Question 1

Bank West's Balance Sheet Assets Liabilities
Cash $500 Deposits $20 000
Deposits at Bank of Canada $700 Capital $1 000
Loans and Mortgages $19 800 $21 000
$21 000
TABLE 26-3
Refer to Table 26-3.Assume that Bank West is operating with no excess reserves.What is its actual reserve ratio?

Accepted Answer

The answer of Bank West's Balance Sheet Assets Liabilities
Cash $500...

Question 2

Consider the following situation in the Canadian banking system: • The Bank of Canada purchases $5 million worth of government securities
From an investment dealer with a cheque drawn on the Bank of Canada.
• The dealer deposits this cheque at Bank XYZ,a commercial bank.
• The target reserve ratio for all commercial banks is 25%.
• All commercial banks operate with no excess reserves.
• There is no cash drain.
TABLE 26-4
Refer to Table 26-4.If Bank XYZ increases its loans to the maximum extent possible with its new excess reserves,the second-generation banks will be able to expand their loans by

Accepted Answer

When the Bank of Canada purchases government securities for $5 million and the cheque is deposited at Bank XYZ, the initial increase in reserves is $5 million. With a reserve ratio of 25%, Bank XYZ must keep $1.25 million (25% of $5 million) as reserves and can loan out the remaining $3.75 million. This $3.75 million, when deposited in second-generation banks, also faces a 25% reserve requirement, allowing these banks to loan out 75% of that amount. The process continues with each generation of banks lending out 75% of the funds deposited from the previous round of lending. This creates a geometric series with the sum given by the initial amount times the multiplier effect, where the multiplier is 1/(Reserve Ratio) = 1/0.25 = 4. The total increase in loans is the initial increase in loans ($3.75 million) times the multiplier (4) minus the initial loan amount, which equals $15 million - $3.75 million = $11.25 million. However, the question asks for the loans that second-generation banks can expand by, which is the initial loan amount of $3.75 million times 75% (since they can only loan out 75% of any new deposits they receive), which equals $2.81 million.

Question 3

Suppose Bank ABC has a target reserve ratio of 10%.If Bank ABC receives a new deposit of $100 000 it will immediately find itself with

Accepted Answer

With a target reserve ratio of 10%, Bank ABC must keep $10,000 (10% of $100,000) as reserves. The remaining $90,000 is excess reserves, as it is above the required reserve amount.

Question 4

Bank West's Balance Sheet Assets Liabilities
Cash $500 Deposits $20 000
Deposits at Bank of Canada $700 Capital $1 000
Loans and Mortgages $19 800 $21 000
$21 000
TABLE 26-3
Refer to Table 26-3.Assume that Bank West is operating at its target reserve ratio and has no excess reserves,and that all commercial banks have the same target reserve ratio.If a new deposit to the Canadian banking system of $1500 is deposited at Bank West,the total new deposits created in the banking system can be calculated as follows:

Accepted Answer

The answer of Bank West's Balance Sheet Assets Liabilities
Cash $500...

Question 5

Which of the following examples constitutes a new deposit to the Canadian commercial banking system?

Accepted Answer

When the Bank of Canada buys government securities from a Canadian commercial bank, it increases the reserves of that bank, effectively creating new deposit money within the Canadian commercial banking system. This action injects new money into the system, unlike the other options which either move existing money around, involve money held outside the system, or do not involve a deposit into the banking system at all.

Question 6

Bank West's Balance Sheet Assets Liabilities
Cash $500 Deposits $20 000
Deposits at Bank of Canada $700 Capital $1 000
Loans and Mortgages $19 800 $21 000
$21 000
TABLE 26-3
Refer to Table 26-3.What are the reserves held by Bank West?

Accepted Answer

Reserves held by a bank include cash in its vaults (physical currency it holds) and deposits at the central bank (in this case, the Bank of Canada). Therefore, Bank West's reserves are $500 (cash) + $700 (deposits at Bank of Canada) = $1200.

Question 7

Bank North's Balance Sheet Assets Liabilities
Reserves $300 Deposits $2000
Loans $2200 Capital $500
$2500 $2500
TABLE 26-2
Refer to Table 26-2.Assume that Bank North is operating at its target reserve ratio and has no excess reserves,and that all commercial banks have the same target reserve ratio.If a new deposit to the Canadian banking system of $400 is deposited at Bank North,the total new deposits created in the banking system can be calculated as follows:

Accepted Answer

If Bank North is operating at its target reserve ratio and has no excess reserves, it means that its reserves equal 15% of its deposits ($300/$2000 = 0.15). Therefore, when a new deposit of $400 is made, Bank North can lend out $340 (0.85 of the deposit). This new loan becomes a new deposit in another bank, which can lend out 0.85 of that deposit, and so on. Using the money multiplier formula (1/reserve ratio), we can calculate the total new deposits created in the banking system:
$400/(0.15) = $2666.67. Therefore, the best choice is B.

