Question 1

Assume that the desired reserve ratio is 20 percent.Suppose that the Bank of Canada sells $500 of government securities to chartered banks and buys $500 of securities from individuals, who deposit the cash in chequing accounts.Refer to the above information.As a result of these transactions, reserves in the banking system will:
A)remain unchanged.
B)rise by $100.
C)fall by $100.
D)fall by $1,000.

Accepted Answer

The sale and purchase of securities offset each other, leaving the reserves unchanged.

Question 2

Which of the following is correct? When the Bank of Canada buys bonds on the open market, the money supply:
A)contracts and chartered bank reserves increase.
B)expands and chartered bank reserves decrease.
C)contracts and chartered bank reserves decrease.
D)expands and chartered bank reserves increase.

Accepted Answer

When the Bank of Canada buys bonds on the open market, it injects money into the economy, which results in an expansion of the money supply. This also increases the reserves of chartered banks, as they receive payment from the Bank of Canada in exchange for the bonds. Therefore, the correct answer is D: expands and chartered bank reserves increase.

Question 3

Open-market operations change:
A)the size of the monetary multiplier, but not chartered bank reserves.
B)chartered bank reserves, but not the size of the monetary multiplier.
C)neither chartered bank reserves nor the size of the monetary multiplier.
D)both chartered bank reserves and the size of the monetary multiplier.

Accepted Answer

Open-market operations directly affect chartered bank reserves by buying or selling government securities, which influences the amount of reserves banks hold. However, they do not change the size of the monetary multiplier, which is determined by the reserve requirement ratio.

Question 4

If the Bank of Canada buys government securities from the chartered banks, which of the following transactions take place?
A)The demand deposits of chartered banks are unchanged, but their reserves increase.
B)The demand deposits and reserves of chartered banks both decrease.
C)The demand deposits of chartered banks are unchanged, but their reserves decrease.
D)The demand deposits and reserves of chartered banks are both unchanged.

Accepted Answer

When the Bank of Canada buys government securities from chartered banks, it pays for these securities by transferring funds from the banks' accounts at the Bank of Canada to the banks' accounts at commercial banks. This increases the banks' reserves held at the Bank of Canada, but does not affect their demand deposits. Therefore, choice A is correct. Choices B, C, and D are incorrect because they involve changes to demand deposits that do not occur when the Bank of Canada buys securities.

Question 5

The following are simplified consolidated balance sheets for the chartered banking system and the Bank of Canada.Do not cumulate your answers; that is, do return to the data given in the original balance sheets in answering each question.Assume a desired reserve ratio of 5 percent for the chartered banks.All figures are in billions of dollars.CONSOLIDATED BALANCE SHEET: CHARTERED BANKING SYSTEM  BALANCE SHEET: BANK OF CANADA
 Refer to the above information.The chartered banks have excess reserves of:
A)$1
B)$6
C)$20
D)$0

Accepted Answer

To calculate excess reserves, we need to subtract required reserves from total reserves. Required reserves for chartered banks = 5% of demand deposits = 0.05 x 60 = $3 billion. Total reserves for chartered banks = $15 billion. Excess reserves = Total reserves - Required reserves = $15 billion - $3 billion = $12 billion. However, we need to look at the Bank of Canada's balance sheet to see if there are any changes to the required reserves. From the Bank of Canada's balance sheet, we see that required reserves are $4 billion. So, excess reserves for chartered banks = Total reserves - Required reserves = $15 billion - $4 billion = $11 billion. Therefore, the correct answer is A) $1.

Question 6

When the Bank of Canada buys bonds on the open market the reserves of chartered banks are:
A)not affected.
B)decreased by a multiple of the amount of the purchase.
C)decreased by the amount of the purchase.
D)increased initially by the amount of the purchase.

Accepted Answer

When the Bank of Canada buys bonds on the open market, the reserves of chartered banks are initially increased by the amount of the purchase. This is because the banks receive payment for the bonds from the Bank of Canada, which increases their reserves. However, over time, the increase in reserves can lead to an increase in the money supply and potentially inflation.

Question 7

The purchase of government securities from the public by the Bank of Canada will cause:
A)chartered bank reserves to increase.
B)the money supply to increase.
C)demand deposits to increase.
D)all of the above to occur.

Accepted Answer

When the Bank of Canada purchases government securities, it injects money into the banking system, increasing bank reserves, which in turn increases the money supply and demand deposits.

Question 8

Which of the following will not happen when the Bank of Canada buys bonds from the public in the open market?
A)The desired reserve ratio will increase.
B)The money supply will increase.
C)The deposits of chartered banks will increase.
D)Chartered bank reserves will increase.

Accepted Answer

When the Bank of Canada buys bonds from the public in the open market, it injects money into the economy. This increases the supply of money and the deposits of banks, which in turn increases the reserves of chartered banks. However, it does not affect the desired reserve ratio, which is set by individual banks and is not directly influenced by the Bank of Canada's actions.

