Question 1

Exhibit 13-3
 
-Refer to the table in the exhibit.How have LeftBank's total reserves changed?

Accepted Answer

In the exhibit, the total reserves for LeftBank decreased from $89,000 in period TB4904 to $79,000 in period TB4905, a decrease of $10,000. Therefore, the correct answer is C.

Question 2

What do open market operations involve?

Accepted Answer

Open market operations involve the purchase and sale of government securities in the open market by central banks to regulate the money supply and interest rates. This is done to either expand or contract the money supply in the economy. Option A, B, and D are unrelated to open market operations.

Question 3

Which of the following is NOT an activity of the Bank of Canada?

Accepted Answer

The Bank of Canada does not make loans to the public. Its main activities include managing monetary policy, issuing and destroying currency, overseeing the financial system, and conducting research and analysis. Clearing banks' cheques, lending funds to the federal government, and purchasing Canadian government securities are all activities performed by the Bank of Canada.

Question 4

Suppose the Bank of Canada sells $10 million in government securities to a chartered bank.And suppose the desired reserve ratio is 0.2.What is the maximum amount by which chequable deposits in the banking system could change?

Accepted Answer

When the Bank of Canada sells $10 million in securities, it reduces the reserves of the banking system by $10 million. With a reserve ratio of 0.2, the money multiplier is 1/0.2 = 5. Therefore, the maximum decrease in chequable deposits is $10 million * 5 = $50 million.

Question 5

What is the appropriate open market operation for reducing the money supply?

Accepted Answer

Selling Canadian government securities is the appropriate open market operation for reducing the money supply. When the central bank sells government securities, it reduces the amount of reserves held by banks, which in turn reduces the amount of money they are able to lend out. By decreasing the amount of money in circulation, the central bank can effectively reduce the money supply.

Question 6

Why is lowering the bank rate a way to expand the money supply?

Accepted Answer

Lowering the bank rate makes it cheaper for banks to borrow money from the central bank (in this case, the Bank of Canada). This encourages banks to borrow more, which increases their reserves and enables them to lend more to their customers, thus expanding the money supply.

Question 7

Suppose the desired reserve ratio is 10 percent.And suppose the Bank of Canada reduces excess reserves by $100,000.How could chequable deposits be affected, assuming no bank holds excess reserves and nobody withdraws cash?

Accepted Answer

When the Bank of Canada reduces excess reserves by $100,000 and the reserve ratio is 10%, banks will have to reduce their lending by $1 million to maintain the required reserves, leading to a decrease in chequable deposits by $1 million. This is because, with a 10% reserve ratio, every dollar of reserves supports $10 of deposits. Reducing reserves by $100,000 thus reduces the potential for deposits by $1 million.

Question 8

Consider a policy that increases the required reserve ratio in countries such as the United States.What type of policy is this?

Accepted Answer

Increasing the required reserve ratio decreases the amount of excess reserves in the banking system, which limits the banks' ability to lend. This is a contractionary monetary policy aimed at reducing the money supply and potentially slowing down economic activity.

Question 9

Consider the Bank of Canada's sale of Canadian government securities in its open market operations.What type of policy is this?

Accepted Answer

The Bank of Canada's sale of Canadian government securities in its open market operations is a contractionary policy because it reduces the amount of total reserves in the banking system. When the Bank of Canada sells securities, it takes money out of the economy and reduces the reserves held by banks. As a result, banks have less money to lend, which can lead to higher interest rates and less borrowing and spending.

Question 10

Suppose that the desired reserve ratio is 0.2, and the Bank of Canada buys $5,000 of Canadian government securities from Bank A.Bank A then lends $4,000 and keeps $1,000 in its vault in cash.In this round of the money-creation process, by what amount has the money supply increased, as measured by M1+?

