Chapter 26.3

Question 1

A central bank can “create” money by
A) selling some of its foreign-currency reserves for domestic currency.
B) selling government Treasury bills to the commercial banks.
C) increasing the rate of inflation.
D) issuing its own Central Bank bonds.
E) purchasing government securities on the open market.

Answer 1

E

Question 2

Which of the following examples constitutes a new deposit to the Canadian commercial banking system?
A) an individual transfers money from ShipShape Credit Union to Scotiabank
B) an individual immigrates to Canada and deposits money from abroad
C) an individual puts cash in a safety-deposit box
D) the Bank of Canada sells government securities to an individual or a firm
E) the Bank of Canada buys foreign currency from abroad

Answer 2

B

Question 3

Which of the following examples constitutes a new deposit to the Canadian commercial banking system?
A) an individual transfers money from Ship Shape Credit Union to Scotiabank
B) an individual immigrates to Canada and maintains his existing deposits in a foreign bank
C) an individual puts cash in a safety-deposit box
D) the Bank of Canada buys government securities from a Canadian commercial bank
E) the Bank of Canada buys foreign currency from abroad

Answer 3

D

Question 4

Refer to Table 26-2. Assume that Bank North is operating with no excess reserves. What is their actual reserve ratio?
A) 12%
B) 13.67%
C) 15%
D) 20%
E) 25%

Answer 4

C

Question 5

Refer to Table 26-2. What are the income-earning assets for Bank North?
A) Reserves
B) Loans
C) Deposits
D) Capital
E) Liabilities

Answer 5

B

Question 6

Refer to Table 26-2. If Bank North receives a new deposit of $400, its actual reserve ratio immediately becomes
A) 7%.
B) 15%.
C) 25%.
D) 29%.
E) 35%.

Answer 6

D

Question 7

Refer to Table 26-2. Assume that Bank North is operating at its target reserve ratio and has no excess reserves. If Bank North receives a new deposit of $400, it can immediately expand its loans by \_\_\_\_\_\_\_\_ while maintaining its target reserve ratio.
A) $260
B) $272
C) $340
D) $400
E) $700

Answer 7

C

Question 8

Refer to Table 26-2. Assume that Bank North is operating at its target reserve ratio and has no excess reserves, and that all commercial banks have the same target reserve ratio. If a new deposit to the Canadian banking system of $400 is deposited at Bank North, the total new deposits created in the banking system can be calculated as follows:
A) 300/0.136 = $2205.88.
B) 400/0.15 = $2666.67.
C) 400/0.12 = $3333.33.
D) 700/0.12 = $5833.33.
E) Not enough information to determine.

Answer 8

B

Question 9

Refer to Table 26-3.  What are the reserves held by Bank West?
A) $500
B) $700
C) $1200
D) $19 800
E) $21 000

Answer 9

C

Question 10

Refer to Table 26-3.  Assume that Bank West is operating with no excess reserves. What is its actual reserve ratio?
A) 2.5%
B) 2.4%
C) 5.7%
D) 6%
E) 10%

Answer 10

D

Question 11

Refer to Table 26-3. If Bank West receives a new deposit of $1500, its actual reserve ratio immediately becomes
A) 6%.
B) 7.5%.
C) 10%.
D) 12.6%.
E) 33.3%.

Answer 11

D

Question 12

Refer to Table 26-3. Assume that Bank West is operating at its target reserve ratio and has no excess reserves. If Bank West receives a new deposit of $1500, it can immediately expand its loans by \_\_\_\_\_\_\_\_ while maintaining its target reserve ratio.
A) $1387.50
B) $1410
C) $1462.50
D) $1464
E) $1500

Answer 12

B

Question 13

Refer to Table 26-3. Assume that Bank West is operating at its target reserve ratio and has no excess reserves, and that all commercial banks have the same target reserve ratio. If a new deposit to the Canadian banking system of $1500 is deposited at Bank West, the total new deposits created in the banking system can be calculated as follows:
A) 1500/0.06 = $25 000.
B) 1500/0.025 = $60 000.
C) 1500/0.024 = $62 500.
D) 2000/0.025 = $80 000.
E) 2000/0.06 = $33 333.

