Question 1

As a measure of the Canadian money supply,M2+ is defined as currency in circulation plus

Accepted Answer

M2+ is defined as currency in circulation plus demand and notice deposits at all financial institutions. Option B is the only choice that includes both currency in circulation and demand and notice deposits, making it the best choice for M2+. The other options include one or two types of deposits, but not both, or include additional types of deposits beyond what is included in M2+.

Question 2

If the target reserve ratio in the banking system is 1%,there is no cash drain,and there are no excess reserves,a new deposit of $1 will lead to an expansion of the money supply of

Accepted Answer

The correct answer is E) $100.00. This is because with a reserve ratio of 1%, banks are required to hold only 1% of deposits as reserves and can lend out 99% of any new deposits. This process of lending and redepositing can theoretically continue until the initial deposit of $1 has expanded the money supply by $100, as each dollar is lent out and redeposited, creating a multiplier effect. The formula for the maximum possible expansion of the money supply is 1/reserve ratio, which in this case is 1/0.01 = 100.

Question 3

Consider a new deposit of $100 000 to the Canadian banking system.The commercial bank that initially receives this deposit will find itself with

Accepted Answer

The answer of Consider a new deposit of $100 000...

Question 4

If the Bank of Canada enters the open market and purchases $1000 of government securities,what will be the eventual change in the money supply given a 10% target reserve ratio in the commercial banking system?

Accepted Answer

When the Bank of Canada purchases $1000 of government securities, it pays for this purchase by increasing the reserves of the seller's bank. Given a 10% target reserve ratio, the seller's bank can then lend out $900 of those newly acquired reserves, which will eventually result in a total increase in the money supply of $10 000 (900/.1 = 9000, plus the initial $1000 purchase). Therefore, the correct answer is E.

Question 5

Suppose Bank ABC has a target reserve ratio of 10%,no excess reserves,and it receives a new deposit of $500 000.This bank will initially expand its loans by

Accepted Answer

The bank's target reserve ratio is 10%, which means they need to hold 10% of their deposits as reserves. With the new deposit of $500,000, they will need to hold $50,000 in reserve (10% of $500,000). Since they have no excess reserves, they will need to increase their reserves by reducing their loans. Therefore, they can expand their loans by $450,000 ($500,000 deposit - $50,000 reserve requirement), which is option B.

Question 6

Suppose the cash drain in the banking system increases during holiday periods.As a result,

Accepted Answer

When the cash drain in the banking system increases during holiday periods, banks have less reserves to work with. This reduces their capacity to create deposit money because they cannot lend out as much as they normally would. Therefore, the correct choice is A, as it accurately reflects this reduction in capacity. The other choices do not address this phenomenon or provide incorrect information.

Question 7

If the Bank of Canada enters the open market and sells $1000 of government securities,what will be the eventual change in the money supply given a 10% target reserve ratio in the commercial banking system and a 10% cash drain?

Accepted Answer

When the Bank of Canada sells $1000 of government securities in the open market, it effectively removes $1000 from the banking system. Given a 10% reserve ratio, this initial removal could support a $10,000 increase in the money supply under the money multiplier effect if it were an addition instead of a removal. However, considering the 10% cash drain, the effective multiplier is reduced. The formula for the adjusted multiplier in this context is 1 / (Reserve Ratio + Cash Drain Ratio), which equals 1 / (0.10 + 0.10) = 5. Therefore, the $1000 removed from the system results in a $5000 decrease in the money supply, as each dollar could have supported five times its amount in the money supply due to the multiplier effect.

Question 8

When discussing the banking system,a cash drain of 5% means that

Accepted Answer

Depositors wishing to hold 5% of the value of their deposits in cash represents a cash drain, as it reduces the amount of money banks have available to lend or invest, impacting the money creation process in the banking system.

Question 9

The expansion of deposits resulting from an injection of new cash to the banking system can be calculated as follows.The change in deposits is equal to

Accepted Answer

The answer of The expansion of deposits resulting from an...