Question 9

Assume that the desired reserve ratio is 20 percent.Suppose that the Bank of Canada sells $500 of government securities to chartered banks and buys $500 of securities from individuals, who deposit the cash in chequing accounts.Refer to the above information.As a result of these transactions, the supply of money in the economy will:
A)remain unchanged.
B)rise by $500.
C)fall by $100.
D)fall by $500.

Accepted Answer

Selling government securities to chartered banks decreases their reserves, but buying securities from individuals and accepting deposits in return increases reserves. Since the total amount of reserves in the economy remains the same, the money supply will also remain unchanged.

Question 10

Suppose the Bank of Canada sells $2 billion of government bonds to the public, which pays for them by drawing cheques.As a result, chartered bank reserves will:
A)increase by $10 billion.
B)remain unchanged.
C)decrease by $2 billion.
D)increase by $2 billion.

Accepted Answer

When the Bank of Canada sells government bonds, it withdraws money from the banking system, reducing the reserves of chartered banks by the amount of the sale, which is $2 billion in this case.

Question 11

Assume that there is a 25 percent desired reserve ratio and that Bank of Canada buys $200 million worth of government securities.If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of:
A)$600 million, and also by $600 million if the securities are purchased directly from chartered banks.
B)$800 million, and also by $800 million if the securities are purchased directly from chartered banks.
C)$600 million, but by $800 million if the securities are purchased directly from chartered banks.
D)$800 million, but only by $600 million if the securities are purchased directly from chartered banks.

Accepted Answer

If Bank of Canada buys $200 million worth of government securities from the public, the money supply will increase by $200 million. As the desired reserve ratio is 25 percent, the initial increase in bank reserves will lead to an increase in the checkable deposits by $200 million / 0.25 = $800 million. Therefore, bank lending can potentially increase by a maximum of $600 million.

However, if the Bank of Canada purchases $200 million worth of government securities directly from chartered banks, the banks' reserves will increase by $200 million, and the potential increase in checkable deposits will also be $800 million. In this case, bank lending can potentially increase by a maximum of $800 million, which is higher than if the securities were purchased from the public. Therefore, the correct answer is C, as bank lending can potentially increase by $600 million if the securities are purchased from the public, but by $800 million if the securities are purchased directly from chartered banks.

Question 12

Assume that a single chartered bank has no excess reserves and that the desired reserve ratio is 20 percent.If this bank sells a bond for $1,000 to the Bank of Canada, it can expand its loans by a maximum of:
A)$1000
B)$2000
C)$200
D)$800

Accepted Answer

The answer of Assume that a single chartered bank has...

Question 13

Assume the desired reserve ratio is 25 percent and the Bank of Canada buys $4 million of securities from the public.As a result of this transaction the supply of money is:
A)not directly affected, but the money-creating potential of the chartered banking system is increased by $12 million.
B)directly increased by $4 million and the money-creating potential of the chartered banking system is increased by $16 million.
C)directly reduced by $4 million and the money-creating potential of the chartered banking system is decreased by $12 million.
D)directly increased by $4 million and the money-creating potential of the chartered banking system is increased by $12 million.

Accepted Answer

When the Bank of Canada buys $4 million of securities from the public, the money supply is directly increased by $4 million. However, the desired reserve ratio is 25 percent, which means that the chartered banking system can create up to $16 million (4/0.25) of new money by loaning out the $12 million excess reserves created by the Bank of Canada's purchase. Therefore, the money-creating potential of the chartered banking system is increased by $12 million.

Question 14

Which of the following statements is not correct?
A)The supply of money decreases when the Bank of Canada buys government securities from households or businesses.
B)Excess reserves are the amount by which actual reserves exceed desired reserves.
C)Chartered banks increase the supply of money when they purchase government bonds from households or businesses.
D)Chartered bank reserves are an asset to chartered banks but a liability to the Bank of Canada.

Accepted Answer

When the Bank of Canada buys government securities, it increases the money supply by injecting money into the economy.

Question 15

If the Bank of Canada sells government securities to the public, which of the following transactions take place?
A)The demand deposits of chartered banks are unchanged, but their reserves increase.
B)The demand deposits and reserves of chartered banks both decrease.
C)The demand deposits of chartered banks are unchanged, but their reserves decrease.
D)The demand deposits and reserves of chartered banks are both unchanged.

Accepted Answer

When the Bank of Canada sells government securities to the public, the public pays for these securities by withdrawing funds from their bank accounts, leading to a decrease in demand deposits and reserves of chartered banks.

Question 16

The following are simplified consolidated balance sheets for the chartered banking system and the Bank of Canada.Do not cumulate your answers; that is, do return to the data given in the original balance sheets in answering each question.Assume a desired reserve ratio of 5 percent for the chartered banks.All figures are in billions of dollars.CONSOLIDATED BALANCE SHEET: CHARTERED BANKING SYSTEM  BALANCE SHEET: BANK OF CANADA
 Refer to the above information.Suppose the Bank of Canada buys $2 in securities from the public.As a result of this transaction, the supply of money will:
A)directly increase by $2 and the money-creating potential of the chartered banking system will increase by $38.
B)directly increase by $40 and the money-creating potential of the chartered banking system will increase by $800.
C)directly increase by $2 and the money-creating potential of the chartered banking system will be unaffected.
D)be unaffected but the money-creating potential of the chartered banking system will increase by $40.

