Deck 14: 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

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+?

Answer 2

Since M1 includes demand deposits but not savings deposits,the transfer increases M1 by $10 billion.However,M2 and M2+,which include both types of deposits,do not change.

Question 3

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+?

Answer 3

Since M1 does not include either type of deposit,it does not change.However,M2 decreases by $10 billion since it includes savings deposits at chartered banks but not deposits in non-bank institutions.M2+,which includes both types of deposits,also does not change.

Question 4

When would money that is declared legal tender be worthless?

Question 5

Money is what money does.Explain.

Question 6

Provide three key reasons why money has value.

Question 7

Use the figures in the table below to answer the following questions.

Question 8

What is a chartered bank (in Canada)?

Question 9

Why is money considered to be debt?

Question 10

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 11

Use the figures in the table below to answer the following questions.

Question 12

What are near monies?

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

What is fiat money?

Question 20

Are credit cards money? Explain.

Question 21

Why do financial institutions keep reserves?

Question 22

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

Question 23

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

Question 24

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 25

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

Question 26

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

Question 27

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 28

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

Question 29

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

Question 30

Answer the next questions based on the following balance sheet for a chartered bank.Assume the desired reserve ratio is 33%.

Question 31

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

Question 32

Explain what is meant by fractional reserve banking.

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

Suppose the First National Bank has the following simplified balance sheet.The reserve ratio is 20% and all dollar figures are in thousands.

Question 38

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

Question 39

Define the desired reserve ratio.

Question 40

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

Question 41

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.

Question 42

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

Question 43

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 44

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

Question 45

Suppose the Second National Bank has the following simplified balance sheet.The reserve ratio is 25% and all dollar figures are in thousands.

Question 46

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 47

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

Question 48

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

Question 49

Define the monetary multiplier.

Question 50

What is meant by the overnight lending rate?

Question 51

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

Question 52

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 53

How does a decrease in the desired reserve ratio 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

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