Deck 15: The Money Supply Process

Question 1

Suppose a person cashes his payroll cheque and holds all the funds in the form of currency. Everything else held constant, total reserves in the banking system ________ and the monetary base ________.

A)remain unchanged; increases
B)decrease; increases
C)decrease; remains unchanged
D)decrease; decreases

Answer 1

C

Question 2

Of the three players in the money supply process, most observers agree that the most important player is ________.

A)the Bank of Canada
B)the Department of Finance
C)the Canada Customs and Revenue Agency
D)the House of Parliament

Answer 2

A

Question 3

The monetary base minus currency in circulation equals ________.

A)reserves
B)the borrowed base
C)the nonborrowed base
D)advances to banks

Answer 3

A

Question 4

The government agency that oversees the banking system and is responsible for the conduct of monetary policy in Canada is ________.

A)the Bank of Canada
B)the Department of Finance
C)the Canada Customs and Revenue Agency
D)the House of Parliament

Question 5

Both ________ and ________ are Bank of Canada assets.

A)notes in circulation; reserves
B)notes in circulation; government securities
C)government securities; advances to banks
D)government securities; reserves

Question 6

When banks borrow money from the Bank of Canada, these funds are called ________.

A)Bank funds
B)borrowed reserves
C)Bank loans
D)overnight funds

Question 7

High-powered money minus reserves equals ________.

A)reserves
B)currency in circulation
C)the monetary base
D)the nonborrowed base

Question 8

Individuals that lend funds to a bank by opening a chequing account are called ________.

A)policyholders
B)partners
C)depositors
D)debt holders

Question 9

When the Bank of Canada purchases a government bond from a bank, reserves in the banking system ________ and the monetary base ________, everything else held constant.

A)increase; increases
B)increase; decreases
C)decrease; increases
D)decrease; decreases

Question 10

Suppose your payroll cheque is directly deposited to your chequing account. Everything else held constant, total reserves in the banking system ________ and the monetary base ________.

A)remain unchanged; remains unchanged
B)remain unchanged; increases
C)decrease; increases
D)decrease; decreases

Question 11

The three players in the money supply process include ________.

A)banks, depositors, and the Department of Finance
B)banks, depositors, and borrowers
C)banks, depositors, and the central bank
D)banks, borrowers, and the central bank

Question 12

The sum of the Bank of Canada's monetary liabilities and the Canadian Mint's monetary liabilities is called ________.

A)the money supply
B)notes in circulation
C)bank reserves
D)the monetary base

Question 13

High-powered money minus currency in circulation equals ________.

A)reserves
B)the borrowed base
C)the nonborrowed base
D)advances to banks

Question 14

The monetary base consists of ________.

A)notes in circulation and Canada bonds
B)notes in circulation and securities
C)notes in circulation and reserves
D)reserves and Canada bonds

Question 15

The interest rate the Bank of Canada charges banks borrowing from the Bank is the ________.

A)overnight rate
B)Treasury bill rate
C)bank rate
D)prime rate

Question 16

The monetary liabilities of the Bank of Canada include ________.

A)government securities and advances to banks
B)notes in circulation
C)government securities and reserves
D)notes in circulation and advances to banks

Question 17

Purchases and sales of government securities by the Bank of Canada are called ________.

A)advances to banks
B)Bank fund transfers
C)open market operations
D)swap transactions

Question 18

The monetary base minus reserves equals ________.

A)currency in circulation
B)the borrowed base
C)the nonborrowed base
D)advances to banks

Question 19

Who are the three players in the money supply process? Describe their roles.

Question 20

Both ________ and ________ are monetary liabilities of the Bank.

A)government securities; advances to banks
B)notes in circulation; reserves
C)government securities; reserves
D)notes in circulation; advances to banks

Question 21

When the Bank of Canada sells a government bond to a bank, reserves in the banking system ________ and the monetary base ________, everything else held constant.

A)increase; increases
B)increase; decreases
C)decrease; increases
D)decrease; decreases

Question 22

When the Bank of Canada buys $100 worth of bonds from First National Bank, reserves in the banking system ________.

A)increase by $100
B)increase by more than $100
C)decrease by $100
D)decrease by more than $100

Question 23

When the Bank of Canada extends a loan to a bank, the monetary base ________ and reserves ________.