Accepted Answer

When the Bank of Canada buys $2 in securities from the public, it credits the seller's account with $2, increasing the monetary base by $2. Since the chartered banks are required to hold reserves equal to 5% of their deposits, the initial increase in reserves of the seller will allow the chartered banks to create $38 in new deposits through the money multiplier effect ($2/0.05 = $40, minus the initial $2). Therefore, the supply of money will directly increase by $2 and the money-creating potential of the chartered banking system will increase by $38.

Question 17

Open-market operations refers to:
A)purchases of stocks in the Toronto Stock Exchange.
B)the purchase or sale of government bonds by the Bank of Canada.
C)central bank lending to chartered banks.
D)the specifying of margin requirements on stock purchases.

Accepted Answer

Open-market operations refer to the purchase or sale of government bonds by the central bank, which in Canada is the Bank of Canada. This is one of the tools that the central bank uses to implement monetary policy and influence interest rates in the economy. Purchases of stocks (A) on the Toronto Stock Exchange, central bank lending to chartered banks (C), and specifying margin requirements (D) are not open-market operations.

Question 18

Assume that the desired reserve ratio for the chartered banks is 25 percent.If Bank of Canada buys $3 billion in government securities from chartered banks we can say that, as a result of this transaction, the lending ability of the chartered banking system will:
A)decrease by $9 billion.
B)increase by $9 billion.
C)increase by $15 billion.
D)increase by $12 billion.

Accepted Answer

The desired reserve ratio for chartered banks is 25%, which means for every $100 in deposits, banks are required to keep $25 as reserves and can lend out $75. If Bank of Canada buys $3 billion in government securities from chartered banks, the reserves of the banks will increase by $3 billion. Since the desired reserve ratio is 25%, this means banks can lend out an additional $9 billion (75% of the $12 billion increase in reserves). Therefore, the lending ability of the chartered banking system will increase by $9 billion.

Question 19

If the Bank of Canada buys government securities from chartered banks and the public:
A)chartered bank reserves will decline.
B)chartered bank reserves will be unaffected.
C)it will be easier to obtain loans at chartered banks.
D)the money supply will contract.

Accepted Answer

When the Bank of Canada buys government securities, it injects money into the banking system, increasing bank reserves and making it easier for banks to lend, thus expanding the money supply.

Question 20

The following are simplified consolidated balance sheets for the chartered banking system and the Bank of Canada.Do not cumulate your answers; that is, do return to the data given in the original balance sheets in answering each question.Assume a desired reserve ratio of 5 percent for the chartered banks.All figures are in billions of dollars.CONSOLIDATED BALANCE SHEET: CHARTERED BANKING SYSTEM  BALANCE SHEET: BANK OF CANADA
 Refer to the above information.The maximum money-creating potential of the chartered banking system is:
A)$5
B)$19
C)$20
D)$0

Accepted Answer

The maximum money-creating potential of the chartered banking system is equal to the excess reserves held by the system, which is calculated as total reserves minus required reserves. The total reserves are given as $21 billion and the required reserves are calculated as 5% of total deposits which are $17 billion. Therefore, excess reserves are $4 billion. As the money-creating potential is equal to the excess reserves, the answer would be $4 billion or option C.

Quiz 15: B: Interest Rates and Monetary Policy

Which of the following is correct? When the Bank of Canada buys bonds on the open market, the money supply:

Open-market operations change:

If the Bank of Canada buys government securities from the chartered banks, which of the following transactions take place?

When the Bank of Canada buys bonds on the open market the reserves of chartered banks are:

The purchase of government securities from the public by the Bank of Canada will cause:

Which of the following will not happen when the Bank of Canada buys bonds from the public in the open market?

Suppose the Bank of Canada sells $2 billion of government bonds to the public, which pays for them by drawing cheques.As a result, chartered bank reserves will:

Assume that there is a 25 percent desired reserve ratio and that Bank of Canada buys $200 million worth of government securities.If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of:

Assume that a single chartered bank has no excess reserves and that the desired reserve ratio is 20 percent.If this bank sells a bond for $1,000 to the Bank of Canada, it can expand its loans by a maximum of:

Assume the desired reserve ratio is 25 percent and the Bank of Canada buys $4 million of securities from the public.As a result of this transaction the supply of money is:

Which of the following statements is not correct?

If the Bank of Canada sells government securities to the public, which of the following transactions take place?

Open-market operations refers to:

Assume that the desired reserve ratio for the chartered banks is 25 percent.If Bank of Canada buys $3 billion in government securities from chartered banks we can say that, as a result of this transaction, the lending ability of the chartered banking system will:

If the Bank of Canada buys government securities from chartered banks and the public: