MONEY AND BANKING

Question 1

Define the monetary multiplier MM based on aggregate reserves R, aggregate deposits D, and coins and notes M0.

Answer 1

MM = M1/MB = (M0+D)/(M0+R)

Question 2

Express it in terms of the “reserves/deposits” ratio and the “coins-notes/deposits” ratio.

Answer 2

MM = (M0/D + D/D)/(M0/D +R/D) = ( (M0/D) +1) / ((M0/D) +(R/D))
M0/D much influenced by Household behaviour
R/D much influenced by Bank decisions

Question 3

What happens to the money multiplier (increases/decreases) if the central bank imposes a higher reserve/deposit ratio?

Answer 3

R/D increases and the money multiplier decreases.

Question 4

What happens to the money multiplier if consumers use is less and less cash to conduct their transactions?

Answer 4

M0/D decreases. Looking at the ratios, this means a higher money multiplier.

Question 4

T OR F : If the Bank of Canada decides to hold more short-term debt but less long-term debt, this will lead to an increase of money supply.

Answer 4

False. This would change the composition of its assets but not the total. Also it does not impact reserves here.

Question 5

T OR F : If banks become more cautious in their landing decisions this could lead to a reduction of money supply.

Answer 5

True. This would increase R/D and thus reduce the money multiplier

Question 6

T OR F : If the Bank of Canada sells a bond to the Royal Bank, this will change the total asset position of the Royal Bank.

Answer 6

False. The investment position would go up but reserves would go down by the same amount.

Question 7

T OR F : If the Bank of Canada sells a bond the Royal Bank, this will lead to a decrease in reserves.

Answer 7

True. The Royal Bank will buy the bond but its reserves would decrease leading to a reduction of money supply.