Deck 14: A: Money, Banking, and Money Creation

Question 1

Some government bonds can be redeemed for currency or a cheque at banks.Why, then, isn't it universally agreed that government bonds are part of the money supply?

Answer 1

The question literally answers itself.These assets must be exchanged for currency or a cheque (which is money by definition) before they can be used in exchange for goods and services.Since they must be exchanged for currency or a cheque first, bonds are one step removed from being spendable as money.

Question 2

What is fiat money?

Answer 2

Fiat money is money that is declared to be legal tender by the government and is backed by the government's ability to keep its value stable rather than by some precious metal.

Question 3

Why is money considered to be debt?

Answer 3

The major parts of the money supply are currency and demand deposits.These items are debts, or promises to pay.Paper money is the circulating debt of the Bank of Canada.Demand deposits are debts of chartered banks.Neither currency nor demand deposits have any intrinsic value.They are simply circulating paper to which people must attach value.

Question 4

Why is the intrinsic value of token money less than its face value?

Question 5

Provide three key reasons why money has value.

Question 6

Suppose depositors at chartered banks transfer $10 billion from their savings deposits to their demand deposits.What impact does this have on M1, M2, and M2+?

Question 7

When would money that is declared legal tender be worthless?

Question 8

Determine the purchasing power of $1 at each of the price levels indicated in the table and enter in the spaces provided.

Question 9

What is the difference between the M2 and M2+ definitions of the money supply?

Question 10

Are credit cards money? Explain.

Question 11

What are the three functions that a commodity must fulfill to be useful as money?

Question 12

Money is what money does.Explain.

Question 13

What is a chartered bank (in Canada)?

Question 14

Use the figures in the table below to answer the following questions. (a) What is the value of M1?
(b) What is the value of M2?
(c) What is the value of M2+?
(d) What is the value of M2++?

Question 15

In Douglas Adams' The Restaurant at the End of the Universe, the Golgafrinchans' management consultant decided to use leaves (from trees) as legal tender (i.e., as money).What is the problem with this plan?

Question 16

Use the figures in the table below to answer the following questions. (a) What is the value of M1?
(b) What is the value of M2?
(c) What is the value of M2+?
(d) What is the value of M2++?

Question 17

What are near monies?

Question 18

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

Question 19

Suppose depositors at chartered banks transfer $10 billion from their savings deposits to their deposits in non-bank institutions.What impact does this have on M1, M2, and M2+?

Question 20

What is the problem with printing money to pay down national debt?

Question 21

Answer the next questions based on the following balance sheet for a chartered bank.Assume the desired reserve ratio is 33%. (a) What is the amount of excess reserves?
(b) By what amount can this bank safely expand its loans?
(c) By expanding its loans by the amount in part (b), what would its demand deposits equal (if all loans were made to customers holding demand deposits)?
(d) If cheques clear against the bank equal to the amount loaned in (b), how much would remain in reserves and in demand deposits?

Question 22

What are the two significant characteristics of the fractional reserve banking system?

Question 23

Give an equation that shows the relationship between actual, desired, and excess reserves.

Question 24

What are the four main assets of Canada's chartered banks?

Question 25

What is the main method banks and other savings institutions use to make profits?

Question 26

Define the desired reserve ratio.

Question 27

Describe the basic features of a chartered bank's balance sheet.

Question 28

What are the five main liabilities of Canada's chartered banks?

Question 29

What are Mortgage-Backed Securities and how are they created?

Question 30

Suppose the First National Bank has the following simplified balance sheet.The reserve ratio is 20% and all dollar figures are in thousands. Assume that households and businesses deposit $5 in this bank and that this currency is added to the bank's reserves.(a) In column (1) show the bank's balance sheet after this occurs.Is there a change in the money supply?
(b) In column (2) show what would happen if the bank now loans all of its excess reserves to a depositor.Is there a change in the money supply?

Question 31

Why do financial institutions keep reserves?

Question 32

What is Securitization and what are its supposed benefits as per government regulators?

Question 33

Describe the nature, causes, and effects of the U.S Mortgage Default Crisis.

Question 34

What is the function of the Canadian Payments Association (CPA)?

Question 35

Explain what is meant by fractional reserve banking.

Question 36

When a cheque is drawn against bank A and deposited in another bank, the first bank loses reserves as the cheque is cleared.Yet the cheque collection involves no loss of reserves by the banking system.Explain what significance this has for the lending ability of the system as a whole.

Question 37

Arrange the following items in the form of a chartered bank's balance sheet, and explain how each might come into being.Capital stock, $300,000; Cash Reserves, $60,000; Property, $290,000; Demand deposits, $150,000; Securities, $40,000; Loans, $60,000

Question 38

What is the history behind the idea of a fractional reserve banking system?

Question 39

How does the problem of Moral Hazard relate to financial investments?

Question 40

What happens to the money supply when a bank accepts deposits of currency from the public and places it in demand deposits?

Question 41

How does a decrease in the desired reserve ratio affect multiple-deposit expansion?

Question 42

Describe and explain what was done during the during the financial crisis of 2007-2008 in the United States (sometimes referred to as Extend and Pretend).

Question 43

What is meant by the overnight lending rate?

Question 44

Define the monetary multiplier.

Question 45

Suppose a fraction of any new loan was kept as cash and not deposited into a bank.How would this currency drain affect multiple-deposit expansion?

Question 46

Give an equation that shows the relationship between excess cash reserves, maximum demand-deposit expansion, and the monetary multiplier.

Question 47

Answer the next question based on the following consolidated balance sheet for the chartered banking system.Assume the desired reserve ratio is 30%.All figures are in millions of dollars. (a) What is the amount of excess reserves in this chartered banking system?
(b) What is the maximum amount that the money supply can be expanded?
(c) If the reserve ratio fell to 25 percent, what is now the maximum amount that the money supply can be expanded?

Question 48

What is the effect on the money supply when a chartered bank sells government securities to the public?

Question 49

Suppose the Second National Bank has the following simplified balance sheet.The reserve ratio is 25% and all dollar figures are in thousands. Assume that households and businesses deposit $10 in this bank and that this currency is added to the bank's reserves.(a) In column (1) show the bank's balance sheet after this occurs.Is there a change in the money supply?
(b) In column (2) show what would happen if the bank now loans all of its excess reserves to a depositor.Is there a change in the money supply?

Question 50

The following is the consolidated balance sheet for the chartered banking system.Assume the desired reserve ratio is 10%.Show the new consolidated balance sheet after maximum loan expansion has occurred.

Question 51

Banks pursue two conflicting goals.Explain what they are and why the conflict.

Question 52

What are the two conflicting goals of bankers? How do these conflicting goals get resolved in the overnight loans market?

Question 53

How does deterioration in the quality of borrowers affect multiple-deposit expansion?

Question 54

The following is the consolidated balance sheet for the chartered banking system.Assume the desired reserve ratio is 33%.Show the new consolidated balance sheet after maximum loan expansion has occurred.

Question 55

The following is the consolidated balance sheet for the chartered banking system.Assume the desired reserve ratio is 10%.Show the new consolidated balance sheet after maximum loan contraction has occurred.

Question 56

What is the effect on the money supply when a chartered bank buys government securities from the public?