Question 8

Which of the following examples constitutes a new deposit to the Canadian commercial banking system?

Accepted Answer

Only option B constitutes a new deposit to the Canadian commercial banking system as it involves an individual depositing money from abroad. Option A simply involves a transfer between two existing accounts within the system. Option C involves an individual holding onto their own cash and not depositing it into a bank account. Option D and E involve transactions between the Bank of Canada and other entities, but do not constitute new deposits into the banking system.

Question 9

Bank West's Balance Sheet Assets Liabilities
Cash $500 Deposits $20 000
Deposits at Bank of Canada $700 Capital $1 000
Loans and Mortgages $19 800 $21 000
$21 000
TABLE 26-3
Refer to Table 26-3.If Bank West receives a new deposit of $1500,its actual reserve ratio immediately becomes

Accepted Answer

The answer of Bank West's Balance Sheet Assets Liabilities
Cash $500...

Question 10

How can a central bank "create" money?

Accepted Answer

A central bank can create money by purchasing government securities on the open market. This process, known as open market operations, involves the central bank buying government bonds or other securities from commercial banks or other financial institutions. The central bank then pays for these securities with newly created money, effectively increasing the amount of money in circulation. This can help to stimulate economic growth by making it easier for businesses and individuals to access credit and invest in new projects.

Question 11

Suppose a commercial bank has a target reserve ratio of 1%,but has an actual reserve ratio of 0.8%.This bank will likely

Accepted Answer

The bank will likely contract its portfolio of loans to increase its reserves and meet its target reserve ratio of 1%.

Question 12

Bank North's Balance Sheet Assets Liabilities
Reserves $300 Deposits $2000
Loans $2200 Capital $500
$2500 $2500
TABLE 26-2
Refer to Table 26-2.If Bank North receives a new deposit of $400,its actual reserve ratio immediately becomes

Accepted Answer

After a new deposit of $400, total reserves become $700 ($300 + $400), and total deposits become $2400 ($2000 + $400). The reserve ratio is calculated as reserves divided by deposits, which is $700/$2400 = 29.17%.

Question 13

Bank West's Balance Sheet Assets Liabilities
Cash $500 Deposits $20 000
Deposits at Bank of Canada $700 Capital $1 000
Loans and Mortgages $19 800 $21 000
$21 000
TABLE 26-3
Refer to Table 26-3.Assume that Bank West is operating at its target reserve ratio and has no excess reserves.If Bank West receives a new deposit of $1500,it can immediately expand its loans by ________ while maintaining its target reserve ratio.

Accepted Answer

The answer of Bank West's Balance Sheet Assets Liabilities
Cash $500...

Question 14

Suppose the Canadian banking system jointly has $20 million in reserves (cash and deposits at the Bank of Canada),all banks have a target reserve ratio of 20%,and there are no excess reserves.What is the amount of deposits in the banking system?

Accepted Answer

Given a target reserve ratio of 20%, the reserve of $20 million represents 20% of the total deposits. To find the total deposits, divide the reserves by the reserve ratio: $20 million / 0.20 = $100 million.

Question 15

Suppose a commercial bank has a level of target reserves of $500 million and actual reserves of $575 million.This bank's ________ $75 million.

Accepted Answer

The difference between the actual reserves and the target reserves is $75 million, which represents excess reserves.

Question 16

Bank North's Balance Sheet Assets Liabilities
Reserves $300 Deposits $2000
Loans $2200 Capital $500
$2500 $2500
TABLE 26-2
Refer to Table 26-2.Assume that Bank North is operating at its target reserve ratio and has no excess reserves.If Bank North receives a new deposit of $400,it can immediately expand its loans by ________ while maintaining its target reserve ratio.

Accepted Answer

The answer of Bank North's Balance Sheet Assets Liabilities
Reserves $300...

Question 17

Bank North's Balance Sheet Assets Liabilities
Reserves $300 Deposits $2000
Loans $2200 Capital $500
$2500 $2500
TABLE 26-2
Refer to Table 26-2.What are the income-earning assets for Bank North?

Accepted Answer

Income-earning assets are typically those that generate interest income, such as loans. Reserves and deposits do not generate interest income. Capital and liabilities are not assets.