Answer 13

A

Question 14

Refer to Table 26-4. Bank XYZ is immediately in a position to expand its loans by 
A) $1.25 million.
B) $3.75 million.
C) $5 million.
D) $15 million.
E) $20 million.

Answer 14

B

Question 15

Refer to Table 26-4. If Bank XYZ increases its loans to the maximum extent possible with its new excess reserves, the second-generation banks will be able to expand their loans by
A) $0.94 million.
B) $1.00 million.
C) $1.50 million.
D) $2.81 million.
E) $3.75 million.

Answer 15

D

Question 16

Refer to Table 26-4. The maximum creation of new deposits by the banking system, including the dealer's original deposit at Bank XYZ, is 
A) $25 million.
B) $22.5 million.
C) $20 million.
D) $15 million.
E) $5 million.

Answer 16

C

Question 17

Refer to Table 26-4. Suppose the public decides to hold 5% of their deposits in cash - that is, there is now a cash drain of 5%. As a result of the new deposit, the money supply would eventually 
A) increase by $16.67 million.
B) increase by $20 million.
C) decrease by $20 million.
D) decrease by $16.67 million.
E) decrease by $8.33 million.

Answer 17

A

Question 18

Refer to Table 26-4. Suppose the public decides to hold 15% of their deposits in cash - that is, there is now a cash drain of 15%. As a result of the new deposit, the money supply would eventually 
A) increase by $3.75 million.
B) increase by $12.50 million.
C) decrease by $12.50 million.
D) decrease by $20.00 million.
E) not change.

Answer 18

B

Question 19

Refer to Table 26-5. Bank XYZ is immediately in a position to 
A) decrease its loans by $100 million.
B) decrease its loans by $10 million.
C) decrease its loans by $9 million.
D) increase loans by $9 million.
E) increase loans by $10 million.

Answer 19

C

Question 20

Refer to Table 26-5. Assume that Bank XYZ has decreased its loans and re-established its target reserve ratio. The second-generation banks in this scenario will
A) decrease their loans by $9.0 million.
B) decrease their loans by $8.1 million.
C) not have to change their loan positions.
D) increase their loans by $8.1 million.
E) increase their loans by $9.0 million.

Answer 20

B

Question 21

Refer to Table 26-5. As a result of this withdrawal from the banking system, the Canadian banking system would eventually 
A) decrease its loans by $100 million.
B) decrease its loans by $90 million.
C) decrease its loans by $10 million.
D) increase loans by $90 million.
E) increase loans by $100 million.

Answer 21

A

Question 22

Consider the creation of deposit money in the banking system. One implication of an increase in the cash drain to the public is that the
A) banking system cannot create any additional money following a new deposit.
B) amount of new money that can be created from a new source of reserves is increased.
C) desired ratio is reduced.
D) desired reserve ratio is increased.
E) banking system’s ability to create new money following a new deposit is reduced.

Answer 22

E

Question 23

Suppose you found a $100 bill that was lost for many years under your grandmother's mattress and you decided to deposit this money in a commercial bank. If the target reserve ratio were 20% and all excess reserves were lent out, your new deposit of $100 would lead to an eventual expansion of the money supply of
A) $120.
B) $200.
C) $500.
D) $1200.
E) $2000.

Answer 23

C

Question 24

Suppose you found a $100 bill that was lost for many years under your grandmother's mattress. If the banking system has a cash drain of 5%, its target reserve ratio is 20%, and all excess reserves were lent out, your new deposit of the $100 bill would lead to an eventual expansion of the money supply of
A) $20.
B) $25.
C) $200.
D) $400.
E) $500.

Answer 24

D

Question 25

If all the banks in the banking system collectively have $20 million in cash reserves and have a target reserve ratio of 5%, the maximum amount of deposits the banking system can support is
A) $4 million.
B) $40 million.
C) $80 million.
D) $100 million.
E) $400 million.

