Question 1

Which of the following is an example of ʺnear moneyʺ?

Accepted Answer

Near money refers to assets that can easily be converted into cash but are not cash themselves. A 30-day Treasury bill is an example of near money because it is a short-term government security that can be quickly converted into cash, typically within a short period like 30 days.

Question 2

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

With a target reserve ratio of 20%, the money multiplier is 1 / 0.20 = 5. This means that a new deposit of $1 can lead to an eventual expansion of the money supply by $5.

Question 3

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 4

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 kinds of bank accounts serve different functions of money such as medium of exchange, store of value, and unit of account. Therefore, the various measures of money supply reflect these different functions. The Bank of Canada uses M1, M2, M2+, and M3 to track the amount of money in circulation and the velocity of money.

Question 5

When you pay for your $74 purchase at the grocery store with a debit card,you are

Accepted Answer

When you pay for your purchase with a debit card, you are electronically transferring the specified amount from your bank account to the merchant's bank account. In this case, you are transferring $74 of deposit money from your bank account to the grocery store's bank account.

Question 6

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, banks could originally create up to $10,000 in new money through the money multiplier effect (1/reserve ratio = 1/0.10 = 10). However, considering a 10% cash drain, the effective money multiplier is reduced. The cash drain means that for every dollar deposited, 10 cents will not be re-deposited but held as cash. The effective multiplier is calculated as 1 / (reserve ratio + cash drain ratio) = 1 / (0.10 + 0.10) = 1 / 0.20 = 5. Therefore, the removal of $1000 from the banking system results in a $5000 decrease in the money supply, as banks have less base money to support lending and money creation.

Question 7

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

Accepted Answer

When discussing the banking system, a cash drain of 5% means that depositors wish to hold 5% of the value of their deposits in cash. This refers to the preference of depositors to keep a portion of their money in physical form rather than deposited in the bank.

Question 8

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 includes both of these components. While options A, C, D and E include some components of M2+, they do not include all of them.

Question 9

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

The common definition of the money supply used by the Bank of Canada was M1, which includes currency in circulation and chequable deposits at the chartered banks. M1 is considered the narrowest definition of the money supply and includes the most liquid forms of money. Other forms of deposits, such as savings accounts, term deposits, and money market funds, are not included in M1.

Question 10

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 money multiplier formula is 1 / reserve ratio. With a 10% reserve ratio, the multiplier is 1 / 0.10 = 10. Therefore, a new deposit of $1 can lead to an expansion of the money supply by $10.

Question 11

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

If the bank has a target reserve ratio of 10%, it must keep 10% of the new deposit ($50,000) as required reserves, leaving $450,000 available to lend out. Therefore, the bank can initially expand its loans by $450,000.

Question 12

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 government securities in the open market, it injects money into the banking system. This increases the reserves of the commercial banks, which they can then lend out to customers. The eventual change in the money supply depends on the target reserve ratio in the banking system.

In this case, the target reserve ratio is 10%. This means that banks are required to hold 10% of their deposits in reserve and can lend out the remaining 90%. When the Bank of Canada purchases $1000 of government securities, it increases the reserves of the banking system by $1000. Given the reserve ratio of 10%, this means that the banking system can lend out an additional $9000 ($1000/0.1). Therefore, the eventual change in the money supply is an increase of $10,000 ($1000 + $9000).

So, the correct answer is option E.

Question 13

The concept of ʺnear moneyʺ refers to

Accepted Answer

Near money refers to assets that can be quickly converted into cash and thus serve as a temporary store of value, but they do not directly function as a medium of exchange.

Question 14

Credit cards are considered to be ʺmoney substitutesʺ instead of money because

Accepted Answer

Credit cards are considered to be "money substitutes" because they allow for purchases to be made without the immediate exchange of physical currency, but the cardholder must eventually use money to pay off the credit card balance. Therefore, credit cards are not a true "medium of exchange" like physical money, which can be used directly to pay for transactions.

Question 15

The M2 and M2+ definitions of the money supply concentrate on the  ________ function of money.

Accepted Answer

The M2 and M2+ definitions of the money supply focus on the medium-of-exchange function of money, as they include components that are readily available for spending and transactions, such as cash, checking deposits, and easily convertible near-money assets.

Question 16

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 that amount from the banking system. With a 2.5% reserve ratio, banks are required to hold 2.5% of deposits as reserves and can lend out the rest. The $1000 sale reduces reserves and thus the potential for lending by a multiplier effect. The money multiplier is 1/reserve ratio = 1/0.025 = 40. Therefore, the decrease in the money supply is $1000 * 40 = $40,000.

Question 17

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

Accepted Answer

The current reserve ratio for Canadian commercial banks is around 1.5%, which is considered powerful enough to create significant amounts of new money through the deposit creation process. This is because banks can use the funds from the deposits to make loans, which in turn creates further deposits and expands the money supply. While not as high as some other countries, such as the US with a reserve ratio of 10%, the Canadian reserve ratio is still significant enough to make the deposit creation process powerful.

Question 18

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 target reserve ratio of 1%, banks are required to hold only 1% of deposits as reserves and can lend out 99% of any new deposit. This process of lending and redepositing (minus the reserve each time) can theoretically continue until the initial deposit has created additional bank deposits totaling $100. This is calculated using the money multiplier formula, which is 1/reserve ratio. In this case, 1/0.01 = 100, meaning a $1 deposit can expand the money supply by up to $100 through the banking system.

Question 19

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 20

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

Accepted Answer

Cash drain reduces the excess reserves of banks and therefore reduces their ability to create deposit money. This dampens the capacity of the banking system to create deposit money during holiday periods.

Quiz 26: Money and Banking