Question 1

Which of the following best describes the consequences of an increase in reserve requirements?

Accepted Answer

An increase in reserve requirements means banks have to hold more reserves, which decreases the amount they can lend out. This reduces the money multiplier and decreases the money supply. Therefore, option B is the correct answer, which describes the consequences of an increase in reserve requirements as the reserve ratio increases, the money multiplier decreases, and the money supply decreases.

Question 2

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

Accepted Answer

When the central bank buys $100 million of bonds, reserves increase by $100 million. In a fractional reserve banking system, this increase in reserves allows banks to create more money through lending, leading to a money supply increase of more than $100 million due to the money multiplier effect.

Question 3

Which of the following best describes the consequences of a decrease in the bank rate?

Accepted Answer

A decrease in the bank rate makes borrowing from the central bank cheaper for commercial banks, encouraging them to borrow more, which increases their reserves.

Question 4

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

Accepted Answer

When the public holds more currency and fewer deposits, banks have fewer reserves to lend out, leading to a decrease in the money supply through the money multiplier effect.

Question 5

Who determines the amount of money in the economy?

Accepted Answer

While the Bank of Canada plays a role in managing the money supply through monetary policy, the behavior of banks also plays a significant role in determining the amount of money in circulation. When banks make loans, they create new money, which increases the money supply. Conversely, when banks reduce lending, the money supply can decrease. Therefore, the amount of money in the economy is not solely determined by the actions of the Bank of Canada or the government.

Question 6

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

Accepted Answer

When the public holds more currency, the amount of deposits held in banks decreases. As a result, banks' reserves also decrease. Since banks cannot lend out more than they have in reserves, the money supply also decreases.

Question 7

Which of the following best describes the consequences of an increase in the bank rate?

Accepted Answer

An increase in the bank rate implies that it is now more expensive for banks to borrow from the central bank. As a result, banks will borrow less from the central bank, leading to a decrease in reserves. Therefore, option D is the correct choice.

Question 8

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

Accepted Answer

Banks holding more excess reserves means they will lend out less money, decreasing the money multiplier. This will lead to a decrease in the money supply.

Question 9

During what period can the Bank of Canada influence unemployment?

Accepted Answer

The Bank of Canada can influence unemployment in the short run through monetary policy, such as adjusting interest rates or implementing quantitative easing. However, in the long run, unemployment is mainly affected by structural factors such as demographics, technology, and education/skills, which are beyond the control of the central bank.

Question 10

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

Accepted Answer

When the Bank of Canada sells $10 million of bonds to the public, bank reserves decrease by $10 million. With a reserve ratio of 10%, the money supply eventually decreases by $100 million due to the money multiplier effect.

Question 11

Which of the following best describes the consequences of a decrease in reserve requirements?

Accepted Answer

When reserve requirements are decreased, banks are required to hold less reserves and can loan out more money, increasing the money multiplier. This leads to an increase in the money supply. The reserve ratio decreases because banks are holding a smaller percentage of their deposits as reserves.

Question 12

Suppose the reserve ratio is 20 percent, and banks do not hold excess reserves. Under these circumstances, suppose the Bank of Canada sells $40 million of bonds to the public. Which of the following best describes the effects of this open market operation?

Accepted Answer

The answer of Suppose the reserve ratio is 20 percent,...

Question 13

Suppose the reserve ratio is 10 percent, banks do not hold excess reserves, people do not hold currency, and the Bank of Canada purchases $20 million of government bonds. Which of the following best describes the effects of Bank of Canada's purchase?

Accepted Answer

With a reserve ratio of 10 percent, the Bank of Canada's purchase of $20 million in government bonds will increase bank reserves by $20 million (10% of the $20 million purchase). Since banks do not hold excess reserves, they will loan out the additional $20 million, which will be deposited into other banks creating more reserves. As this process repeats, the money supply will eventually increase by a multiple of the initial $20 million, which is 1/RR, where RR is the reserve ratio. Therefore, the money supply will increase by $200 million (1/0.1 x $20 million).

Question 14

Which of the following best describes the consequences of a decrease in the reserve requirements in a fractional reserve system?

Accepted Answer

A decrease in the reserve requirements means that banks are required to hold less money in reserve and can lend out more. This leads to an increase in the money multiplier, as banks can create more loans for every dollar held in reserve. As a result, the money supply increases as well.

Question 15

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

Accepted Answer

The Bank of Canada sets the bank rate, which is the interest rate it charges on loans it makes to banks. The prime rate is set by individual commercial banks and is based on the bank rate. The federal funds rate is the interest rate at which banks lend reserves to each other overnight in the United States. The operating band is the range within which the Bank of Canada aims to keep the overnight interest rate, which is currently between 0.25% and 0.75%.

Question 16

Which of the following best defines reserve requirements?

Accepted Answer

Reserve requirements refer to the amount of reserves that banks are required to hold against their deposits. These reserves can be held in either cash or with the central bank. It is a tool used by central banks to regulate and control the money supply in an economy. Option A refers to discount rate, option C refers to lending restrictions, and option D refers to the interest rate set by the central bank.

Question 17

Is there tradeoff between inflation and unemployment?

Accepted Answer

In the short-run, there is a tradeoff between inflation and unemployment known as the Phillips curve. As unemployment decreases, inflation tends to increase, and vice versa. However, this tradeoff is only present in the short-run and disappears in the long-run.

Question 18

Which of the following best defines the bank rate?

Accepted Answer

The bank rate is the interest rate at which a nation's central bank, such as the Bank of Canada, lends money to domestic banks, often influencing the rates those banks charge customers.

Question 19

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

Accepted Answer

When banks borrow more from the Bank of Canada, they have more funds available to lend to the public. This leads to an increase in the supply of money in the economy, which causes a decrease in interest rates and stimulates economic growth. Therefore, the correct answer is option C – Banks lend more to the public, and the money supply will increase.

Question 20

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...

Quiz 10: The Monetary System