Question 1

Deposit insurance shifts most of the financial risk of bank failures from depositors to ______.

Accepted Answer

Deposit insurance is provided by the federal government, which means that in the event of a bank failure, the government will bear most of the financial risk instead of individual depositors. This is meant to protect the average depositor from losing their savings due to circumstances beyond their control. Therefore, the correct answer is (A) the federal government.

Question 2

What type of financial institution raises money from investors by selling shares?

Accepted Answer

A mutual fund raises money from investors by selling shares. Property and liability insurance companies, credit unions, and pension funds do not raise money by selling shares to investors.

Question 3

All of the following are included in M1 EXCEPT ______.

Accepted Answer

Money market mutual funds are not included in M1 as they are considered part of M2 or M3 money supply measures. M1 includes currency in circulation, chequing accounts, and the total value of coins.

Question 4

Which of the following is a depository financial institution?

Accepted Answer

A depository financial institution is one that accepts deposits from individuals and businesses and uses those funds to lend to others. Credit unions are a type of depository financial institution that are owned by their members and operate as nonprofits. The other choices (an insurance company, a pension fund, and a finance company) are not depository financial institutions as they do not accept deposits from customers.

Question 5

The interest rate at which the Bank of Canada makes short-term loans to member banks is called the ______.

Accepted Answer

The interest rate at which the Bank of Canada loans money to member banks is called the discount rate. The Federal Funds Rate is the interest rate at which banks lend to each other overnight. The margin rate is the percentage of the purchase price of securities that must be covered by cash or collateral when buying on margin. The reserve requirement is the percentage of deposits that banks must hold in reserve.

Question 6

M2 includes ______ M1.

Accepted Answer

M2 includes all of M1, plus additional assets such as savings deposits, small time deposits, and money market mutual fund shares.

Question 7

According to a recent survey, ______ were the highest users of Internet banking.

Accepted Answer

According to recent surveys, Canadians have been identified as the highest users of Internet banking among the given options.

Question 8

Which of the following is a nondepository financial institution?

Accepted Answer

Nondepository financial institutions do not accept deposits like banks and credit unions. Instead, they provide financial services such as insurance and investment management. Commercial banks, savings banks, and credit unions are all depository financial institutions as they accept deposits from customers. Therefore, the nondepository financial institution from the given options is C, life insurance company.

Question 9

Sean made a purchase at his local Walmart. Instead of writing a cheque, Sean used a card issued by his bank with a Visa logo on the front. He entered his PIN and the purchase was automatically deducted from his chequing account. Sean used his ______ card.

Accepted Answer

Sean used a card that allowed him to access funds directly from his chequing account, indicating he used a debit card. The other options do not fit the description of the card Sean used.

Question 10

All of the following statements are correct EXCEPT ______.

Accepted Answer

Commercial banks can sell securities and insurance through their subsidiaries or affiliates. Therefore, statement B is incorrect.

Question 11

All of the following statements concerning the Bank of Canada are correct EXCEPT ______.

Accepted Answer

Credit unions and savings banks do not have to belong to the Bank of Canada as they are not considered as large commercial banks.

Question 12

Which of the following is NOT one of the four basic responsibilities the Bank of Canada has for controlling the growth in the supply of money and credit?

Accepted Answer

Cheque clearing is not one of the four basic responsibilities for controlling the growth in the supply of money and credit. The other three responsibilities are regulating monetary policy, designing and issuing bank notes, and regulating the financial system.

Question 13

______ is a federal agency which insures deposits at commercial and savings banks.

Accepted Answer

Canada Deposit Insurance Corporation (CDIC) is a federal agency that insures deposits at commercial and savings banks in Canada. It provides protection to eligible deposits of up to $100,000 per depositor per insured category in case a member financial institution fails.

Question 14

Which of the following financial institutions would invest the greatest percentage of its assets in common stocks and other long-term investments?

Accepted Answer

Pension funds are typically long-term investors and have a higher risk tolerance than other financial institutions. Therefore, they are more likely to invest a greater percentage of their assets in common stocks and other long-term investments. Commercial banks, property and liability insurance companies, and credit unions usually have more conservative investment portfolios and lower risk tolerance.

Question 15

If the Bank of Canada reduced reserve requirements, ______.

Accepted Answer

Reducing reserve requirements means banks are required to hold less money in reserve and can therefore lend out more money. This increases the supply of loanable funds and puts downward pressure on interest rates. Therefore, choice B is the correct answer. Option A is incorrect because reducing reserve requirements actually allows banks to lend more money, not less. Option C is incorrect because reducing reserve requirements is likely to increase inflation, given that it results in a greater supply of money in circulation. Option D is incorrect because reducing reserve requirements stimulates economic growth by increasing the availability of loanable funds.

Question 16

Which of the following financial institutions is organized as a not-for-profit cooperative?

Accepted Answer

Credit unions are organized as not-for-profit cooperatives that are owned by their members. Therefore, profits are returned to members in the form of lower fees, higher interest rates, and improved services. Commercial banks, savings banks, and life insurance companies, on the other hand, are typically organized as for-profit institutions.

Question 17

Nina's financial institution has an office next to where she works. Everyone who uses the financial institution's services either works for Nina's employer or is related to someone who does. Nina's financial institution is a ______.

Accepted Answer

Credit unions typically have a common bond requirement for their members, such as working for the same employer, living in the same geographic area, or belonging to the same organization. The scenario provided suggests that the financial institution serves a specific group of people who are all affiliated with Nina's employer, which fits the common bond requirement of a credit union.

Question 18

Which of the following interest rates does the Bank of Canada actually set?

Accepted Answer

The Bank of Canada sets the discount rate, which is the interest rate at which banks can borrow funds from the central bank.

Question 19

The process used by an insurance company to determine whom to insure and how much to charge is called ______.

Accepted Answer

Underwriting is the process used by an insurance company to evaluate the risk of insuring a particular person, business, or property. This process includes analyzing the potential policyholder's health, lifestyle, occupation, and other risk factors to determine whether to approve coverage and at what premium rate.

Question 20

Commercial banks obtain most of their funds from ______.

Accepted Answer

Commercial banks obtain most of their funds from depositors, such as individuals and businesses, who deposit their money into checking, savings, and other types of accounts. This allows the bank to use these funds for loans and investments while still maintaining enough reserves to meet withdrawal demands from depositors. While commercial banks may also raise funds through the sale of securities or from stockholders, these sources are typically secondary to deposits. The government may also provide funds to banks through various programs, but this is not the primary source of funding for commercial banks.

Quiz 16: The Financial System