Question 1

If the desired reserve ratio is one-third, currency in circulation is $300 billion, and chequable deposits are $900 billion, then the monetary base is ________.

Accepted Answer

The monetary base is the sum of currency in circulation and reserves. Reserves are equal to chequable deposits multiplied by the desired reserve ratio. Using the given information, reserves are $300 billion (one-third of $900 billion), so the monetary base is $600 billion (currency in circulation ($300 billion) plus reserves ($300 billion)).

Question 2

If the desired reserve ratio is ten percent, currency in circulation is $400 billion, chequable deposits are $1000 billion, and excess reserves total $1 billion, then the money supply is ________.

Accepted Answer

To calculate the money supply, we need to use the formula: Money supply = currency in circulation + chequable deposits.

We can first calculate the total reserves as: 
Total reserves = desired reserve ratio * chequable deposits 
= 0.1 * $1000 billion 
= $100 billion

The actual reserves would be the sum of excess reserves and required reserves: 
Actual reserves = excess reserves + required reserves 
Since excess reserves are $1 billion, required reserves would be: 
Required reserves = total reserves - excess reserves 
= $100 billion - $1 billion 
= $99 billion

Using the money multiplier formula, we can solve for the money supply: 
Money multiplier = 1 / reserve ratio 
= 1 / 0.1 
= 10

Money supply = money multiplier * actual reserves 
= 10 * $99 billion 
= $990 billion

Finally, we add the currency in circulation to get the total money supply: 
Money supply = currency in circulation + chequable deposits 
= $400 billion + $990 billion 
= $1400 billion

Question 3

If the desired reserve ratio is fifteen percent, currency in circulation is $400 billion, and chequable deposits are $1000 billion, then the money multiplier is approximately ________.

Accepted Answer

The money multiplier is calculated as 1/(desired reserve ratio). In this case, the desired reserve ratio is 15%, or 0.15. Therefore, the money multiplier is 1/0.15 = 6.67.

Question 4

If the desired reserve ratio is ten percent, currency in circulation is $400 billion, chequable deposits are $1000 billion, and excess reserves total $1 billion, then the excess reserves-chequable deposit ratio is ________.

Accepted Answer

The excess reserves-chequable deposit ratio is calculated by dividing the excess reserves by the chequable deposits. In this case, it is $1 billion / $1000 billion = 0.001.

Question 5

If the desired reserve ratio is one-third, currency in circulation is $300 billion, and chequable deposits are $900 billion, then the money supply is ________.

Accepted Answer

The money supply is the sum of currency in circulation and chequable deposits, which is $300 billion + $900 billion = $1200 billion.

Question 6

If the desired reserve ratio is one-third, currency in circulation is $300 billion, and chequable deposits are $900 billion, then the level of excess reserves in the banking system is ________.

Accepted Answer

With a desired reserve ratio of one-third, banks need to hold $300 billion in reserves (one-third of $900 billion in chequable deposits). Since currency in circulation does not count towards bank reserves, the entire $300 billion in reserves must come from the deposits themselves. Therefore, there are no excess reserves, as the banks are holding exactly the amount required by the reserve ratio.

Question 7

If the desired reserve ratio is ten percent, currency in circulation is $400 billion, chequable deposits are $800 billion, and excess reserves total $0.8 billion, then the monetary base is ________.

Accepted Answer

The monetary base is composed of currency in circulation and reserves (both required and excess). Given a ten percent reserve ratio and chequable deposits of $800 billion, required reserves would be $80 billion (10% of $800 billion). With excess reserves of $0.8 billion, total reserves are $80.8 billion. Adding this to the currency in circulation ($400 billion) gives a monetary base of $480.8 billion.

Question 8

If the desired reserve ratio is five percent, currency in circulation is $400 billion, and chequable deposits are $800 billion, then the money multiplier is approximately ________.

Accepted Answer

The formula for the money multiplier is 1/reserve ratio. So, the reserve ratio is 0.05 (or 5%), the currency in circulation is not relevant to the calculation, and the total deposits are $800 billion. Thus, the money multiplier is 1/0.05 = 20. Dividing $800 billion by the money multiplier of 20 gives us $40 billion, which is the amount of required reserves. Therefore, the initial deposit that led to the creation of $1 of money supply is $40 billion. To get the inverse, we divide 1 by $40 billion, which gives us approximately 0.000000025. Multiplying by 100 gives us the percentage value, which is 0.0000025%. Converting to a simplified fraction gives us 1/2.72, which is approximately 0.367. So, the money multiplier is approximately 2.72.

Question 9

When the nonborrowed monetary base is equal to $200 billion, the borrowed reserves are equal to $100 billion, and the money supply is equal to $700 billion, the money multiplier is ________.

Accepted Answer

The money multiplier is calculated as the money supply divided by the monetary base. Here, the monetary base is the sum of nonborrowed monetary base and borrowed reserves, which is $300 billion. The money supply is $700 billion. Thus, the money multiplier is $700 billion / $300 billion = 2.33.

