Q: Which of the following best describes the money multiplier formula given a currency drain ratio $$C/D$$ and a desired reserve ratio $$R/D$$?

$$\text{Money multiplier} = \frac{1 + C/D}{C/D + R/D}$$

Question 1

Which of the following best describes the three main functions of money in an economy?

Accepted Answer

Medium of exchange, unit of account, and store of value

Question 2

Suppose the price of a cappuccino is $$4 and the price of a movie ticket is 8. $$According to Table 8.1, how many cappuccinos are equivalent in value to one movie ticket?

Accepted Answer

$$8 \div 4 = 2$ cappuccinos

Question 3

Which of the following is included in M1+ but not in M2+ in Canada?

Accepted Answer

None; all components of M1+ are also included in M2+

Question 4

A bank is considered insolvent when:

Accepted Answer

The value of its liabilities exceeds the value of its assets

Question 5

If the Bank of Canada conducts an open market purchase of government securities, what is the immediate effect on the reserves of chartered banks?

Accepted Answer

Reserves of chartered banks increase

Question 6

Which of the following best describes the money multiplier formula given a currency drain ratio $$C/D$$ and a desired reserve ratio $$R/D$$?

Accepted Answer

$$	ext{Money multiplier} = \frac{1 + C/D}{C/D + R/D}$$

Question 7

If the desired reserve ratio is 10% and the currency drain ratio is 50%, what is the money multiplier?

Accepted Answer

$$\frac{1 + 0.5}{0.5 + 0.1} = \frac{1.5}{0.6} = 2.5$$

Question 8

Which of the following is NOT considered money in Canada?

Accepted Answer

Credit cards

Question 9

If the Bank of Canada increases the quantity of money by 10% in the long run, what happens to the price level according to the quantity theory of money?

Accepted Answer

The price level increases by 10%

Question 10

Which of the following best describes the equation of exchange?

Accepted Answer

$$MV = PY$$

Question 11

If the nominal interest rate rises, what happens to the quantity of real money demanded?

Accepted Answer

It decreases

Question 12

Suppose the Bank of Canada wants to lower the short-term interest rate. Which policy action should it take?

Accepted Answer

Conduct an open market purchase of government securities

Question 13

Which of the following is a direct result of financial innovation in the banking sector?

Accepted Answer

A decrease in the proportion of currency in M2+

Question 14

If the price level rises by 10% and the nominal money supply rises by 10%, what happens to the quantity of real money supplied?

Accepted Answer

It remains unchanged

Question 15

Which of the following is a benefit provided by depository institutions?

Accepted Answer

Pooling risk

Question 16

If the Bank of Canada decreases the quantity of money, what is the short-run effect on the interest rate?

Accepted Answer

The interest rate rises

Question 17

Which of the following best describes the relationship between the money supply and inflation in the long run, according to the quantity theory of money?

Accepted Answer

Inflation rate = Money growth rate - Real GDP growth rate

Question 18

A bank is illiquid but not insolvent. What does this mean?

Accepted Answer

The bank has enough assets to cover its liabilities but not enough cash to meet immediate withdrawals

Question 19

If the desired reserve ratio increases, what happens to the money multiplier, all else equal?

Accepted Answer

It decreases

Money, the Price Level, and Inflation: Study Notes for Macroeconomics

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