Question 1

Which of the following best describes the outcomes of a decrease in the reserve requirement in a fractional reserve system?
A)Both the money multiplier and the money supply increase.
B)Both the money multiplier and the money supply decrease.
C)The money multiplier increases, but the money supply decreases.
D)The money multiplier decreases, but the money supply increases.

Accepted Answer

When there is a decrease in reserve requirements in a fractional reserve system, banks are required to hold fewer reserves, which allows them to lend out more money. This leads to an increase in the money supply, which is magnified by the money multiplier effect. The money multiplier measures the amount of money the banking system can create from each dollar of reserves, and as banks are able to lend out more money, the money multiplier increases as well. Therefore, both the money multiplier and the money supply increase in this scenario.

Question 2

Which of the following is quantitative easing?
A)The Bank of Canada sells short-term government securities.
B)The Bank of Canada sells long-term government securities.
C)The Bank of Canada buys long-term government securities.
D)The Bank of Canada buys short-term government securities.

Accepted Answer

The answer of Which of the following is quantitative easing?
A)The...

Question 3

Suppose the reserve ratio is 10 percent,banks do not hold excess reserves,people do not hold currency,and the Bank of Canada purchases $20 million of government bonds.Which of the following best describes the effects of Bank of Canada's purchase?
A)Bank reserves increase by $20 million, and the money supply eventually increases by $200 million.
B)Bank reserves decrease by $20 million, and the money supply eventually increases by $200 million.
C)Bank reserves increase by $20 million, and the money supply eventually decreases by $200 million.
D)Bank reserves decrease by $20 million, and the money supply eventually decreases by $200 million.

Accepted Answer

Given the reserve ratio of 10 percent, banks are required to hold 10 percent of their deposits as reserves. When Bank of Canada purchases $20 million of government bonds, the sellers of the bonds will receive $20 million in deposits that they will deposit in banks. As banks do not hold any excess reserves, they will need to hold $2 million as reserves against these new deposits ($20 million x 0.1). The remaining $18 million ($20 million - $2 million) will be available for banks to lend. As a result, the money supply will increase by $18 million when those funds are lent out. Since the borrowers will deposit these funds in their banks, the banks will again be required to hold 10 percent of these deposits as reserves (i.e., $1.8 million). The remaining $16.2 million will be available for further lending, increasing the money supply by this amount again. This process continues until the total increase in the money supply would be $200 million (($20 million / 0.1) x 0.9). So, Bank reserves increase by $20 million, and the money supply eventually increases by $200 million.

Question 4

When the Bank of Canada decreases the bank rate,banks will borrow more from the Bank of Canada.Which of the following best describes the outcomes of this process?
A)Banks lend more to the public, and so the money supply will decrease.
B)Banks lend less to the public, and so the money supply will decrease.
C)Banks lend more to the public, and so the money supply will increase.
D)Banks lend less to the public, and so the money supply will increase.

Accepted Answer

When the bank rate is decreased, it makes borrowing cheaper for banks, which encourages them to borrow more money from the Bank of Canada. With this additional money, they have more funds available to lend to the public. As a result, the money supply in the economy increases. Therefore, Choice C is the correct answer.

Question 5

Suppose the public decides to hold more currency and fewer deposits in banks.Which of the following best describes the effects of this decision?
A)Bank reserves decrease, and the money supply eventually decreases.
B)Bank reserves decrease, but the money supply does not change.
C)Bank reserves increase, and the money supply eventually increases.
D)Bank reserves increase, but the money supply does not change.

Accepted Answer

If the public decides to hold more currency and fewer deposits in banks, the banks' reserves will decrease. This is because banks hold a portion of deposits as reserves. With fewer deposits, banks will have fewer reserves. A decrease in bank reserves will lead to a contraction of the money supply through the process of the money multiplier. Therefore, the best choice is A.

Question 6

During recessions,banks typically choose to hold more excess reserves relative to their deposits.Which of the following best describes the effects of the increase in reserves?
A)The money multiplier increases, and the money supply increases.
B)The money multiplier decreases, and the money supply decreases.
C)The money multiplier does not change, but the money supply increases.
D)The money multiplier does not change, but the money supply decreases.

Accepted Answer

When banks hold more excess reserves, it reduces the amount of money they have available for lending. This lowers the fractional reserve ratio, which decreases the money multiplier effect. As a result, the money supply decreases.

Question 7

Which of the following best describes the outcome of a decrease in the bank rate?
A)Banks will borrow less from Bank of Canada, so reserves increase.
B)Banks will borrow less from Bank of Canada, so reserves decrease.
C)Banks will borrow more from Bank of Canada, so reserves increase.
D)Banks will borrow more from Bank of Canada, so reserves decrease.