A)remains unchanged; decrease
B)remains unchanged; increase
C)increases; increase
D)increases; remain unchanged

Question 24

The monetary base declines when ________.

A)the Bank extends advances to banks
B)deposits at the Bank decrease
C)float increases
D)the Bank sells securities

Question 25

All else the same, when the Bank calls in a $100 loan previously extended to the First National Bank, reserves in the banking system ________.

A)increase by $100
B)increase by more than $100
C)decrease by $100
D)decrease by more than $100

Question 26

For which of the following is the change in reserves necessarily different from the change in the monetary base?

A)Open market purchases from a bank
B)Open market purchases from an individual who deposits the cheque in a bank
C)Open market purchases from an individual who cashes the cheque
D)Open market sale to a bank

Question 27

The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in currency, the open market purchase ________ reserves; if the proceeds are kept as deposits, the open market purchase ________ reserves.

A)has no effect on; has no effect on
B)has no effect on; increases
C)increases; has no effect on
D)decreases; increases

Question 28

When a bank sells a government bond to the Bank of Canada, reserves in the banking system ________ and the monetary base ________, everything else held constant.

A)increase; increases
B)increase; decreases
C)decrease; increases
D)decrease; decreases

Question 29

When the Bank extends a $100 loan to the First National Bank, reserves in the banking system ________.

A)increase by $100
B)increase by more than $100
C)decrease by $100
D)decrease by more than $100

Question 30

If a member of the nonbank public purchases a government bond from the Bank of Canada in exchange for currency, the monetary base will ________, but reserves will ________.

A)remain unchanged; rise
B)remain unchanged; fall
C)rise; remain unchanged
D)fall; remain unchanged

Question 31

When the Bank of Canada sells $100 worth of bonds to First National Bank, reserves in the banking system ________.

A)increase by $100
B)increase by more than $100
C)decrease by $100
D)decrease by more than $100

Question 32

When the Bank of Canada calls in a loan from a bank, the monetary base ________ and reserves ________.

A)remains unchanged; decrease
B)remains unchanged; increase
C)decreases; decrease
D)decreases; remains unchanged

Question 33

When a bank buys a government bond from the Bank of Canada, reserves in the banking system ________ and the monetary base ________, everything else held constant.

A)increase; increases
B)increase; decreases
C)decrease; increases
D)decrease; decreases

Question 34

When a member of the nonbank public withdraws currency from her bank account, ________.

A)both the monetary base and bank reserves fall
B)both the monetary base and bank reserves rise
C)the monetary base falls, but bank reserves remain unchanged
D)bank reserves fall, but the monetary base remains unchanged

Question 35

An increase in ________ leads to an equal ________ in the monetary base in the long run.

A)float; increase
B)float; decrease
C)securities; increase
D)securities; decrease

Question 36

The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in ________, the open market purchase has no effect on reserves; if the proceeds are kept as ________, reserves increase by the amount of the open market purchase.

A)deposits; deposits
B)deposits; currency
C)currency; deposits
D)currency; currency

Question 37

If a member of the nonbank public sells a government bond to the Bank of Canada in exchange for currency, the monetary base will ________, but ________.

A)remain unchanged; reserves will fall
B)remain unchanged; reserves will rise
C)rise; currency in circulation will remain unchanged
D)rise; reserves will remain unchanged

Question 38

If a person selling bonds to the Bank of Canada cashes the Bank's cheque, then reserves ________ and currency in circulation ________, everything else held constant.

A)remain unchanged; declines
B)remain unchanged; increases
C)decline; remains unchanged
D)increase; remains unchanged

Question 39

When an individual sells a $100 bond to the Bank, she may either deposit the cheque she receives or cash it for currency. In both cases ________.

A)reserves increase
B)high-powered money increases
C)reserves decrease
D)high-powered money decreases

Question 40

When a member of the nonbank public deposits currency into her bank account, ________.

A)both the monetary base and bank reserves fall
B)both the monetary base and bank reserves rise
C)the monetary base falls, but bank reserves remain unchanged
D)bank reserves rise, but the monetary base remains unchanged

Question 41

The Bank does not tightly control the monetary base because it does not completely control ________.

A)open market purchases
B)open market sales
C)borrowed reserves
D)the rate

Question 42

Explain two ways by which the Bank of Canada can increase the monetary base. Why is the effect of Bank of Canada actions on bank reserves less exact than the effect on the monetary base?

