B) $20000 C) $21000 D) $26000
Answer: C
If reserves in the banking system increase by $100, then chequable deposits will increase by $667 in the simple model of deposit creation when the desired reserve ratio is ________. A) 0.01 B) 0.05 C) 0.15 D) 0.20
Answer: C
If reserves in the banking system increase by $200, then chequable deposits will increase by $500 in the simple model of deposit creation when the desired reserve ratio is ________. A) 0.04 B) 0.25 C) 0.40 D) 0.50
Answer: C
If the desired reserve ratio is 25 percent, the simple deposit multiplier is ________. A) 5.0 B) 2.5 C) 4.0 D) 10.0
Answer: C
In the simple deposit expansion model, an expansion in chequable deposits of $1000 when the desired reserve ratio is equal to 20 percent implies that the Bank of Canada ________. A) sold $200 in government bonds B) sold $500 in government bonds C) purchased $200 in government bonds D) purchased $500 in government bonds
Answer: C
In the simple deposit expansion model, if the Bank of Canada purchases $100 worth of bonds from a bank that previously had no excess reserves, deposits in the banking system can potentially increase by ________. A) $10 B) $100 C) $100 times the reciprocal of the desired reserve ratio D) $100 times the desired reserve ratio
Answer: C
In the simple deposit expansion model, if the desired reserve ratio is 20 percent and the Bank of Canada increases reserves by $100, chequable deposits can potentially expand by ________. A) $100 B) $250 C) $500 D) $1000
Answer: C
Individuals that lend funds to a bank by opening a chequing account are called ________. A) policyholders B) partners C) depositors D) debt holders
Answer: C
Purchases and sales of government securities by the Bank of Canada are called ________. A) advances to banks B) Bank fund transfers C) open market operations D) swap transactions
Answer: C
Subtracting borrowed reserves from the monetary base obtains ________. A) reserves B) high-powered money C) the nonborrowed monetary base D) the borrowed monetary base
Answer: C
Suppose a person cashes his payroll cheque and holds all the funds in the form of currency. Everything else held constant, total reserves in the banking system ________ and the monetary base ________. A) remain unchanged; increases B) decrease; increases C) decrease; remains unchanged D) decrease; decreases
Answer: C
The Bank does not tightly control the monetary base because it does not completely control ________. A) open market purchases B) open market sales C) borrowed reserves D) the rate
Answer: C
The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in ________, the open market purchase has no effect on reserves; if the proceeds are kept as ________, reserves increase by the amount of the open market purchase. A) deposits; deposits B) deposits; currency C) currency; deposits D) currency; currency
Answer: C
The interest rate the Bank of Canada charges banks borrowing from the Bank is the ________. A) overnight rate B) Treasury bill rate C) bank rate D) prime rate
Answer: C
The monetary base consists of ________. A) notes in circulation and Canada bonds B) notes in circulation and securities C) notes in circulation and reserves D) reserves and Canada bonds
Answer: C
The relationship between borrowed reserves, the nonborrowed monetary base, and the monetary base is ________. A) MB = MBn - BR B) BR = MBn - MB C) BR = MB - MBn D) MB = BR - mn
Answer: C
The three players in the money supply process include ________. A) banks, depositors, and the Department of Finance B) banks, depositors, and borrowers C) banks, depositors, and the central bank D) banks, borrowers, and the central bank
Answer: C
There are two ways in which the Bank can provide additional reserves to the banking system: it can ________ government bonds or it can ________ advances to banks to commercial banks. A) sell; extend B) sell; call in C) purchase; extend D) purchase; call in
Answer: C
When the Bank of Canada calls in a loan from a bank, the monetary base ________ and reserves ________. A) remains unchanged; decrease B) remains unchanged; increase C) decreases; decrease D) decreases; remains unchanged
Answer: C
When the Bank of Canada extends a loan to a bank, the monetary base ________ and reserves ________. A) remains unchanged; decrease B) remains unchanged; increase C) increases; increase D) increases; remain unchanged
Answer: C
When the Bank of Canada sells $100 worth of bonds to First National Bank, reserves in the banking system ________. A) increase by $100 B) increase by more than $100 C) decrease by $100 D) decrease by more than $100
Answer: C
A bank has excess reserves of $10000 and demand deposit liabilities of $100,000 when the desired reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will be ________. A) -$5000 B) -$1000 C) $1000 D) $5000
Answer: D
A decrease in ________ leads to an equal ________ in the monetary base in the long run. A) float; increase B) float; decrease C) securities; increase D) securities; decrease
Answer: D
Decisions by ________ about their holdings of currency and by ________ about their holdings of excess reserves affect the money supply. A) borrowers; depositors B) banks; depositors C) depositors; borrowers D) depositors; banks
Answer: D
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. A) deposits; desired reserves B) deposits; excess reserves C) currency; desired reserves D) currency; excess reserves
