Question 1

Suppose the reserve ratio is 4 percent, banks do not hold excess reserves, people do not hold currency, and the Bank of Canada purchases $25 million of government bonds. Which statement best describes the effects of Bank of Canada's purchase?

Accepted Answer

With a reserve ratio of 4 percent, the initial money multiplier is 1/0.04 = 25. The Bank of Canada's purchase of $25 million of government bonds increases the reserves of the banking system by $25 million. This increases the amount of lending that banks can do. The total amount of loans increases by 25 x $25 million = $625 million. The increase in the money supply is $625 million - $25 million = $600 million. Therefore, the overall effect is an increase in the money supply of $600 million.

Question 2

Suppose the reserve ratio is 20 percent and banks do not hold excess reserves. Suppose the Bank of Canada sells $10 million of bonds to the public. Which statement best describes the effects of this open-market operation?

Accepted Answer

When the Bank of Canada sells bonds to the public, the public pays for these bonds with their deposits, which decreases the reserves in the banking system by the amount of the sale, in this case, $10 million. With a reserve ratio of 20%, each dollar of reserves supports $5 of money (1/0.20 = 5). Therefore, a $10 million decrease in reserves leads to a $50 million decrease in the money supply.

Question 3

During wars, the public tends to hold relatively more currency and relatively fewer deposits. Which statement best describes the effects of this increase in currency holdings?

Accepted Answer

During wars, the public holds relatively more currency, which means that banks have fewer reserves. This decrease in reserves, along with the decrease in deposits, leads to a decrease in the money supply. Therefore, both reserves and the money supply would decrease.

Question 4

Which of the following is a sterilization operation that supports the Canadian dollar?

Accepted Answer

The answer of Which of the following is a sterilization...

Question 5

Suppose the reserve ratio is 10 percent and banks do not hold excess reserves. Under these circumstances, suppose the Bank of Canada sells $60 million of bonds to the public. Which statement best describes the effects of this open-market operation?

Accepted Answer

The answer of Suppose the reserve ratio is 10 percent...

Question 6

Which statement best describes the outcome of an increase in the bank rate?

Accepted Answer

An increase in the bank rate means that it becomes more expensive for banks to borrow from the Bank of Canada. Therefore, banks will borrow less from the Bank of Canada, so reserves will decrease.

Question 7

Which of the following is quantitative easing?

Accepted Answer

The answer of Which of the following is quantitative easing?
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Question 8

What is a bank's capital?

Accepted Answer

The bank's capital refers to its equity, which is the difference between its assets (including reserves) and liabilities (including deposits and debt). It represents the amount of money held by the bank that belongs to its owners, rather than to its depositors or other creditors.

Question 9

In a fractional reserve banking system with no excess reserves and no currency holdings, suppose the central bank buys $100 million of bonds. Which statement best describes the effects of this open-market operation?

Accepted Answer

When the central bank buys $100 million of bonds in a fractional reserve banking system, it directly increases reserves by $100 million. Banks can then lend out a portion of these reserves, which gets deposited and re-lent multiple times, leading to a multiplier effect on the money supply. Therefore, the money supply increases by more than $100 million.

Question 10

Suppose the public decides to hold more currency and fewer deposits in banks. Which statement describes the effects of this decision?

Accepted Answer

If the public decides to hold more currency and fewer deposits in banks, this will lead to a decrease in bank reserves, as banks have less money available to lend out. As bank reserves decrease, the banks will have less capacity to make loans and create new money, ultimately leading to a decrease in the money supply. Therefore, the correct answer is A.

Question 11

Who determines the amount of money in the economy?

Accepted Answer

The amount of money in the economy depends on the behaviour of banks. Banks create money by making loans, which increases the money supply. Conversely, when loans are repaid, money is destroyed, decreasing the money supply. The Bank of Canada can influence the amount of money in the economy through its monetary policy tools, but it does not have complete control. The Minister of Finance does not determine the amount of money in the economy by law.

Question 12

During recessions, banks typically choose to hold more excess reserves relative to their deposits. Which statement best describes the effects of the increase in reserves?

Accepted Answer

When banks hold more excess reserves, the money multiplier decreases because there is less money available to lend out, which in turn leads to a decrease in the money supply. This is because the money multiplier formula (1/required reserve ratio) assumes that all excess reserves are being lent out. When banks hold more excess reserves, the multiplier decreases because less money is being created through the lending process.

Question 13

Which statement best describes the outcomes of a decrease in the reserve requirement in a fractional reserve system?

Accepted Answer

Decreasing the reserve requirement means that banks are required to hold less money in reserve and can lend out more money. This leads to an increase in the money multiplier, as the same amount of reserves can support a larger amount of loans. This increase in the money multiplier leads to an increase in the money supply, as more money is being created through the lending process. Therefore, both the money multiplier and the money supply increase.

Question 14

What is the interest rate the Bank of Canada charges on loans it makes to banks?

Accepted Answer

The Bank of Canada charges the bank rate on loans it makes to banks. This rate is set by the Bank of Canada and is the interest rate at which the central bank makes loans to commercial banks in the country. The bank rate is an important tool for the central bank to manage monetary policy and control the money supply. The prime rate is the interest rate that commercial banks charge their most creditworthy customers. The federal repayment rate and dividend debt are not relevant to the Bank of Canada's lending activities.

Question 15

In a fractional reserve banking system, how does an increase in the reserve requirement change the money multiplier?

Accepted Answer

The answer of In a fractional reserve banking system, how...

Question 16

Which statement best describes the outcome of a decrease in the bank rate?

Accepted Answer

A decrease in the bank rate, which is the interest rate at which commercial banks can borrow from the central bank (in this case, the Bank of Canada), makes borrowing cheaper for banks. As a result, banks are likely to borrow more from the central bank, leading to an increase in their reserves.

Question 17

Which statement best defines the bank rate?

Accepted Answer

The bank rate is the interest rate set by the Bank of Canada, which is used to influence the lending and borrowing rates in the economy. It is the interest rate that the Bank of Canada charges commercial banks for short-term loans, and it is used as a benchmark for other interest rates in the economy.

Question 18

Which statement best describes the outcomes of a decrease in reserve requirements?

Accepted Answer

A decrease in reserve requirements means that banks are required to hold less money in reserves and can lend out more. This leads to an increase in the money multiplier, which is the ratio of the money supply to the amount of reserves held by banks. With a higher money multiplier, the money supply will increase as banks are able to lend out more money. Therefore, the correct statement is that the reserve ratio decreases, the money multiplier increases, and the money supply increases.

Question 19

Which statement best defines reserve requirements?

Accepted Answer

Reserve requirements are regulations set by central banks that mandate the minimum amount of reserves that banks must hold against their deposits. Reserves can include cash, deposits with the central bank, and other liquid assets. This requirement is aimed at ensuring that banks have enough liquidity to meet the demands of their depositors and prevent bank runs.

Question 20

When the Bank of Canada decreases the bank rate, banks will borrow more from the Bank of Canada. Which statement best describes the outcomes of this process?

Accepted Answer

When the Bank of Canada decreases the bank rate, it becomes cheaper for banks to borrow from the central bank. This increases the amount of money banks have available to lend to the public. As a result, banks will lend more to the public, which increases the money supply. Therefore, the correct choice is C.

Quiz 10: The Monetary System