Question 1

Whenever actual reserves exceed desired reserves, the bank

Accepted Answer

When actual reserves exceed desired reserves, it means the bank has excess reserves that can be used to make new loans. This allows the bank to earn more interest income and potentially increase profits. Therefore, the correct choice is E: the bank can make new loans.

Question 2

The money creation process begins when

Accepted Answer

The money creation process begins when banks have excess reserves, which they can then lend out, leading to an increase in the money supply.

Question 3

Excess reserves are

Accepted Answer

Excess reserves are the amount of reserves held by a bank that exceeds the required reserves and desired reserves. Therefore, excess reserves are equal to actual reserves minus desired reserves.

Question 4

If the desired reserve ratio is 3 percent and deposits are $5.75 billion, banks hold

Accepted Answer

To find the required reserves, we multiply the deposits by the desired reserve ratio:
$5.75 billion x 0.03 = $172.5 million.
Therefore, banks hold $172.5 million in reserves.

Question 5

Whenever desired reserves exceed actual reserves, the bank

Accepted Answer

When a bank's desired reserves exceed its actual reserves, it indicates that the bank does not have enough reserves on hand to meet its desired reserve ratio. To rectify this situation and ensure it meets regulatory requirements or its own internal policies, the bank may call in loans to increase its reserves. This action helps the bank to realign its actual reserves with its desired reserves level.

Question 6

When the nominal interest rate rises, the opportunity cost of holding money

Accepted Answer

When the nominal interest rate rises, the opportunity cost of holding money also rises. This means that if people hold onto their money, they are sacrificing potential interest earnings. Therefore, people are less likely to hold onto money and are more likely to invest or spend it, leading to a decrease in money held.

Question 7

Use the information below to answer the following questions.
Fact 8.4.2
The Bank of Hobbiton has chosen the following initial balance sheet:
 
-Refer to Fact 8.4.2.Based on the Bank of Hobbiton's initial balance sheet, what is its desired reserve ratio?

Accepted Answer

The desired reserve ratio is the ratio of reserves to deposits. In this case, the bank has $10 million in reserves and $200 million in deposits, so the reserve ratio is 5 percent ($10 million / $200 million = 0.05). Therefore, the correct answer is B.

Question 8

Use the information below to answer the following questions.
Fact 8.4.1
The Bank of Speedy Creek has chosen the following initial balance sheet:
 
-Refer to Fact 8.4.1.Based on the Bank of Speedy Creek's initial balance sheet, what is its desired reserve ratio?

Accepted Answer

The answer of Use the information below to answer the...

Question 9

If people decide to transfer their currency into their bank deposits then,

Accepted Answer

When people transfer their currency into their bank deposits, the actual reserves of banks increase because the deposited money adds to the banks' reserves. This does not immediately change the total quantity of money in the economy, interest rates, or the inflation rate directly.

Question 10

In Canada

Accepted Answer

The M1 multiplier is typically less than the M2 multiplier because M2 includes a broader set of financial assets, including those in M1 plus savings deposits, time deposits, and non-institutional money market funds, which generally have a lower reserve requirement or none at all, allowing for a greater expansion of the money supply for a given amount of base money.

Question 11

Use the information below to answer the following questions.
Fact 8.4.1
The Bank of Speedy Creek has chosen the following initial balance sheet:
 
-Refer to Fact 8.4.1.Huck Finn comes along and deposits $10.After Huck's deposit, but before any other actions occur, the total amount of money in the economy

Accepted Answer

When Huck Finn deposits $10, the total amount of money in the economy remains the same. However, the composition of the money changes: currency in circulation decreases by $10, while deposits in the banking system increase by $10.

Question 12

The quantity of money that the banking system can create is limited by

Accepted Answer

The quantity of money that the banking system can create is limited by the monetary base (which is controlled by the central bank), desired reserves (which banks keep on hand as a percentage of deposits), and desired currency holdings (which is the amount of cash that customers keep outside of banks). The other factors listed may affect the lending decisions of banks, but they do not directly determine the quantity of money that the banking system can create.

Question 13

The ratio of currency to deposits is the

Accepted Answer

The currency drain ratio refers to the ratio of currency to deposits, indicating the preference of the public to hold currency rather than depositing it in banks.

Question 14

Use the information below to answer the following questions.
Fact 8.4.2
The Bank of Hobbiton has chosen the following initial balance sheet:
 
-Refer to Fact 8.4.2.Bilbo Baggins comes to the bank and deposits a $100 bill.After Bilbo's deposit, but before any other actions occur, the total quantity of money in the economy

Accepted Answer

When Bilbo deposits a $100 bill in the bank, the physical currency held by the public decreases by $100, but the amount of deposits in the bank increases by $100. The total quantity of money in the economy remains the same, but its composition changes.

Question 15

The Canadian money multiplier is calculated as the

Accepted Answer

The Canadian money multiplier is calculated as the change in the quantity of money divided by the change in the monetary base. This indicates the amount by which the money supply can increase for every dollar increase in the monetary base.

Question 16

Quantitative easing

Accepted Answer

Quantitative easing is an open market purchase of securities by the U.S. Federal Reserve. It is a monetary policy used to stimulate the economy by increasing the money supply and lowering long-term interest rates. This is done by the Federal Reserve acquiring government bonds or other assets from banks, injecting cash into the economy in exchange for those assets.

Question 17

A bank can create money by

Accepted Answer

When a bank loans out its excess reserves, it is essentially creating new money. This is because when the borrower receives the loan, they are able to spend it, increasing the amount of money in circulation. The bank still has the original amount of reserves, but now there is also additional money in the economy. However, the other options listed do not involve the creation of new money. Converting reserves into securities just changes the form of the bank's assets, selling securities decreases the amount of the bank's assets, increasing reserves does not necessarily create new money if the reserves were already held in excess of requirements, and printing more cheques does not necessarily create new money if the cheques are being drawn on existing funds.

Question 18

When the interest rate falls in the money market, the quantity of money demanded _______ and the quantity of money supplied _______.

Accepted Answer

When the interest rate falls, the cost of borrowing money decreases, making it more attractive for people and businesses to borrow money, hence the quantity of money demanded increases. The quantity of money supplied, however, is determined by the central bank and is not directly affected by changes in the interest rate in the short term, so it remains unchanged.

Question 19

The banks on Sunny Island have deposits of $4 million, reserves of $600,000, and loans of $2.4 million.The desired reserve ratio is 10 percent.The banks have _______ of desired reserves and _______ of excess reserves.

Accepted Answer

The desired reserves are 10% of $4 million in deposits, which is $400,000. The banks already have $600,000 in reserves. Therefore, they have $400,000 of desired reserves and $200,000 ($600,000 - $400,000) of excess reserves.

Question 20

Suppose that a country has $50 billion in bank reserves, $100 billion in currency held by the public, and $500 billion in bank deposits.The currency drain ratio is

Accepted Answer

The currency drain ratio is calculated as the ratio of currency held by the public to the total amount of money in the economy (currency held by the public plus bank deposits). Here, it is $100 billion / ($100 billion + $500 billion) = 1/6, which is approximately 16.67%, closest to 20%.

Quiz 8: Money, the Price Level, and Inflation