Accepted Answer

A decrease in the bank rate makes borrowing from the central bank cheaper, encouraging banks to borrow more, which increases their reserves.

Question 8

Which of the following best defines the bank rate?
A)It is the interest rate the Bank of Canada charges banks.
B)It is one divided by the difference between one and the reserve ratio.
C)It is the interest rate banks receive on reserve deposits with Bank of Canada.
D)It is the interest rate that banks charge on overnight loans to other banks.

Accepted Answer

The answer of Which of the following best defines the...

Question 9

Who determines the amount of money in the economy?
A)The Bank of Canada controls the money supply precisely.
B)The amount of money in the economy does not depend on the behaviour of depositors.
C)The amount of money in the economy depends in part on the behaviour of banks.
D)The Minister of Finance determines the amount of money in the economy by law.

Accepted Answer

The amount of money in the economy depends in part on the behaviour of banks. The central bank (such as the Bank of Canada) can influence the money supply through various policy tools, but ultimately the behaviour of banks and their lending practices also affects the amount of money in circulation. When banks make loans, they can create new money in the process, increasing the money supply. Conversely, when banks reduce lending, money can be taken out of circulation, decreasing the money supply.

Question 10

What is a bank's capital?
A)the bank's reserves
B)the bank's deposits
C)the bank's debt
D)the bank's equity

Accepted Answer

A bank's capital refers to its equity, which includes common and preferred stock, retained earnings, and other reserves. This is the amount of money that the bank's owners have invested in the bank, and it serves as a cushion to absorb losses and protect depositors. Reserves (A) are included in the bank's capital, but they are not the same thing. Deposits (B) and debt (C) are liabilities of the bank, not its capital.

Question 11

Which of the following best describes the outcomes of a decrease in reserve requirements?
A)The reserve ratio decreases, the money multiplier decreases, and the money supply decreases.
B)The reserve ratio increases, the money multiplier increases, and the money supply increases.
C)The reserve ratio decreases, the money multiplier increases, and the money supply increases.
D)The reserve ratio increases, the money multiplier decreases, and the money supply decreases.

Accepted Answer

When reserve requirements are decreased, banks are required to hold less money in reserves and have more money available to lend out. This leads to an increase in the money multiplier and an increase in the money supply. The reserve ratio, however, is decreased because banks are holding less money in reserves.

Question 12

Which of the following best defines reserve requirements?
A)They are regulations concerning the amount banks are allowed to borrow from the central bank.
B)They are regulations concerning the amount of reserves banks must hold against deposits.
C)They are regulations concerning reserves banks must hold based on the number and type of loans they make.
D)They are regulations concerning the interest rate at which banks can borrow from the central bank.

Accepted Answer

Reserve requirements refer to the regulations that require banks to hold a certain percentage of their deposits as reserves with the central bank. This is done to ensure that banks have enough funds to cover customer withdrawals and to maintain financial stability. Option A and D are both incorrect, as they refer to regulations concerning borrowing and interest rates, respectively. Option C is also incorrect, as there are no regulations that tie loans made by banks to reserve requirements.

Question 13

Suppose the reserve ratio is 20 percent and banks do not hold excess reserves.Under these circumstances,suppose the Bank of Canada sells $40 million of bonds to the public.Which of the following best describes the effects of this open-market operation?
A)Bank reserves increase by $40 million, and the money supply eventually increases by $200 million.
B)Bank reserves increase by $40 million, and the money supply eventually increases by $800 million.
C)Bank reserves decrease by $40 million, and the money supply eventually decreases by $200 million.
D)Bank reserves decrease by $40 million, and the money supply eventually decreases by $800 million.

Accepted Answer

The answer of Suppose the reserve ratio is 20 percent...

Question 14

In a fractional reserve banking system with no excess reserves and no currency holdings,suppose the central bank buys $100 million of bonds.Which of the following best describes the effects of this open-market operation?
A)Reserves and the money supply increase by less than $100 million.
B)Reserves increase by $100 million, and the money supply increases by $100 million.
C)Reserves increase by $100 million, and the money supply increases by more than $100 million.
D)Both reserves and the money supply increase by more than $100 million.

Accepted Answer

The answer of In a fractional reserve banking system with...

Question 15

During wars,the public tends to hold relatively more currency and relatively fewer deposits.Which of the following best describes the effects of this increase in currency holdings?
A)Reserves would decrease, and the money supply would increase.
B)Reserves and the money supply would decrease.
C)Reserves would increase, but the money supply would be unchanged.
D)Reserves would decrease, but the money supply would be unchanged.