Answer 25

E

Question 26

If all the banks in the banking system collectively have $500 million in cash reserves, and have a target reserve ratio of 5%, the maximum amount of deposits the banking system can support is
A) $10 million.
B) $100 million.
C) $25 billion.
D) $100 billion.
E) $10 billion.

Answer 26

E

Question 27

Assume that Bank ABC has a target reserve ratio of 10%. If Bank ABC receives a new deposit of $100 000, the largest new loan this bank could initially make, and maintain its target reserve ratio, is
A) $1000.
B) $10 000.
C) $90 000.
D) $100 000.
E) $900 000.

Answer 27

C

Question 28

Suppose the excess reserves in Toronto Dominion Bank increase by $700. Given a desired reserve ratio of 2.5% and no cash drain, the maximum change in deposits for the entire banking system would be
A) $682.50.
B) $700.00.
C) $17 500.00.
D) $28 000.00.
E) $70 000.00.

Answer 28

D

Question 29

Suppose the excess reserves in Toronto Dominion Bank increase by $700. Given a target reserve ratio of 1.0% and no cash drain, the maximum change in deposits for the entire banking system would be
A) $682.50.
B) $700.00.
C) $17 500.00.
D) $28 000.00.
E) $70 000.00.

Answer 29

E

Question 30

A desire by ________ has no effect on the ability of the banking system to create bank deposits, for a given amount of reserves in the banking system.
A) banks to delay making loans in expectation of higher future interest rates
B) households to increase the fraction of their money held in the form of currency
C) households to hold more money in safety-deposit boxes
D) the government to increase its level of spending
E) firms to reduce their desired level of borrowing from banks

Answer 30

D

Question 31

Refer to Table 26-6. Assume that Northern Bank's target reserve ratio is 10%. What is it's actual reserve ratio?
A) 6.67%
B) 7.1%
C) 8.0%
D) 9.1%
E) 10.0%

Answer 31

C

Question 32

Refer to Table 26-6. Northern Bank extends credit to its customers in the form of household mortgages and lines of credit. Under which category of the balance sheet do these fall?
A) Reserves
B) Loans
C) Liabilities
D) Deposits
E) Capital

Answer 32

B

Question 33

Refer to Table 26-6. Owners of Northern Bank contributed money to start the bank. Under which category of it's balance sheet do these funds fall?
A) Reserves
B) Loans
C) Assets
D) Deposits
E) Capital

Answer 33

E

Question 34

Refer to Table 26-6. Assume that Northern Bank's target reserve ratio is 10%. What is its current level of excess reserves?
A) -$320
B) -$200
C) $0
D) $320
E) $200

Answer 34

B

Question 35

Refer to Table 26-6. Assume that Northern Bank’s target reserve ratio is 10%. In order to achieve its target reserve ratio, Northern Bank must ________ and ________.
A) increase its reserves by $200; decrease its deposits by $200
B) increase its reserves by $400; decrease its deposits by $400
C) not change its reserves; not change its deposits
D) increase its reserves by $200; decrease its loans by $200
E) increase its reserves by $400; increase its loans by $800

Answer 35

D

Question 36

Refer to Table 26-6. Northern Bank holds cash in its vault and has some deposits in its account at the central bank. Under which category on its balance sheet are these funds included?
A) reserves
B) loans
C) liabilities
D) deposits
E) capital

Answer 36

A

Question 37

Consider a new deposit of $10 000 to the Canadian banking system. The commercial 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 2%.
D) $9000 of excess cash reserves if its target reserve ratio is 10%.
E) $98 000 of excess cash reserves if its target reserve ratio is 2%.

Answer 37

D

Question 38

Consider a new deposit of $10 000 to the Canadian banking system. Assuming that all Canadian banks have a target reserve ratio of 2%, and that there is no cash drain, the banking system as a whole could create \_\_\_\_\_\_\_\_ as a result of this single new deposit.
A) $10 000 of new deposits
B) $50 000 of new deposits
C) $500 000 of new deposits
D) $980 000 of additional loans
E) $1 000 000 of additional loans

Answer 38

C

Question 39

Consider a new deposit of $100 000 to the Canadian banking system. The commercial 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 2%.
D) $10 000 of excess cash reserves if its target reserve ratio is 10%.
E) $98 000 of excess cash reserves if its target reserve ratio is 2%.