Question 10

If the Bank of Canada enters the open market and sells $1000 of government securities,what will be the eventual change in the money supply if commercial banks lend out all excess reserves and they have a 2.5% target reserve ratio?

Accepted Answer

When the Bank of Canada sells $1000 of government securities in the open market, it effectively removes $1000 from the banking system. With a 2.5% reserve ratio, banks can lend out 97.5% of their deposits. The money multiplier is 1 / reserve ratio = 1 / 0.025 = 40. Therefore, the initial $1000 reduction in reserves leads to a $40,000 decrease in the money supply, as banks lend less due to having fewer reserves.

Question 11

If the target reserve ratio in the banking system is 10%,there is no cash drain,and there are no excess reserves,a new deposit of $1 will lead to an eventual expansion of the money supply of

Accepted Answer

The correct answer is D) $10.00. This is because with a target reserve ratio of 10%, banks are required to hold 10% of deposits as reserves and can lend out the other 90%. This process of lending and redepositing can theoretically continue until the initial deposit of $1 has created additional bank deposits totaling $10. This is calculated using the money multiplier formula, which is 1/reserve ratio = 1/0.10 = 10.

Question 12

Until recently,and for many years,the common definition of the money supply used by the Bank of Canada was M1,which included currency in circulation plus

Accepted Answer

M1 includes currency in circulation and chequable deposits at the chartered banks, which is the definition used by the Bank of Canada until recently. The other options listed are not included in the traditional definition of M1.

Question 13

The money supply in Canada is measured using M1,M2,M2+,and M3.The reason there are so many measures of the money supply is that

Accepted Answer

Different types of bank accounts have different functions, such as transactional accounts versus savings accounts. The various measures of the money supply are created to reflect these different functions and provide a more accurate picture of the money supply.

Question 14

The concept of "near money" refers to

Accepted Answer

Near money refers to assets that can be quickly converted into cash and fulfill the store-of-value function but are not used directly as a medium of exchange.

Question 15

The main distinction between M2 and M2+ is that M2+ also includes

Accepted Answer

The answer of The main distinction between M2 and M2+...

Question 16

Consider a new deposit of $10 000 to the Canadian banking system.The commercial bank that initially receives this deposit will find itself with

Accepted Answer

When a bank receives a new deposit, it must keep a fraction of the deposit as reserves if there is a reserve requirement. If the reserve ratio is 10%, the bank must keep 10% of $10,000, which is $1,000, as reserves. The rest, $9,000, can be considered excess reserves that the bank can lend out.

Question 17

If the target reserve ratio in the banking system is 20%,there is no cash drain,and there are no excess reserves,a new deposit of $1 will lead to an eventual expansion of the money supply of

Accepted Answer

The money multiplier formula is 1 / reserve ratio. With a reserve ratio of 20% (or 0.20), the money multiplier is 1 / 0.20 = 5. Therefore, a new deposit of $1 can lead to an eventual expansion of the money supply by $5.

Question 18

In reality,the reserve ratio for Canadian commercial banks is approximately ________%,which means that the deposit creation process is ________.

Accepted Answer

The answer of In reality,the reserve ratio for Canadian commercial...

Question 19

Credit cards are considered to be "money substitutes" instead of money because

Accepted Answer

Credit cards are not considered actual money because they do not have intrinsic value and must eventually be paid off with actual money. Credit cards only serve as a temporary medium of exchange and are not a store of value in themselves. While credit card accounts are not chequable, this is not the defining characteristic that makes them money substitutes.

Question 20

Consider a new deposit of $10 000 to the Canadian banking system.Assuming that all Canadian banks have a target reserve ratio of 2%,and that there is no cash drain,the banking system as a whole could create ________ as a result of this single new deposit.

Accepted Answer

The answer of Consider a new deposit of $10 000...

Quiz 26: Money and Banking