Question 1

What would be the immediate effect if an individual made a $9 000 cash deposit in a bank?

Accepted Answer

A cash deposit of $9 000 would not immediately affect the money supply, as it does not result in the creation or destruction of money. The deposit simply represents a transfer of existing money from the individual to the bank. However, if the bank were to use the deposit to make loans or investments, then the money supply could eventually be affected.

Question 2

Suppose that initially a bank has excess reserves of $800 and the reserve ratio is 30%.Then Andy deposits $1 000 of cash in his chequing account and the bank lends $600 to Molly.That bank can lend an additional:

Accepted Answer

The bank can lend an additional $900 because the initial excess reserves of $800 plus the $1,000 deposit minus the $600 loan to Molly equals $1,200. The bank can lend 70% of this amount, which is $900.

Question 3

The existence of banks:

Accepted Answer

Banks are able to create money through the process of fractional reserve banking. When banks loan out a portion of the deposits they hold, they create new deposits in the process. This results in the money supply being larger than the amount of currency in circulation.

Question 4

Suppose a bank has excess reserves of $50 and the reserve ratio is 20%.If Andy deposits $5 000 of cash in his chequing account and the bank lends $2 500 to Molly,the money supply:

Accepted Answer

The answer of Suppose a bank has excess reserves of...

Question 5

Banks create money when they:

Accepted Answer

Banks create money when they make loans. When a bank makes a loan, it credits the borrower's account with new money which did not exist before. This new money is created out of thin air and is added to the money supply. When the borrower spends the loan amount, it circulates into the economy and increases the overall money supply.

Question 6

Which factor is NOT one of the main features designed to protect depositors and the economy against bank runs?

Accepted Answer

Interest rate ceilings on chequable deposits may actually increase the likelihood of bank runs by creating a situation where depositors may seek higher returns on their money elsewhere. The other three factors listed (deposit insurance, capital requirements, and reserve requirements) are all designed to protect depositors and stabilize the banking system during times of financial stress.

Question 7

If a bank has deposits of $100000,cash in its vault of $10000,and $15000 on deposit at the Bank of Canada and if the required reserve ratio is 20%,then the bank has:

Accepted Answer

The required reserve ratio is 20%, which means the bank is required to keep 20% of its deposits as reserves.

Required reserves = 20% of $100000 = $20000

The bank has cash reserves of $10000 and $15000 on deposit at the Bank of Canada, which totals to $25000.

Excess reserves = Total reserves - Required reserves
Excess reserves = $25000 - $20000
Excess reserves = $5000

Therefore, the bank has excess reserves of $5000.

Question 8

Probably the most important feature of deposit insurance is that it:

Accepted Answer

Deposit insurance protects the economy against bank runs by providing a guarantee to bank customers that their deposits will be protected up to a certain amount, even if the bank fails. This helps to prevent panic and mass withdrawals that can lead to a systemic banking crisis. The other answer choices are incorrect: A is incorrect because while deposit insurance is often backed by the government, it is actually funded by premiums paid by the banks themselves; B is incorrect because the cost of deposit insurance can vary depending on a number of factors, and is not always cheap; D is incorrect because deposit insurance is not designed to ensure bank profits, but rather to protect the deposits of their customers.

Question 9

Suppose that a bank does NOT hold excess reserves and the reserve ratio is 20%.If Molly deposits $1 000 of cash in her chequing account and the bank lends $600 to Freda,the bank can lend an additional:

Accepted Answer

When Molly deposits $1 000 cash, the bank can hold onto $200 as required reserves (20% of $1 000) and lend out the remaining $800. When the bank lends $600 to Freda, the bank must keep $120 (20% of $600) as required reserves and can lend out the remaining $480. Therefore, the bank can lend an additional $480, which is choice B) $200.

Question 10

Capital requirements for banks do NOT serve the purpose of:

Accepted Answer

Capital requirements for banks are not designed to reduce deposits. Instead, they serve to ensure that banks are able to absorb losses and continue operating even during periods of financial stress, thereby enhancing financial stability.

