Deck 7: Money and the Canadian Banking System

Question 1

The most important characteristic of money is that it be:

A) easily recognizable.
B) readily accepted.
C) divisible.
D) portable.

Answer 1

readily accepted.

Question 2

In order to function as a medium of exchange, money must:

A) be backed by some precious commodity.
B) be generally accepted in exchange for goods and services.
C) be backed by gold.
D) maintain a constant value over an extended period of time.

Answer 2

be generally accepted in exchange for goods and services.

Question 3

In order to function as a store of wealth, money must:

A) maintain a constant value over an extended period of time.
B) be backed by some precious commodity.
C) be generally accepted in exchange for goods and services.
D) be backed by gold.

Answer 3

maintain a constant value over an extended period of time.

Question 4

Paper currency circulates as money because:

A) the Bank of Canada stands behind it.
B) people believe that it has value.
C) it is backed by precious metals.
D) the government of Canada has declared it legal tender.

Question 5

The major component of the money supply M1 is:

A) paper currency.
B) savings deposits.
C) demand deposits.
D) coins.

Question 6

The definition of money supply M1 includes:

A) currency and demand deposits.
B) currency and all chequing deposits.
C) currency and all chequing and notice deposits.
D) currency and all chequing and non-personal term deposits.

Question 7

In actual dollar terms, the major portion of the money supply in Canada is created by:

A) trust and mortgage companies.
B) credit unions and caisses populaires.
C) the Bank of Canada.
D) the chartered banks.

Question 8

Chartered banks in Canada receive their charter from:

A) Parliament.
B) the minister of finance.
C) the Inspector-General of Banks.
D) the governor of the Bank of Canada.

Question 9

The principal assets of Canada's chartered banks are:

A) cash, loans, and savings deposits.
B) Bank of Canada deposits and demand deposits.
C) cash, loans, and government bonds.
D) cash, loans, and demand deposits.

Question 10

Which of the following statements regarding deposit insurance is true?

A) The maximum amount of insurance is $100 000 for each person.
B) It only covers savings accounts and GIC's.
C) Any deposit with a financial institution is potentially covered.
D) It is necessary for a depositor to apply for deposit insurance.

Question 11

Which of the following statements regarding the Bank Act is false?

A) It describes the procedure that banks must follow to become incorporated.
B) Since 1980, foreign-controlled banks have not been allowed to operate in Canada.
C) Every ten years the act is reviewed and enacted again.
D) Since 1992, reserve requirements for banks have been phased out.

Question 12

Which one of the following is not an advantage of a branch banking system?

A) it protects against the centralization of financial power
B) it has more diversified assets and liabilities
C) it is able to respond to large loan demands
D) it tends to be more stable

Question 13

Which of the following deposit-accepting institutions is organized on the basis of Roman Catholic parish boundaries?

A) trust companies
B) credit unions
C) mortgage companies
D) caisses populaires

Question 14

If chartered banks have more reserves than they wish to have, the impact on the money supply will be:

A) an increase in the money supply when banks lend out reserves.
B) a decrease, since the reserves came from people paying back loans.
C) a decrease in the money supply because interest rates will fall.
D) zero because the banks will pay back loans to the Bank of Canada.

Question 15

Assume banks keep 10 percent of deposits on reserve. If a chartered bank has demand deposits of $200 million and reserves of $40 million, the banking system could potentially expand the
Money supply by:

A) $160 million.
B) $40 million.
C) $200 million.
D) $20 million.

Question 16

Assuming a 10 percent reserve ratio, if a chartered bank sells a government bond to the Bank of Canada for $50 000, the chartered bank can increase its loans by:

A) $50 000.
B) $5000.
C) $45
000)D) none of the above

Question 17

If the entire Canadian bank system had reserves of $30 billion and demand deposits of $300 billion, (assuming a 5 percent reserve ratio), the banking system could expand the money supply by:

A) $300 billion.
B) $100 billion.
C) $220 billion.
D) $150 billion.

Question 18

The money supply expands whenever:

A) you put money in a demand deposit.
B) you put money in a savings deposit.
C) banks lend out money.
D) bank loans are repaid.

Question 19

The extent to which a chartered bank can lend out money depends on its:

A) reserves.
B) demand and notice deposits.
C) demand deposits.
D) Bank of Canada regulations.

Question 20

If, from reserves of $5000, the banking system can expand the money supply by a maximum of $25 000, then the reserve ratio is:

A) 10 percent.
B) 15 percent.
C) 20 percent.
D) 25 percent.

Question 21

A chartered bank sells a $10 000 government bond to a life insurance company. As a result, the bank increases its loans by:

A) $90 000.
B) $10 000.
C) $9000.
D) $100 000.

Question 22

If banks want to keep 15 percent of deposits in reserves, then a deposit of $10 000 into a demand Deposit at a chartered bank has the potential of increasing the money supply by:

A) approximately $1500.
B) approximately $67 000.
C) approximately $57 000.
D) approximately $20
000)

Question 23

If a $100 deposit in a chartered bank can lead to $2500 in new money, then the reserve ratio must be:

A) 2 percent.
B) 4 percent.
C) 5 percent.
D) 3 percent.

Question 24

Assume banks like to keep 10 percent of deposits on reserve. If a bank has excess reserves of $25 million and demand deposits of $500 million, what amount is the bank's total reserves?

A) $50 million
B) $475 million
C) $75 million
D) $525 million

Question 25

If you deposit $800 in a chartered bank and later that day your friend borrows $500 from this bank, the money supply has increased by:

A) $800.
B) $300.
C) $500.
D) $1300.