Answer 39

E

Question 40

If the Bank of Canada enters the open market and purchases $1000 of government securities, what will be the eventual change in the money supply given a 10% target reserve ratio in the commercial banking system?
A) decrease of $1000
B) decrease of $5000
C) decrease of $10 000
D) increase of $5000
E) increase of $10 000

Answer 40

E

Question 41

) If the Bank of Canada enters the open market and sells $1000 of government securities, what will be the eventual change in the money supply if commercial banks lend out all excess reserves and they have a 2.5% target reserve ratio? 
A) decrease of $40 000
B) decrease of $4000
C) increase of $40 000
D) increase of $4000
E) decrease of $25 000

Answer 41

A

Question 42

If the Bank of Canada enters the open market and sells $1000 of government securities, what will be the eventual change in the money supply given a 10% target reserve ratio in the commercial banking system and a 10% cash drain?
A) decrease of $1000
B) decrease of $5000
C) decrease of $10 000
D) increase of $5000
E) increase of $10 000

Answer 42

B

Question 43

If the target reserve ratio in the banking system is 20%, there is no cash drain, and there are no excess reserves, a new deposit of $1 will lead to an eventual expansion of the money supply of
A) $0.20.
B) $1.20.
C) $2.00.
D) $5.00.
E) $20.00.

Answer 43

D

Question 44

If the target reserve ratio in the banking system is 10%, there is no cash drain, and there are no excess reserves, a new deposit of $1 will lead to an eventual expansion of the money supply of
A) $0.01.
B) $0.10.
C) $1.00.
D) $10.00.
E) $100.00.

Answer 44

D

Question 45

If the target reserve ratio in the banking system is 1%, there is no cash drain, and there are no excess reserves, a new deposit of $1 will lead to an expansion of the money supply of
A) $0.01.
B) $1.10.
C) $1.00.
D) $10.00.
E) $100.00.

Answer 45

E

Question 46

Suppose Bank ABC has a target reserve ratio of 10%, no excess reserves, and it receives a new deposit of $500 000. This bank will initially expand its loans by
A) $50 000.
B) $450 000.
C) $500 000.
D) $4.5 million.
E) $5 million.

Answer 46

B

Question 47

The expansion of deposits resulting from an injection of new cash to the banking system can be calculated as follows. The change in deposits is equal to
A) the change in loans divided by the sum of the target reserve ratio.
B) the change in reserves divided by the cash-deposit ratio.
C) the change in reserves divided by the target reserve ratio.
D) the change in reserves divided by the sum of the target reserve ratio and the cash-deposit ratio.
E) the change in reserves divided by the sum of excess reserves and cash drain.

Answer 47

D

Question 48

Suppose that the cash drain in the banking system increases during holiday periods. As a result,
A) the capacity of the banking system to create deposit money is dampened during holiday periods.
B) the capacity of the banking system to create deposit money is increased during holiday periods.
C) commercial banks decrease their target reserve ratios.
D) changes in reserves will result in no change in deposits during holiday periods.
E) the money supply will automatically increase.

Answer 48

A

Question 49

When discussing the banking system, a cash drain of 5% means that
A) 5% of an initial new deposit to the banking system is paid in banking fees and is therefore not available for the creation of new deposit money.
B) depositors wish to hold 5% of the value of their deposits in cash.
C) 5% of an initial new deposit to the banking system is payable as a financial services tax.
D) 95% of an initial new deposit is maintained as cash reserves by the commercial bank.
E) depositors wish to hold 95% of the value of their deposits in cash.

Answer 49

B

Question 50

In reality, the reserve ratio for Canadian commercial banks is approximately ________%, which means that the deposit creation process is ________.
A) 0.1; extremely powerful
B) 1.5; powerful
C) 20; similar to that discussed in the text
D) 50; weak
E) 100; very weak

Answer 50

B