Chapter 26.2

Question 1

The largest element of the Canadian money supply today is
A) coins.
B) paper money.
C) bank deposits.
D) gold.
E) the debt of the federal government.

Answer 1

C

Question 2

The functions of the Bank of Canada include
A) acting as the lender of last resort for the largest private corporations.
B) acting as banker for the commercial banks.
C) regulating both the money market and stock market.
D) setting the exchange rate for the Canadian dollar on world markets.
E) providing deposit insurance at Canadian commercial banks.

Answer 2

B

Question 3

Basic functions of the Bank of Canada include
1) acting as lender of last resort to private non-financial corporations;
2) acting as banker for the chartered banks.
3) regulating the money supply.
A) 1 only
B) 2 only
C) 3 only
D) 2 and 3
E) 1, 2, and 3

Answer 3

D

Question 4

The largest component of the assets of the Bank of Canada is
A) Government of Canada securities.
B) Government of Canada deposits.
C) notes and coins in circulation.
D) loans to commercial banks.
E) loans to private individuals.

Answer 4

A

Question 5

The largest component of the liabilities of the Bank of Canada is
A) Government of Canada securities.
B) Government of Canada deposits.
C) Canadian currency in circulation.
D) deposits of commercial banks and other financial institutions.
E) loans to private individuals.

Answer 5

C

Question 6

In the event of a sudden loss in confidence in the ability of the commercial banks to redeem deposits, the Bank of Canada would probably
A) take over the operation of any banks in severe difficulties.
B) lend reserves to the commercial banks.
C) offer to sell government bonds to the chartered banks.
D) suspend operation of the banking system until the panic subsided.
E) impose severe financial penalties on the commercial banks by charging them interest at higher than the Bank rate.

Answer 6

B

Question 7

Suppose the rare event occurs that a major Canadian commercial bank is on the verge of insolvency and collapse due to volatile world credit markets. The likely initial response is
A) a bankruptcy filing overseen by the Superintendent of Financial Institutions.
B) the adoption of all of the bank’s liabilities by the Bank of Canada as the “lender of last resort.”
C) the sale of the bank’s assets to the remaining commercial banks.
D) the provision of funds by the World Bank as the “lender of last resort.”
E) the provision of funds by the Bank of Canada as the “lender of last resort.”

Answer 7

E

Question 8

Which of the following statements best describes the relationship between the Bank of Canada and the Government of Canada?
A) The Bank of Canada has the same status as the Department of Finance and is directly responsible to Parliament for its day-to-day operations of monetary policy.
B) The Bank of Canada is a wholly owned entity of the government but is given independence in the day-to-day operations of monetary policy.
C) The Bank of Canada is a central-banking institution that is completely independent of the government and is fully autonomous in its conduct of monetary policy.
D) The Bank of Canada is a privately owned banking institution that is overseen by a Board of Directors with a mandate to act in the best interests of the citizens of Canada.
E) The governor of the Bank of Canada and the minister of finance have joint responsibility for both fiscal and monetary policy.

Answer 8

B

Question 9

Which of the following entries would appear on the liabilities side of the Bank of Canada’s balance sheet?
A) deposit money held in accounts at Canada’s commercial banks
B) Government of Canada securities
C) foreign currency reserves
D) paper notes in circulation
E) Canadian corporate securities

Answer 9

D

Question 10

Commercial banks in Canada are prohibited by law from
A) accepting demand deposits.
B) issuing paper currency.
C) lending money to households and firms.
D) accepting term deposits.
E) settling inter-bank debts through a clearinghouse.

Answer 10

B

Question 11

The financial crisis that occurred in 2007 and 2008 highlighted one of the crucial functions of commercial banks and other financial institutions in developed economies. A crucial function that ceased to work smoothly during this time, and contributed to the global recession that began in 2008, was
A) the acceptance of deposits from firms and households.
B) the joint regulation of financial markets.
C) the provision of credit to firms, households and other banks.
D) cheque clearing and collection.
E) the clearing of electronic transfers.

Answer 11

C

Question 12

An example of “interbank activities” in the Canadian banking system is
A) banks pooling their money together to fund the operations of the Bank of Canada.
B) banks lending money to each other in order to meet daily cash requirements.
C) the joint regulation of financial markets.
D) the joint regulation of the money supply.
E) lender of last resort to the banking system.

