Question 1

Reserves held by Canadian banks represent ________ percent of the value of all demand deposits.

Accepted Answer

Canadian banks are only required to hold a small fraction of the value of all demand deposits as reserves, which is less than 1 percent. This means that the majority of the deposits are available for lending and other activities that generate revenue for the banks.

Question 2

Canadian currency today is

Accepted Answer

Canadian currency is fiat money, meaning its value is not backed by any physical commodity but rather by the trust in the government and central bank that issues it. It is widely accepted by merchants and individuals in Canada as a medium of exchange, and its value is determined by supply and demand in the foreign exchange market.

Question 3

Most money today is

Accepted Answer

Most money today is deposit money, which refers to the balances held in bank accounts that can be accessed through checks, debit cards, or electronic transfers.

Question 4

There is a tradeoff in any banking system between

Accepted Answer

When a banking system holds a larger fraction of reserves, it reduces the risk of bank runs and insolvency, but it earns lower profits because it cannot lend out as much money. Therefore, there is a tradeoff between the safety and profitability of a banking system. Holding a larger fraction of reserves is generally considered to be a prudent regulatory policy to prevent systemic risks and financial crises.

Question 5

Debit cards are an example of deposit money.

Accepted Answer

Debit cards are not an example of deposit money. Deposit money is money that is deposited in a bank account, while debit cards are used to withdraw money from a bank account.

Question 6

The Bank of Canada preserves the stability of the financial system by

Accepted Answer

The Bank of Canada acts as a lender of last resort to provide liquidity to financial institutions in times of crisis, thereby preserving the stability of the financial system.

Question 7

Which is not a role of the Bank of Canada?

Accepted Answer

While the Bank of Canada does issue and distribute currency, it does not physically print the bills. That task is handled by the Canadian Bank Note Company and the British American Bank Note Company.

Question 8

A debit card is

Accepted Answer

A debit card is not considered money itself; it is a tool or instrument that allows electronic access to bank accounts to transfer money or make payments.

Question 9

Last week Clinton paid off $10,000 on his student loan. As a result,

Accepted Answer

Paying off a loan reduces the money supply because it decreases the amount of money in circulation. When a loan is repaid, the money is essentially transferred from the borrower's bank account back to the bank, where it is removed from the available money supply.

Question 10

By making loans to banks that are short of funds because borrowers went bankrupt, the Bank of Canada is

Accepted Answer

When the Bank of Canada makes loans to banks that are short of funds, it is acting as a lender of last resort. This is a function of central banks to ensure the stability of the financial system and prevent bank runs.

Question 11

After winning $100 on a trip to Las Vegas, Hugo returns to Canada and deposits $60 in his savings account and $40 in his chequing account. The immediate effect is

Accepted Answer

The answer of After winning $100 on a trip to...

Question 12

Useful commodity money has the qualities of being easy to carry, to measure, and to divide into fractions. Which function of money is not affected by these qualities?

Accepted Answer

The function of money that is not affected by the qualities of being easy to carry, measure, and divide into fractions is its function as a store of value. A store of value refers to the ability of money to retain its purchasing power over time.

Question 13

Suppose you deposit $2,000 cash in your bank. The bank desires to hold 20 percent of all deposits as reserves. What amount of new loans will your bank create immediately after you make the deposit?

Accepted Answer

The bank is required to hold 20 percent of the deposit as reserves, which is 0.20 x $2,000 = $400. Therefore, the remaining $1,600 ($2,000 - $400) can be used to create new loans. The amount of new loans that the bank can create is equal to the deposit multiplied by the money multiplier. Assuming a money multiplier of 5, the bank can create $1,600 x 5 = $8,000 in new loans. However, the question asks for the amount of new loans immediately after the deposit, so the answer is simply $1,600.

Question 14

Canadian dollar bills used to be convertible into gold, but now are valuable simply because the government says they are.

Accepted Answer

Canadian dollar bills were once convertible into gold but the country moved away from the gold standard in the 1930s. Now, the value of Canadian dollar bills is based on the government's declaration that they are legal tender and can be used to pay debts.

Question 15

Playing card money in 17th century New France is an example of fiat money.

Accepted Answer

Fiat money is currency that is not backed by a physical commodity, but is instead declared legal tender by a government. In New France, playing cards were used as a form of currency because of the scarcity of coins and the difficulty in obtaining them. This playing card money was declared legal tender by the government, making it an example of fiat money.

Question 16

A bank run

Accepted Answer

A bank run occurs when many depositors want to withdraw their money at the same time due to fear of the bank's insolvency. The fear of one depositor requesting their money can spread to other depositors, influencing them to withdraw their money as well. Thus, the likelihood of one depositor asking for their money is influenced by other depositors asking for their money, making choice D the best option.

Question 17

Commodity money has no alternative uses.

Accepted Answer

Commodity money, such as gold or silver, can also be used for jewelry or industrial purposes, giving it alternative uses beyond just serving as a medium of exchange.

Question 18

Playing card money in 17th century New France is an example of convertible paper money.

Accepted Answer

Playing card money in 17th century New France was an emergency currency and not convertible into gold or silver, but rather a form of fiat money issued to address coin shortages.

Question 19

When cash is deposited in a chartered bank, the bank makes new loans. This,

Accepted Answer

When cash is deposited in a chartered bank, the bank can use a portion of it to make new loans, which increases the total volume of deposits (and therefore M1+) within the banking system. This is because the deposit made is considered a liability of the bank and is used as a basis for creating a new loan, which is an asset for the bank. The creation of new loans thus expands the money supply, leading to an increase in M1+.

Question 20

Canadian dollar bills used to be convertible into gold, but now are only convertible into silver.

Accepted Answer

Canadian dollar bills were never convertible into gold. The convertibility of any currency into a precious metal is known as the gold standard, which Canada abandoned in 1933. Currently, Canadian dollar bills are not convertible into any precious metal, including silver.

Quiz 9: Money Is for Lunatics: Demanders and Suppliers of Money