Answer: D
If a bank has excess reserves of $20000 and demand deposit liabilities of $80000, and if the reserve requirement is 20 percent, then the bank has total reserves of ________. A) $16000 B) $20000 C) $26000 D) $36000
Answer: D
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 ________. A) remain unchanged; rise B) remain unchanged; fall C) rise; remain unchanged D) fall; remain unchanged
Answer: D
If a member of the nonbank public sells a government bond to the Bank of Canada in exchange for currency, the monetary base will ________, but ________. A) remain unchanged; reserves will fall B) remain unchanged; reserves will rise C) rise; currency in circulation will remain unchanged D) rise; reserves will remain unchanged
Answer: D
If reserves in the Bank of Canada increase by $100, then chequable deposits will increase by $400 in the simple model of deposit creation when the desired reserve ratio is ________. A) 0.01 B) 0.10 C) 0.20 D) 0.25
Answer: D
If reserves in the banking system increase by $100, then chequable deposits will increase by $100 in the simple model of deposit creation when the desired reserve ratio is ________. A) 0.01 B) 0.10 C) 0.20 D) 1.00
Answer: D
If reserves in the banking system increase by $100, then chequable deposits will increase by $500 in the simple model of deposit creation when the desired reserve ratio is ________. A) 0.01 B) 0.10 C) 0.05 D) 0.20
Answer: D
In the simple deposit expansion model, an expansion in chequable deposits of $1000 when the desired reserve ratio is equal to 10 percent implies that the Bank of Canada ________. A) sold $1000 in government bonds B) sold $100 in government bonds C) purchased $1000 in government bonds D) purchased $100 in government bonds
Answer: D
In the simple deposit expansion model, if the desired reserve ratio is 10 percent and the Bank of Canada increases reserves by $100, chequable deposits can potentially expand by ________. A) $100 B) $250 C) $500 D) $1000
Answer: D
The monetary base declines when ________. A) the Bank extends advances to banks B) deposits at the Bank decrease C) float increases D) the Bank sells securities
Answer: D
The sum of the Bank of Canada's monetary liabilities and the Canadian Mint's monetary liabilities is called ________. A) the money supply B) notes in circulation C) bank reserves D) the monetary base
Answer: D
When a bank buys a government bond from the Bank of Canada, reserves in the banking system ________ and the monetary base ________, everything else held constant. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases
Answer: D
When a member of the nonbank public deposits currency into her bank account, ________. A) both the monetary base and bank reserves fall B) both the monetary base and bank reserves rise C) the monetary base falls, but bank reserves remain unchanged D) bank reserves rise, but the monetary base remains unchanged
Answer: D
When a member of the nonbank public withdraws currency from her bank account, ________. A) both the monetary base and bank reserves fall B) both the monetary base and bank reserves rise C) the monetary base falls, but bank reserves remain unchanged D) bank reserves fall, but the monetary base remains unchanged
Answer: D
When the Bank of Canada sells a government bond to a bank, reserves in the banking system ________ and the monetary base ________, everything else held constant. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases
Answer: D
Explain two ways by which the Bank of Canada can increase the monetary base. Why is the effect of Bank of Canada actions on bank reserves less exact than the effect on the monetary base?
Answer: The Bank can increase the monetary base by purchasing government bonds and by extending advances to banks. If the person selling the security chooses to keep the proceeds in currency, bank reserves do not increase. Because the Bank cannot control the distribution of the monetary base between reserves and currency, it has less control over reserves than the base.
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.
Answer: The Bank of Canada does not completely control the level of bank deposits and loans because banks can hold excess reserves and the public can change its currency holdings. A change in either factor changes the deposit expansion process. An increase in either excess reserves or currency reduces the amount by which deposits and loans are increased.
Explain why the simple deposit multiplier overstates the true deposit multiplier.
Answer: The simple model ignores the role banks and their customers play in the creation process. The bank's customers can decide to hold currency and the bank can decide to hold excess reserves. Both of these will restrict the banking system's ability to create deposits. Thus, the true multiplier is less than the prediction of the simple deposit multiplier.
Who are the three players in the money supply process? Describe their roles.
Answer: The three players are: the central bank, depository institutions (banks) and depositors. The central bank (in Canada, the Bank of Canada) oversees the banking system and is responsible for the conduct of monetary policy. Banks are the financial intermediaries that accept deposits from individuals and institutions. Depositors, both individuals and institutions, hold deposits in banks.