Question 26

When borrowers repay their bank loans:

A) the money supply remains the same.
B) the money supply remains the same; however, interest rates increase.
C) the money supply decreases.
D) the money supply increases.

Question 27

If you and your friend both have demand deposits at the same chartered bank and you write a cheque to your friend for $100 that is deposited in her account, then:

A) the bank's reserves increase by $100.
B) the bank can increase its loans.
C) the bank's reserves remain unchanged.
D) the bank's reserves go down by $100.

Question 28

The amount of money that individuals hold for transaction purposes varies directly with:

A) the unemployment rate.
B) their income.
C) the money supply.
D) the interest rate.

Question 29

An increase in the general level of interest rates will:

A) cause people to hold less money.
B) increase the amount of money held for speculative purposes.
C) increase the number of bank loans.
D) cause people to hold more money.

Question 30

A change in the interest rates will affect which of the following to the greatest extent?

A) consumption
B) exports
C) government spending
D) business investment

Question 31

The crude-quantity theory of money states that an increase in the money supply would:

A) decrease gross domestic product.
B) increase gross domestic product.
C) increase the average level of prices.
D) decrease the velocity of money.

Question 32

The Fisher equation of exchange states that an increase in the money supply would:

A) decrease the velocity of money.
B) increase the average level of prices.
C) decrease gross domestic product.
D) increase gross domestic product.

Question 33

Which of the following is not an example of a liquid asset?

A) a treasury bill
B) a common share
C) a Canada Savings Bond
D) a savings deposit

Question 34

An increase in the money supply will have little impact on GDP if:

A) the velocity of money remains constant.
B) prices continue to increase.
C) consumers do not react to lower interest rates.
D) interest rates increase.

Question 35

A change in the money supply will not bring about a significant change in GDP if:

A) the velocity of money remains constant.
B) business investment does not react to the change in the interest rate.
C) the value of K remains constant.
D) business investment does react to the change in the interest rate.

Question 36

Changes in the money supply influence the level of GDP through changes in:

A) the velocity of money.
B) the interest rate.
C) consumer incomes.
D) the average price level.

Question 37

Individuals have an increased demand for money, instead of another asset:

A) if they believe that government spending will decrease.
B) if interest rates are expected to increase.
C) if interest rates are expected to decrease.
D) if their incomes decrease.

Question 38

The overall demand for money in our economy will increase if:

A) incomes decrease and interest rates increase.
B) incomes and interest rates increase.
C) incomes and interest rates decrease.
D) incomes increase and interest rates decrease.

Question 39

If at a given interest rate, the amount of money demanded is less than the money supply:

A) the interest rate will increase.
B) the demand-for-money curve will shift to the right.
C) the interest rates will fall.
D) individual spending will decrease.

Question 40

The primary assets of the Bank of Canada are:

A) loans to government and chartered banks.
B) cash and chartered-bank deposits.
C) cash and government bonds.
D) loans to government and chartered-bank deposits.

Question 41

If the reserve ratio is 10 percent and chartered banks have no excess reserves, the chartered banks could expand the money supply by $1 million if the Bank of Canada would:

A) buy $100 000 worth of government bonds from the chartered banks.
B) sell $1 million worth of government bonds to the chartered banks.
C) buy $1 million worth of government bonds from the chartered banks.
D) sell $100 000 worth of government bonds to the chartered banks.

Question 42

Chartered-bank reserves are:

A) liabilities to both the chartered bank and the Bank of Canada.
B) assets to the Bank of Canada but liabilities to the chartered bank.
C) liabilities to the Bank of Canada but assets to the chartered bank.
D) assets to both the chartered bank and the Bank of Canada.

Question 43

If the Bank of Canada sells $500 000 worth of government bonds to a group of life insurance companies, and the companies pay for them by taking money out of their bank accounts, then:

A) chartered bank reserves will decrease by $500 000.
B) chartered-bank reserves will remain unchanged as the money will go into a Bank of Canada deposit.
C) the Bank of Canada will have increased the money supply.
D) chartered bank reserves will increase by $500 000.

Question 44

If a chartered bank gets a loan from the Bank of Canada:

A) the money supply remains unchanged since this money is part of the bank's reserves.
B) the money supply will increase because the Bank of Canada has made more money available.
C) the money supply will decrease until the bank repays the loan.
D) the money supply will increase because bank depositors will now have more money to draw on.

Question 45

Treasury bills:

A) are liquid assets.
B) represent debt incurred by the government of Canada.
C) are auctioned every Tuesday by the Bank of Canada.
D) all of the above

Question 46

If the Bank of Canada wants to increase the money supply, it can:

A) insist that banks keep more money on reserve.
B) decrease the bank rate.
C) sell government bonds to chartered banks.
D) all of the above

Question 47

The Bank of Canada can increase chartered-bank reserves by:

A) selling government bonds to chartered banks.
B) transferring government deposits to the Bank of Canada from the chartered banks.
C) buying government bonds from the chartered banks.
D) lowering the bank rate.

Question 48

The main liability of the Bank of Canada is:

A) chartered-bank deposits.
B) currency in circulation.
C) Canadian dollars held by residents of other countries.
D) government deposits.

Question 49

Open market operations are:

A) conducted by the Bank of Canada to influence the money supply.
B) conducted by the Bank of Canada on behalf of the chartered banks.
C) conducted by the Bank of Canada to raise money for the government.
D) conducted by the Bank of Canada on behalf of the government.