Question 43

In the simple deposit expansion model, if the Bank of Canada purchases $100 worth of bonds from a bank that previously had no excess reserves, the bank can now increase its loans by ________.

A)$10
B)$100
C)$100 times the reciprocal of the desired reserve ratio
D)$100 times the desired reserve ratio

Question 44

If the desired reserve ratio is 15 percent, the simple deposit multiplier is ________.

A)15.0
B)1)5
C)6)67
D)3)33

Question 45

A decrease in ________ leads to an equal ________ in the monetary base in the long run.

A)float; increase
B)float; decrease
C)securities; increase
D)securities; decrease

Question 46

If reserves in the banking system increase by $100, then chequable deposits will increase by $1000 in the simple model of deposit creation when the desired reserve ratio is ________.

A)0)01
B)0)10
C)0)05
D)0)20

Question 47

If the desired reserve ratio is equal to 10 percent, a single bank can increase its loans up to a maximum amount equal to ________.

A)its excess reserves
B)10 times its excess reserves
C)10 percent of its excess reserves
D)its total reserves

Question 48

An increase in ________ leads to an equal ________ in the monetary base in the short run.

A)float; decrease
B)float; increase
C)advances to banks; decrease
D)deposits at the Bank; increase

Question 49

The formula for the simple deposit multiplier can be expressed as ________.

A)△R = × △T
B)△D = × △R
C)△r = × △T
D)△R = × △D

Question 50

There are two ways in which the Bank can provide additional reserves to the banking system: it can ________ government bonds or it can ________ advances to banks to commercial banks.

A)sell; extend
B)sell; call in
C)purchase; extend
D)purchase; call in

Question 51

If reserves in the banking system increase by $100, then chequable deposits will increase by $500 in the simple model of deposit creation when the desired reserve ratio is ________.

A)0)01
B)0)10
C)0)05
D)0)20

Question 52

When the Bank of Canada supplies the banking system with an extra dollar of reserves, deposits ________ by ________ than one dollar-a process called multiple deposit creation.

A)increase; less
B)increase; more
C)decrease; less
D)decrease; more

Question 53

The relationship between borrowed reserves, the nonborrowed monetary base, and the monetary base is ________.

A)MB = MB ₙ - BR
B)BR = MB ₙ - MB
C)BR = MB - MB ₙ
D)MB = BR - m ₙ

Question 54

In the simple model of multiple deposit creation in which banks do not hold excess reserves, the increase in chequable deposits equals the product of the change in excess reserves and the ________.

A)reciprocal of the excess reserve ratio
B)simple deposit multiplier
C)reciprocal of the simple deposit multiplier
D)bank rate

Question 55

Subtracting borrowed reserves from the monetary base obtains ________.

A)reserves
B)high-powered money
C)the nonborrowed monetary base
D)the borrowed monetary base

Question 56

The simple deposit multiplier can be expressed as the ratio of the ________.

A)change in reserves in the banking system divided by the change in deposits
B)change in deposits divided by the change in reserves in the banking system
C)desired reserve ratio divided by the change in reserves in the banking system
D)change in deposits divided by the desired reserve ratio

Question 57

If the desired reserve ratio is 10 percent, the simple deposit multiplier is ________.

A)5)0
B)2)5
C)100.0
D)10.0

Question 58

When the Bank of Canada supplies the banking system with an extra dollar of reserves, deposits increase by more than one dollar - a process called ________.

A)extra deposit creation
B)multiple deposit creation
C)expansionary deposit creation
D)stimulative deposit creation

Question 59

A decrease in ________ leads to an equal ________ in the monetary base in the short run.

A)float; increase
B)float; decrease
C)deposits at the Bank; decrease
D)advances to banks; increase

Question 60

In the simple deposit expansion model, if the Bank of Canada purchases $100 worth of bonds from a bank that previously had no excess reserves, deposits in the banking system can potentially increase by ________.

A)$10
B)$100
C)$100 times the reciprocal of the desired reserve ratio
D)$100 times the desired reserve ratio

Question 61

A simple deposit multiplier equal to four implies a desired reserve ratio equal to ________.

A)100 percent
B)50 percent
C)25 percent
D)0 percent

Question 62

If the desired reserve ratio is 20 percent, the simple deposit multiplier is ________.