Answer 12

B

Question 13

The Canada Deposit Insurance Corporation (CDIC) was set up to protect
A) member financial institutions in case of non-payment of loans from borrowers.
B) member financial institutions in case of non payment of loans from the government.
C) depositors with Canadian dollar accounts in member institutions for up to a maximum of $100 000 per eligible deposit.
D) depositors with Canadian dollar accounts in any Canadian financial institution for up to a maximum of $100 000 per institution.
E) depositors of any currency in any Canadian financial institution for up to a maximum of $100 000 per institution.

Answer 13

C

Question 14

Which of the following entries would appear on the liabilities side of the Bank of Canada's balance sheet?
A) Government of Canada securities
B) deposits of commercial banks
C) advances to commercial banks
D) savings deposits
E) shareholders' equity

Answer 14

B

Question 15

Which of the following entries would appear on the assets side of a commercial bank's balance sheet?
A) Government of Canada securities
B) chequable deposits
C) Government of Canada deposits
D) savings deposits
E) shareholders' equity

Answer 15

A

Question 16

Which of the following entries would appear on the liabilities side of a commercial bank's balance sheet? 
A) mortgage loans
B) Government of Canada securities
C) cash reserves
D) foreign currency reserves
E) demand deposits

Answer 16

E

Question 17

Refer to Table 26-1. What are the total assets on the balance sheet of this commercial bank? 
A) 2410
B) 2520
C) 2810
D) 2960
E) 3160

Answer 17

D

Question 18

Refer to Table 26-1. What are the total liabilities on the balance sheet of this commercial bank? 
A) 2410
B) 2520
C) 2810
D) 2960
E) 3160

Answer 18

D

Question 19

A bank run is unlikely to occur in Canada today because
A) if necessary, the central bank can provide all the reserves that are necessary to avoid this situation.
B) the commercial banks are required by law to maintain 100% of their deposits in cash.
C) there is relatively little demand for cash at present.
D) banking is done mostly electronically.
E) the commercial banks hold enough government securities that are convertible into cash.

Answer 19

A

Question 20

What is a bank run?
A) A situation where a commercial bank is holding zero reserves.
B) A panic situation where many depositors rush simultaneously to withdraw their deposit money in the form of cash.
C) A situation where all commercial banks in the system are simultaneously short of reserves.
D) The collapse of a non-commercial bank as a result of non-payment of loans.
E) The collapse of a commercial banks as a result of the devaluation of their assets.

Answer 20

B

Question 21

Why is the possibility of a bank run extremely small in Canada today?
A) The Bank of Canada guarantees the deposits at all commercial banks in Canada, eliminating the danger of a rush of withdrawals.
B) The Department of Finance guarantees the deposits at all commercial banks in Canada, eliminating the danger of a rush of withdrawals.
C) The Canadian Deposit Insurance Corporation provides deposit insurance on eligible deposits, so most depositors would not feel the need to withdraw all of their money in a panic.
D) The Office of the Superintendent of Financial Institutions provides deposit insurance on eligible deposits, so most depositors would not feel the need to withdraw all of their money in a panic.
E) Industry Canada guarantees the deposits at all commercial banks in Canada, eliminating the danger of a rush of withdrawals.

Answer 21

C

Question 22

Canadian commercial banks maintain their reserves in the form of
A) cash in their bank vaults and deposits at the Bank of Canada.
B) cash in their bank vaults.
C) gold in their bank vaults.
D) deposits at other commercial banks that are immediately accessible.
E) cash and foreign currency at the Bank of Canada.

Answer 22

A

Question 23

A commercial bank’s actual reserve ratio is the
A) fraction of its deposit liabilities that it actually holds as gold, other precious metal or cash in its own vaults.
B) fraction of its deposit liabilities that are backed by gold.
C) ratio of Canadian dollars to foreign currencies that it holds on its books.
D) ratio of chequable deposits to term deposits that it holds on its books.
E) fraction of its deposit liabilities that it actually holds as reserves, either as cash or as deposits with the Bank of Canada.

Answer 23

E

Question 24

Excess reserves” for a commercial bank refer to
A) any surplus in the bank’s supply of gold.
B) any surplus of chequable deposits.
C) any reserves (cash or deposits with the Bank of Canada) that the bank holds over and above its desired reserves.
D) reserves (cash or deposits with the Bank of Canada) that the Bank of Canada requires the bank to hold.
E) excess demand for money from that bank.

