Question 1

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, as they are responsible for creating money through the process of fractional reserve banking. The Bank of Canada can influence the money supply through monetary policy tools, but cannot control it precisely. The behaviour of depositors and the Minister of Finance can also impact the economy, but they do not directly determine the amount of money in circulation.

Question 2

Which statement 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 are regulations set by the central bank that require banks to hold a certain percentage of their deposits as reserves, either in cash or held electronically at the central bank. This is done to ensure that banks have enough funds to cover withdrawals and to maintain financial stability.

Question 3

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 4

Which statement 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, which is the interest rate at which commercial banks can borrow from the central bank (in this case, the Bank of Canada), makes borrowing cheaper for banks. As a result, banks are likely to borrow more from the central bank, leading to an increase in their reserves.

Question 5

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 is its equity, which represents the funds provided by the bank's owners or shareholders. This includes the money invested in the bank's stock as well as any accumulated profits or retained earnings. The capital serves as a cushion against losses and helps the bank maintain its solvency and financial stability. Reserves, deposits, and debt are important components of a bank's balance sheet, but they are not the same as its capital.

Question 6

Suppose the reserve ratio is 10 percent and banks do not hold excess reserves.Under these circumstances,suppose the Bank of Canada sells $60 million of bonds to the public.Which statement best describes the effects of this open-market operation?
A) Bank reserves increase by $60 million,and the money supply eventually increases by $600 million.
B) Bank reserves increase by $60 million,and the money supply eventually increases by $800 million.
C) Bank reserves decrease by $60 million,and the money supply eventually decreases by $600 million.
D) Bank reserves decrease by $60 million,and the money supply eventually decreases by $800 million.

Accepted Answer

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

Question 7

Suppose the reserve ratio is 20 percent and banks do not hold excess reserves.Suppose the Bank of Canada sells $10 million of bonds to the public.Which statement 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 $50 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 $50 million.

Accepted Answer

When the Bank of Canada sells bonds to the public, the public pays for these bonds with their deposits, which decreases the reserves in the banking system by the amount of the sale, in this case, $10 million. With a reserve ratio of 20%, each dollar of reserves supports $5 of money (1/0.20 = 5). Therefore, a $10 million decrease in reserves leads to a $50 million decrease in the money supply.

Question 8

Suppose the reserve ratio is 4 percent,banks do not hold excess reserves,people do not hold currency,and the Bank of Canada purchases $25 million of government bonds.Which statement best describes the effects of Bank of Canada's purchase?
A) Bank reserves increase by $25 million,and the money supply eventually increases by $500 million.
B) Bank reserves decrease by $25 million,and the money supply eventually increases by $500 million.
C) Bank reserves increase by $25 million,and the money supply eventually decreases by $500 million.
D) Bank reserves decrease by $25 million,and the money supply eventually decreases by $500 million.

Accepted Answer

The reserve ratio is 4 percent, which means that banks hold 4 percent of deposits as reserves and lend out the rest. With no excess reserves, the Bank of Canada's purchase of $25 million of government bonds increases the banks' reserves by $25 million. Given the reserve ratio, banks can lend out $25 million/0.96 = $26.04 million. When this money is borrowed and deposited in other banks, those banks are required to hold 4 percent as reserves and lend out the rest. The process repeats until the total increase in the money supply is $500 million ($26.04 million multiplied by the money multiplier of 0.96). Thus, choice A is correct.

Question 9

Which statement 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 means that it is more expensive for banks to borrow from the Bank of Canada. As a result, banks will borrow less from the Bank of Canada and their reserves will decrease.

Question 10

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 11

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)...

Question 12

Suppose the public decides to hold more currency and fewer deposits in banks.Which statement 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, this will lead to a decrease in bank reserves, as banks have less money available to lend out. As bank reserves decrease, the banks will have less capacity to make loans and create new money, ultimately leading to a decrease in the money supply. Therefore, the correct answer is A.

Question 13

Which statement 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 bank rate is the interest rate that the Bank of Canada charges on loans to commercial banks. This interest rate influences other interest rates in the economy, such as the prime rate and mortgage rates.

Question 14

Which statement 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 the reserve requirements decrease, banks are required to hold fewer reserves, thus increasing the amount of money they can loan out. This creates a larger money multiplier, which in turn increases the money supply. Therefore, the reserve ratio decreases, the money multiplier increases, and the money supply increases.

Question 15

In a fractional reserve banking system with no excess reserves and no currency holdings,suppose the central bank buys $100 million of bonds.Which statement 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

When the central bank buys $100 million of bonds in a fractional reserve banking system, it directly increases reserves by $100 million. Banks can then lend out a portion of these reserves, which gets deposited and re-lent multiple times, leading to a multiplier effect on the money supply. Therefore, the money supply increases by more than $100 million.

Question 16

When the Bank of Canada decreases the bank rate,banks will borrow more from the Bank of Canada.Which statement 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 banks borrow more from the Bank of Canada due to a decrease in the bank rate, they have more money to lend to the public. This leads to an increase in the money supply as there is more money flowing in the economy. Therefore, option C is the correct answer.

Question 17

Which statement 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 the reserve requirement in a fractional reserve system is decreased, banks are required to hold less money in reserve, which enables them to lend more money. This leads to an increase in the money supply, as more loan money enters circulation. Additionally, as banks can lend out more money, the money multiplier (the amount by which the money supply is increased by each dollar increase in bank reserves) increases. Thus, both the money multiplier and the money supply increase when the reserve requirement decreases.

Question 18

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

Accepted Answer

The bank rate is the interest rate that the Bank of Canada charges when it lends money to commercial banks. It is one of the key tools that the central bank uses to implement monetary policy in Canada. The bank rate affects the interest rates that banks charge their customers for loans and mortgages, and it also influences the cost of borrowing for businesses and consumers across the country. The Bank of Canada adjusts the bank rate periodically to control inflation and promote economic growth.

Question 19

During recessions,banks typically choose to hold more excess reserves relative to their deposits.Which statement 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, the amount of money available for lending decreases, which decreases the money multiplier. This in turn leads to a decrease in the money supply. Therefore, option B is the correct answer.

Question 20

During wars,the public tends to hold relatively more currency and relatively fewer deposits.Which statement 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

When the public holds more currency and fewer deposits during wars, banks have fewer reserves, which leads to a decrease in the money supply. This is because banks cannot lend as much money since they have fewer reserves to meet deposit outflows. As a result, the public's increase in currency holdings will decrease both reserves and the money supply.

Quiz 10: The Monetary System

Who determines the amount of money in the economy?

Which statement best defines reserve requirements?

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

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

What is a bank's capital?

Suppose the reserve ratio is 10 percent and banks do not hold excess reserves.Under these circumstances,suppose the Bank of Canada sells $60 million of bonds to the public.Which statement best describes the effects of this open-market operation?

Suppose the reserve ratio is 20 percent and banks do not hold excess reserves.Suppose the Bank of Canada sells $10 million of bonds to the public.Which statement best describes the effects of this open-market operation?

Suppose the reserve ratio is 4 percent,banks do not hold excess reserves,people do not hold currency,and the Bank of Canada purchases $25 million of government bonds.Which statement best describes the effects of Bank of Canada's purchase?

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

In a fractional reserve banking system,how does an increase in the reserve requirement change the money multiplier?

Which of the following is quantitative easing?

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

Which statement best defines the bank rate?

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

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

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

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

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

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

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