Deck 16: The Money Supply Process

Question 1

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 1

C

Question 2

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 2

A

Question 3

Who are the three players in the money supply process? Describe their roles.

Answer 3

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.

Question 4

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

Question 5

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

Question 6

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

Question 7

High-powered money minus reserves equals ________.

A) reserves
B) currency in circulation
C) the monetary base
D) the nonborrowed base

Question 8

The monetary base minus reserves equals ________.

A) currency in circulation
B) the borrowed base
C) the nonborrowed base
D) advances to banks

Question 9

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

Question 10

Individuals that lend funds to a bank by opening a chequing account are called ________.

A) policyholders
B) partners
C) depositors
D) debt holders

Question 11

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

Question 12

The monetary base minus currency in circulation equals ________.

A) reserves
B) the borrowed base
C) the nonborrowed base
D) advances to banks

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

High-powered money minus currency in circulation equals ________.

A) reserves
B) the borrowed base
C) the nonborrowed base
D) advances to banks

Question 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

Subtracting borrowed reserves from the monetary base obtains ________.

A) reserves
B) high-powered money
C) the nonborrowed monetary base
D) the borrowed monetary base

Question 42

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

Question 43

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

Question 44

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

Question 45

The formula for the simple deposit multiplier can be expressed as ________.

Question 46

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

Question 47

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

Question 48

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

Question 49

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

Question 50

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

Question 51

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

Question 52

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

Question 53

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

Question 54

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

Question 55

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

Question 56

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

Question 57

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

Question 58

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

Question 59

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?

Question 60

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

Question 61

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

Question 62

If a bank has excess reserves of $10,000 and demand deposit liabilities of $80,000,and if the reserve requirement is 20 percent,then the bank has actual reserves of ________.

A) $16,000
B) $20,000
C) $26,000
D) $36,000

Question 63

If reserves in the banking system increase by $100,then chequable deposits will increase by $2,000 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

Question 64

In the simple deposit expansion model,an expansion in chequable deposits of $1,000 when the desired reserve ratio is equal to 10 percent implies that the Bank of Canada ________.

A) sold $1,000 in government bonds
B) sold $100 in government bonds
C) purchased $1000 in government bonds
D) purchased $100 in government bonds

Question 65

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

Question 66

In the simple deposit expansion model,an expansion in chequable deposits of $1,000 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

Question 67

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

Question 68

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

Question 69

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

Question 70

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) $1,000

Question 71

In the simple deposit expansion model,a decline in chequable deposits of $1,000 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

Question 72

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

Question 73

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

Question 74

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

Question 75

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

Question 76

In the simple deposit expansion model,a decline in chequable deposits of $1,000 when the desired reserve ratio is equal to 10 percent implies that the Bank of Canada ________.

A) sold $1,000 in government bonds
B) sold $100 in government bonds
C) purchased $1,000 in government bonds
D) purchased $100 in government bonds

Question 77

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

Question 78

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) $1,000

Question 79

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

Question 80

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