Answer 24

C

Question 25

Consider a new deposit of $10 000 to the Canadian banking system. The bank that initially receives this deposit will find itself with
A) no excess reserves if there is no reserve requirement.
B) $1000 of excess cash reserves if its target reserve ratio is 10%.
C) $2000 of excess cash reserves if its target reserve ratio is 10%.
D) $8000 of excess cash reserves if its target reserve ratio is 20%.
E) $10 000 of excess cash reserves if its target reserve ratio is 100%.

Answer 25

D

Question 26

A commercial bank’s target reserve ratio is the
A) fraction of its deposit liabilities that it wishes to holds as reserves, either as cash or as deposits with the Bank of Canada.
B) fraction of its deposit liabilities that it actually holds as cash in its own vaults.
C) fraction of its deposit liabilities that are backed by gold.
D) ratio of Canadian dollars to foreign currencies that the bank holds on its books.
E) ratio of chequable deposits to term deposits that the bank holds on its books.

Answer 26

A

Question 27

If all the commercial banks in the banking system collectively have $300 million in cash reserves and are satisfying their target reserve ratio of 20%, what is the amount of deposits they have?
A) $0
B) $60 million
C) $600 million
D) $1500 million
E) $2000 million

Answer 27

D

Question 28

Which of the following statements about reserve ratios at Canadian commercial banks is true? Commercial banks in Canada
A) are required by the Bank Act to hold required reserves.
B) have a reserve ratio of zero.
C) have a reserve ratio of 100%.
D) have a positive reserve ratio.
E) never have excess reserves.

Answer 28

D

Question 29

Without a central bank, commercial banks in Canada would probably hold \_\_\_\_\_\_\_\_ reserves than they do now, resulting in a \_\_\_\_\_\_\_\_ money supply than at present.
A) the same; the same
B) more; larger
C) more; smaller
D) less; smaller
E) less; larger

Answer 29

C

Question 30

Commercial banks hold a fraction of their deposits in cash in their vaults (or as deposits with the central bank). This fraction is known as
A) the required reserve.
B) the excess reserve ratio.
C) the fractional reserve.
D) the reserve ratio.
E) the target reserve.

Answer 30

D

Question 31

The Canadian banking system is a 
A) gold-reserve system.
B) fractional-reserve system.
C) target-reserve system.
D) asset-backed reserve system.
E) treasury-bill reserve system.

Answer 31

B

Question 32

Suppose a commercial bank has a level of target reserves of $500 million and actual reserves of $575 million. This bank's \_\_\_\_\_\_\_\_ is/are $75 million.
A) profits
B) fractional reserves
C) excess reserves
D) reserve ratio
E) cash drain

Answer 32

C

Question 33

Suppose a commercial bank has a target reserve ratio of 1%, but has an actual reserve ratio of 0.8%. This bank will likely
A) expand its portfolio of loans.
B) contract its portfolio of loans.
C) maintain its new, higher reserve ratio because it is more profitable.
D) buy government securities from the Bank of Canada.
E) allow fewer cash withdrawals by the bank’s customers.

Answer 33

B

Question 34

Suppose Bank ABC has a target reserve ratio of 10%. If Bank ABC receives a new deposit of $100 000 it will immediately find itself with
A) no excess cash reserves.
B) excess cash reserves of $10 000.
C) excess cash reserves of $90 000.
D) excess cash reserves of $100 000.
E) excess cash reserves equal to 10% of its deposits.

Answer 34

C

Question 35

Suppose Bank ABC has a target reserve ratio of 2%. If Bank ABC receives a new deposit of $50 million it will immediately find itself with
A) no excess cash reserves.
B) excess cash reserves of $1 million.
C) excess cash reserves of $10 million.
D) excess cash reserves of $49 million.
E) excess cash reserves of $49.5 million.

Answer 35

D

Question 36

Suppose the Canadian banking system jointly has $20 million in reserves (cash and deposits at the Bank of Canada), all banks have a target reserve ratio of 20%, and there are no excess reserves. What is the amount of deposits in the banking system?
A) $4 million
B) $40 million
C) $80 million
D) $100 million
E) $120 million

Answer 36

D