A)5)0
B)2)5
C)4)0
D)10.0

Question 63

In the simple deposit expansion model, a decline in chequable deposits of $1000 when the desired reserve ratio is equal to 10 percent implies that the Bank of Canada ________.

A)sold $1000 in government bonds
B)sold $100 in government bonds
C)purchased $1000 in government bonds
D)purchased $100 in government bonds

Question 64

If reserves in the banking system increase by $100, then chequable deposits will increase by $100 in the simple model of deposit creation when the desired reserve ratio is ________.

A)0)01
B)0)10
C)0)20
D)1)00

Question 65

If reserves in the banking system increase by $100, then chequable deposits will increase by $667 in the simple model of deposit creation when the desired reserve ratio is ________.

A)0)01
B)0)05
C)0)15
D)0)20

Question 66

If reserves in the banking system increase by $200, then chequable deposits will increase by $500 in the simple model of deposit creation when the desired reserve ratio is ________.

A)0)04
B)0)25
C)0)40
D)0)50

Question 67

In the simple deposit expansion model, a decline in chequable deposits of $1000 when the desired reserve ratio is equal to 20 percent implies that the Bank of Canada ________.

A)sold $200 in government bonds
B)sold $500 in government bonds
C)purchased $200 in government bonds
D)purchased $500 in government bonds

Question 68

If the desired reserve ratio is 25 percent, the simple deposit multiplier is ________.

A)5)0
B)2)5
C)4)0
D)10.0

Question 69

In the simple deposit expansion model, an expansion in chequable deposits of $1000 when the desired reserve ratio is equal to 10 percent implies that the Bank of Canada ________.

A)sold $1000 in government bonds
B)sold $100 in government bonds
C)purchased $1000 in government bonds
D)purchased $100 in government bonds

Question 70

In the simple deposit expansion model, an expansion in chequable deposits of $1000 when the desired reserve ratio is equal to 20 percent implies that the Bank of Canada ________.

A)sold $200 in government bonds
B)sold $500 in government bonds
C)purchased $200 in government bonds
D)purchased $500 in government bonds

Question 71

In the simple deposit expansion model, if the desired reserve ratio is 10 percent and the Bank of Canada increases reserves by $100, chequable deposits can potentially expand by ________.

A)$100
B)$250
C)$500
D)$1000

Question 72

If a bank has excess reserves of $10000 and demand deposit liabilities of $80000, and if the reserve requirement is 20 percent, then the bank has actual reserves of ________.

A)$16000
B)$20000
C)$26000
D)$36000

Question 73

A simple deposit multiplier equal to one implies a desired reserve ratio equal to ________.

A)100 percent
B)50 percent
C)25 percent
D)0 percent

Question 74

In the simple deposit expansion model, if the desired reserve ratio is 20 percent and the Bank of Canada increases reserves by $100, chequable deposits can potentially expand by ________.

A)$100
B)$250
C)$500
D)$1000

Question 75

In the simple deposit expansion model, a decline in chequable deposits of $500 when the desired reserve ratio is equal to 20 percent implies that the Bank of Canada ________.

A)sold $250 in government bonds
B)sold $100 in government bonds
C)sold $50 in government bonds
D)purchased $100 in government bonds

Question 76

In the simple deposit expansion model, if the banking system has excess reserves of $75, and the desired reserve ratio is 20 percent, the potential expansion of chequable deposits is ________.

A)$75
B)$750
C)$37.50
D)$375

Question 77

In the simple deposit expansion model, a decline in chequable deposits of $500 when the desired reserve ratio is equal to 10 percent implies that the Bank of Canada ________.

A)sold $500 in government bonds
B)sold $50 in government bonds
C)purchased $50 in government bonds
D)purchased $500 in government bonds

Question 78

A simple deposit multiplier equal to two implies a desired reserve ratio equal to ________.

A)100 percent
B)50 percent
C)25 percent
D)0 percent

Question 79

If reserves in the banking system increase by $100, then chequable deposits will increase by $2000 in the simple model of deposit creation when the desired reserve ratio is ________.

A)0)01
B)0)05
C)0)10
D)0)20

Question 80

If reserves in the Bank of Canada increase by $100, then chequable deposits will increase by $400 in the simple model of deposit creation when the desired reserve ratio is ________.

A)0)01
B)0)10
C)0)20
D)0)25