Question 11

Suppose that the reserve ratio is 20%.If Sam deposits $500 in his chequing account,his bank can increase loans by:

Accepted Answer

The reserve ratio is 20%, meaning the bank must keep 20% of the deposit as reserves. For a $500 deposit, the bank must keep $100 (20% of $500) and can loan out the remaining $400.

Question 12

If a bank has assets of $100 million,according to practice,its liabilities should NOT exceed:

Accepted Answer

According to the 70% rule, a bank's liabilities should not exceed 70% of its assets. Therefore, the bank's liabilities should not exceed $100 million x 0.70 = $70 million.

Question 13

If banks were required to keep 100% of deposits in reserves,they could:

Accepted Answer

If banks were required to keep 100% of deposits in reserves, they would not be able to make any loans as all deposits would have to be held in reserve.

Question 14

The guarantee by the CDIC to reimburse bank customers up to $100 000 per deposit in the event of bank problems is called:

Accepted Answer

The guarantee provided by CDIC to reimburse bank customers up to $100,000 per deposit in the event of bank problems is called deposit insurance. Fractional reserve banking refers to a banking system where banks keep only a fraction of their deposits on reserve and lend out the remainder to earn profits. Reserve requirements are the minimum amount of reserves that banks are required by law to hold against their deposits. Bank rate refers to the rate at which central banks lend money to commercial banks. None of these options are relevant to CDIC's guarantee for deposit insurance.

Question 15

Suppose that a bank receives a $5000 deposit and the reserve ratio is 25%.Based on this deposit alone,the bank can lend out:

Accepted Answer

The reserve ratio is 25%, so the bank must keep 25% of the $5,000 deposit as reserves, which is $1,250. This means the bank can lend out the remaining $3,750.

Question 16

Which entity acts to protect depositors from a bank run by insuring all deposits up to $100 000?

Accepted Answer

CDIC stands for the Canada Deposit Insurance Corporation, which is a federal agency responsible for insuring all deposits up to $100 000 in case of a bank failure or financial crisis. The CDIC ensures that depositors do not lose their savings and maintains public confidence in the banking system, ultimately contributing to financial stability in Canada. Options B), C), and D) do not have responsibility for insuring deposits or protecting depositors in case of a bank run.

Question 17

Suppose your grandma sends you $100 for your birthday and you deposit it in your chequing account.The reserve ratio is 10%.Based upon this deposit,the bank's reserves have increased by _____ and the bank's chequable deposits have increased by _____.

Accepted Answer

When you deposit $100, the bank's reserves increase by the full amount of the deposit, which is $100. The chequable deposits also increase by the same amount, $100, as this is the amount added to your account.

Question 18

Suppose that the reserve ratio is 20%.If Holly deposits $1 000 of cash in her chequing account and the bank lends $600 to Freda,the money supply:

Accepted Answer

When Holly deposits $1,000 in her chequing account, the bank is required to hold on to 20% of it ($200) as reserves and can lend out the remaining 80% ($800) to Freda.

Since the bank is making a loan of $600 to Freda, it will have $200 in reserves and $600 in loans on its balance sheet.

The money supply will increase by the amount of the loan, which is $600. Therefore, the correct answer is D) increases by $600.

Question 19

Suppose that initially a bank has excess reserves of $800 and the reserve ratio is 20%.Then Andy deposits $1 000 of cash in his chequing account and the bank lends $600 to Molly.That bank can lend an additional:

Accepted Answer

The answer of Suppose that initially a bank has excess...

Question 20

Which example of bank regulations is NOT designed to prevent bank runs?

Accepted Answer

The overnight rate is a monetary policy tool used by central banks to influence short-term interest rates and the money supply. It is not directly related to preventing bank runs, which is the sudden mass withdrawal of deposits by panicked customers. The other options (A, B, D) are all designed to prevent bank runs: reserve requirements ensure that banks have a minimum amount of cash on hand to meet withdrawals, deposit insurance protects depositors from losing their money in the event of a failure, and capital requirements mandate that banks maintain a certain level of equity to absorb losses.

Quiz 14: Money, Banking, and the Federal Reserve System