Accepted Answer

The initial increase in the monetary base (the money supply held by the banks) is $5,000, as Bank of Canada purchased $5,000 in government securities. According to the desired reserve ratio of 0.2, Bank A needs to keep 20% of its deposits in reserve, which is $800 ($4,000 x 0.2). Therefore, it can lend out the remaining $3,200 ($4,000 - $800). This $3,200 is added to the money supply. Thus, the total increase in the money supply is $5,000 + $3,200 = $8,200, which is equivalent to the initial increase in the monetary base multiplied by the money multiplier (1 / 0.2) = $5,000 x 5 = $25,000. However, we are only interested in the increase as measured by M1+, which only includes the amount of currency and demand deposits held by the public. Since Bank A kept $1,000 in its vault in cash, the increase in M1+ is only equal to the amount lent out, which is $3,200. Therefore, the correct answer is B, by $4,000.

Question 11

What type of monetary policy raises the bank rate?

Accepted Answer

When the central bank raises the bank rate, it becomes more expensive for chartered banks to borrow money, which tightens credit conditions and reduces borrowing and spending in the economy. This is a contractionary monetary policy meant to control inflation and cool down an overheating economy.

Question 12

Consider the Bank of Canada's purchase of Canadian government securities.What type of policy is this?

Accepted Answer

The Bank of Canada's purchase of Canadian government securities is an expansionary policy because it raises the amount of total reserves in the banking system. When the Bank of Canada purchases government securities, it injects cash into the banking system, which increases the total reserves held by banks. This, in turn, increases the amount of available funds that banks can use to make loans and conduct other transactions, which stimulates economic activity.

Question 13

How does a higher bank rate affect reserves?

Accepted Answer

A higher bank rate typically leads to higher borrowing costs for banks, which can reduce their willingness to hold excess reserves, thus decreasing excess reserves.

Question 14

Suppose the Bank of Canada sells a member bank a $3,000 security, the desired reserve ratio is 20 percent, banks hold no excess reserves, and all loans are redeposited.How is the money supply affected?

Accepted Answer

The answer of Suppose the Bank of Canada sells a...

Question 15

Suppose the Bank of Canada wishes to make only a small change in the money supply.Which of its policy tools is it most likely to use?

Accepted Answer

Open-market operations refer to the buying or selling of government securities in the financial market. By buying or selling government securities, the Bank of Canada can affect the amount of money in circulation in the economy. If the Bank of Canada wants to make only a small change in the money supply, it is most likely to use open-market operations as it allows for precise control over the money supply. The other policy tools, such as the prime interest rate, loans made to the public, and influence over the desired reserve ratio, may have a greater impact on the money supply than desired if the objective is to make only a small change.

Question 16

What is the Bank of Canada's most important monetary policy tool?

Accepted Answer

Conducting open-market operations is the Bank of Canada's most important monetary policy tool. This involves buying and selling government securities in order to influence the money supply and interest rates.

Question 17

Exhibit 13-3
 
-Refer to the table in the exhibit.What kind of transaction just took place at LeftBank?

Accepted Answer

The answer of Exhibit 13-3
 
-Refer to the table in...

Question 18

The Bank of Canada performs all of the following functions except one.Which is the exception?

Accepted Answer

The Bank of Canada does not mint Canadian coins; this responsibility falls under the Royal Canadian Mint, a separate entity. The Bank of Canada's main functions include setting monetary policy, issuing Canadian banknotes, managing the country's foreign exchange reserves, and providing banking services to the federal government and other financial institutions.

Question 19

If a bank calls in a loan to replenish its reserves, what is likely to happen to the other bank's reserves?

Accepted Answer

When a bank calls in a loan to replenish its reserves, it is essentially withdrawing money from circulation, which in turn reduces the reserves of other banks. Therefore, another bank's actual reserves will decrease.

Question 20

How could the Bank of Canada increase the money supply?

Accepted Answer

When the Bank of Canada lends reserves to banks, it increases the banks' ability to lend and create deposits, thus increasing the overall money supply. Selling a bond to a chartered bank (option A) would not necessarily increase the money supply, as the bank would be using its reserves to purchase the bond. Selling a bond to a securities dealer (option B) would likely not have a significant impact on the money supply, as securities dealers primarily trade existing securities rather than creating new money. Increasing the bank rate (option D) would actually decrease the money supply, as it would make borrowing more expensive and decrease the incentive for banks to lend.

Quiz 14: Banking and the Money Supply

Exhibit 13-3 -Refer to the table in the exhibit.How have LeftBank's total reserves changed?