Question 10

If the desired reserve ratio is ten percent, currency in circulation is $400 billion, chequable deposits are $1000 billion, and excess reserves total $1 billion, then the currency ratio is ________.

Accepted Answer

Currency ratio = Currency in circulation / Chequable deposits
Currency in circulation = $400 billion
Chequable deposits = $1000 billion
Currency ratio = $400 billion / $1000 billion
Currency ratio = 0.4 or 40%

Question 11

If the desired reserve ratio is one-third, currency in circulation is $300 billion, and chequable deposits are $900 billion, then the money multiplier is approximately ________.

Accepted Answer

The money multiplier is calculated as 1 divided by the reserve ratio. With a reserve ratio of one-third (or 0.33), the money multiplier is approximately 1 / 0.33 = 3. However, considering the currency in circulation and deposits, the effective money multiplier is lower, closer to 2.0.

Question 12

Recognizing the distinction between advances to banks and the nonborrowed monetary base, the money supply model is specified as ________.

Accepted Answer

The correct formula for the money supply model, taking into account the distinction between advances to banks and the nonborrowed monetary base, is M = m × (MB_n + BR), where M is the money supply, m is the money multiplier, MB_n represents the nonborrowed monetary base, and BR stands for bank reserves. The "+" sign indicates that bank reserves (BR) are added to the nonborrowed monetary base to calculate the total monetary base before applying the multiplier.

Question 13

The relationship between advances to banks, the nonborrowed monetary base, and the monetary base is ________.

Accepted Answer

The relationship between advances to banks, the nonborrowed monetary base, and the monetary base is that advances to banks (BR) equal the monetary base (MB) minus the nonborrowed monetary base (MB_n): BR = MB - MB_n. This equation highlights the fact that advances to banks increase the monetary base by injecting additional reserves into the banking system.

Question 14

If the desired reserve ratio is ten percent, currency in circulation is $400 billion, and chequable deposits are $1000 billion, then the money multiplier is approximately ________.

Accepted Answer

To calculate the money multiplier, we use the formula:
Money Multiplier = 1 / Reserve Ratio
Reserve ratio = 10% = 0.1
Currency in circulation = $400 billion
Chequable deposits = $1000 billion
Total deposits = Currency in circulation + Chequable deposits = $1400 billion
Reserves = Required reserves = Reserve ratio x Total deposits = 0.1 x $1400 billion = $140 billion
Money supply = Total deposits / Reserve ratio = $1400 billion / 0.1 = $14,000 billion
Money multiplier = Money supply / Monetary base = $14,000 billion / ($400 billion + $1000 billion) = 2.8. 
Therefore, the best choice is B.

Question 15

If the desired reserve ratio is ten percent, currency in circulation is $400 billion, chequable deposits are $800 billion, and excess reserves total $0.8 billion, then the currency ratio is ________.

Accepted Answer

The currency ratio is calculated as the currency in circulation divided by the chequable deposits. Given the currency in circulation is $400 billion and chequable deposits are $800 billion, the currency ratio is $400 billion / $800 billion = 0.5.

Question 16

If the desired reserve ratio is ten percent, currency in circulation is $400 billion, chequable deposits are $800 billion, and excess reserves total $0.8 billion, then the excess reserves-chequable deposit ratio is ________.

Accepted Answer

The excess reserves-chequable deposit ratio is calculated by dividing the excess reserves by the chequable deposits. Here, excess reserves are $0.8 billion and chequable deposits are $800 billion. Therefore, the ratio is $0.8 billion / $800 billion = 0.001.

Question 17

Explain the complete formula for the money supply, and explain how changes in desired reserves, excess reserves, the currency ratio, the nonborrowed base, and Bank of Canada lending affect the money supply.

Accepted Answer

The answer of Explain the complete formula for the money...

Question 18

If the desired reserve ratio is fifteen percent, currency in circulation is $400 billion, and chequable deposits are $800 billion, then the money multiplier is approximately ________.

Accepted Answer

The answer of If the desired reserve ratio is fifteen...

Question 19

If the desired reserve ratio is ten percent, currency in circulation is $400 billion, chequable deposits are $1000 billion, and excess reserves total $1 billion, then the monetary base is ________.

Accepted Answer

The monetary base is the sum of currency in circulation and the reserves (both required and excess) held by banks. With a desired reserve ratio of 10%, the required reserves for $1000 billion in chequable deposits would be $100 billion (10% of $1000 billion). Given that excess reserves are $1 billion, total reserves are $101 billion. Adding this to the $400 billion in currency gives a monetary base of $501 billion.

Question 20

If the desired reserve ratio is one-third, currency in circulation is $300 billion, and chequable deposits are $900 billion, then the currency ratio is ________.

Accepted Answer

The answer of If the desired reserve ratio is one-third,...

Quiz 15: The Money Supply Process