Question 18

Consider the following situation in the Canadian banking system: • The Bank of Canada purchases $5 million worth of government securities
From an investment dealer with a cheque drawn on the Bank of Canada.
• The dealer deposits this cheque at Bank XYZ,a commercial bank.
• The target reserve ratio for all commercial banks is 25%.
• All commercial banks operate with no excess reserves.
• There is no cash drain.
TABLE 26-4
Refer to Table 26-4.Bank XYZ is immediately in a position to expand its loans by

Accepted Answer

When the Bank of Canada purchases $5 million worth of government securities, it increases the reserves of the banking system by $5 million. The dealer who receives the cheque drawn on the Bank of Canada will deposit it at Bank XYZ, increasing its reserves by $5 million.

The target reserve ratio for all commercial banks is 25%. This means that for every dollar of deposits, banks are required to hold 25 cents in reserve. The remaining 75 cents can be lent out.

Since Bank XYZ operates with no excess reserves, it must hold the required 25% reserve against the $5 million increase in deposits. Thus, it must hold $1.25 million in reserves and can loan out the remaining $3.75 million.

Therefore, Bank XYZ is immediately in a position to expand its loans by $3.75 million. The correct answer is B.

Question 19

Bank North's Balance Sheet Assets Liabilities
Reserves $300 Deposits $2000
Loans $2200 Capital $500
$2500 $2500
TABLE 26-2
Refer to Table 26-2.Assume that Bank North is operating with no excess reserves.What is their actual reserve ratio?

Accepted Answer

The answer of Bank North's Balance Sheet Assets Liabilities
Reserves $300...

Question 20

Suppose Bank ABC has a target reserve ratio of 2%.If Bank ABC receives a new deposit of $50 million it will immediately find itself with

Accepted Answer

The answer of Suppose Bank ABC has a target reserve...

Quiz 26: Money and Banking

Bank West's Balance Sheet Assets Liabilities Cash $500 Deposits $20 000 Deposits at Bank of Canada $700 Capital $1 000 Loans and Mortgages $19 800 $21 000 $21 000 TABLE 26-3 Refer to Table 26-3.Assume that Bank West is operating with no excess reserves.What is its actual reserve ratio?

Suppose Bank ABC has a target reserve ratio of 10%.If Bank ABC receives a new deposit of $100 000 it will immediately find itself with

Which of the following examples constitutes a new deposit to the Canadian commercial banking system?

Bank West's Balance Sheet Assets Liabilities Cash $500 Deposits $20 000 Deposits at Bank of Canada $700 Capital $1 000 Loans and Mortgages $19 800 $21 000 $21 000 TABLE 26-3 Refer to Table 26-3.What are the reserves held by Bank West?

Which of the following examples constitutes a new deposit to the Canadian commercial banking system?

Bank West's Balance Sheet Assets Liabilities Cash $500 Deposits $20 000 Deposits at Bank of Canada $700 Capital $1 000 Loans and Mortgages $19 800 $21 000 $21 000 TABLE 26-3 Refer to Table 26-3.If Bank West receives a new deposit of $1500,its actual reserve ratio immediately becomes

How can a central bank "create" money?

Suppose a commercial bank has a target reserve ratio of 1%,but has an actual reserve ratio of 0.8%.This bank will likely

Bank North's Balance Sheet Assets Liabilities Reserves $300 Deposits $2000 Loans $2200 Capital $500 $2500 $2500 TABLE 26-2 Refer to Table 26-2.If Bank North receives a new deposit of $400,its actual reserve ratio immediately becomes

Suppose the Canadian banking system jointly has $20 million in reserves (cash and deposits at the Bank of Canada) ,all banks have a target reserve ratio of 20%,and there are no excess reserves.What is the amount of deposits in the banking system?

Suppose a commercial bank has a level of target reserves of $500 million and actual reserves of $575 million.This bank's ________ $75 million.

Bank North's Balance Sheet Assets Liabilities Reserves $300 Deposits $2000 Loans $2200 Capital $500 $2500 $2500 TABLE 26-2 Refer to Table 26-2.What are the income-earning assets for Bank North?

Bank North's Balance Sheet Assets Liabilities Reserves $300 Deposits $2000 Loans $2200 Capital $500 $2500 $2500 TABLE 26-2 Refer to Table 26-2.Assume that Bank North is operating with no excess reserves.What is their actual reserve ratio?

Suppose Bank ABC has a target reserve ratio of 2%.If Bank ABC receives a new deposit of $50 million it will immediately find itself with