Accepted Answer

During wars, people tend to hold onto more physical currency and withdraw money from banks in fear of financial instability. This results in a decrease in deposits, which also decreases reserves held by banks. With lower reserves, banks have less money to lend out, resulting in a decrease in the overall money supply. Therefore, both reserves and the money supply would decrease.

Question 16

Suppose the reserve ratio is 10 percent and banks do not hold excess reserves.Suppose the Bank of Canada sells $10 million of bonds to the public.Which of the following best describes the effects of this open-market operation?
A)Bank reserves increase by $1 million, and the money supply eventually increases by $10 million.
B)Bank reserves increase by $10 million, and the money supply eventually increases by $100 million.
C)Bank reserves decrease by $1 million, and the money supply eventually increases by $10 million.
D)Bank reserves decrease by $10 million, and the money supply eventually decreases by $100 million.

Accepted Answer

The answer of Suppose the reserve ratio is 10 percent...

Question 17

Which of the following is a sterilization operation that supports the Canadian dollar?
A)The Bank of Canada sells U.S. dollars and buys government bonds.
B)The Bank of Canada buys U.S. dollars and sells government bonds.
C)The Bank of Canada sells both U.S. dollars and government bonds.
D)The Bank of Canada buys both U.S. dollars and government bonds.

Accepted Answer

The answer of Which of the following is a sterilization...

Question 18

In a fractional reserve banking system,how does an increase in the reserve requirement change the money multiplier?
a.The money multiplier increases by a higher percentage change than the increase in the reserve ratio.
b.The money multiplier decreases by a higher percentage change than the increase in the reserve ratio.
c.The money multiplier increases by a lower percentage change than the increase in the reserve ratio.
d.The money multiplier decreases by a lower percentage change than the increase in the reserve ratio.

Accepted Answer

The answer of In a fractional reserve banking system,how does...

Question 19

What is the interest rate the Bank of Canada charges on loans it makes to banks?
A)the prime rate
B)the federal funds rate
C)the bank rate
D)the operating band

Accepted Answer

The Bank of Canada charges the bank rate on loans it makes to banks. The bank rate is the interest rate at which the Bank of Canada lends money to commercial banks. This rate affects the interest rates that commercial banks charge borrowers, and it is a tool used by the Bank of Canada to influence economic activity and inflation. The prime rate and federal funds rate are used in the US, and the operating band is a range of interest rates that the Bank of Canada targets for overnight loans between banks.

Question 20

Which of the following best describes the outcome of an increase in the bank rate?
A)Banks will borrow more from Bank of Canada, so reserves increase.
B)Banks will borrow more from Bank of Canada, so reserves decrease.
C)Banks will borrow less from Bank of Canada, so reserves increase.
D)Banks will borrow less from Bank of Canada, so reserves decrease.

Accepted Answer

An increase in the bank rate makes it more expensive for banks to borrow from the central bank, so they are likely to borrow less. This will decrease the amount of reserves in the banking system.

Quiz 10: The Monetary System

Which of the following best describes the outcomes of a decrease in the reserve requirement in a fractional reserve system?

Which of the following is quantitative easing?

Suppose the reserve ratio is 10 percent,banks do not hold excess reserves,people do not hold currency,and the Bank of Canada purchases $20 million of government bonds.Which of the following best describes the effects of Bank of Canada's purchase?

When the Bank of Canada decreases the bank rate,banks will borrow more from the Bank of Canada.Which of the following best describes the outcomes of this process?

Suppose the public decides to hold more currency and fewer deposits in banks.Which of the following best describes the effects of this decision?

During recessions,banks typically choose to hold more excess reserves relative to their deposits.Which of the following best describes the effects of the increase in reserves?

Which of the following best describes the outcome of a decrease in the bank rate?

Which of the following best defines the bank rate?

Who determines the amount of money in the economy?

What is a bank's capital?

Which of the following best describes the outcomes of a decrease in reserve requirements?

Which of the following best defines reserve requirements?

Suppose the reserve ratio is 20 percent and banks do not hold excess reserves.Under these circumstances,suppose the Bank of Canada sells $40 million of bonds to the public.Which of the following best describes the effects of this open-market operation?

In a fractional reserve banking system with no excess reserves and no currency holdings,suppose the central bank buys $100 million of bonds.Which of the following best describes the effects of this open-market operation?

During wars,the public tends to hold relatively more currency and relatively fewer deposits.Which of the following best describes the effects of this increase in currency holdings?

Suppose the reserve ratio is 10 percent and banks do not hold excess reserves.Suppose the Bank of Canada sells $10 million of bonds to the public.Which of the following best describes the effects of this open-market operation?

Which of the following is a sterilization operation that supports the Canadian dollar?

What is the interest rate the Bank of Canada charges on loans it makes to banks?

Which of the following best describes the outcome of an increase in the bank rate?