Q: If a bank receives a new deposit of $100,000 and the reserve ratio is 10%, what is the maximum total amount of deposits that can be created in the banking system?

$$100,000 \times \frac{1}{0.10} = 1$$,000,000$

Question 1

Which of the following is NOT one of the four primary functions of money as described in macroeconomics?

Accepted Answer

Source of credit

Question 2

Which characteristic is LEAST important for an asset to serve as money in a modern economy?

Accepted Answer

High intrinsic value

Question 3

In Canada, which measure of the money supply is considered the narrowest and most liquid?

Accepted Answer

M1+

Question 4

A bank operates on a fractional reserve system. If the reserve ratio is 10%, what is the theoretical simple deposit multiplier?

Accepted Answer

$$\frac{1}{0.10} = 10$$

Question 5

Which scenario best illustrates the risk of a bank run in a fractional reserve system?

Accepted Answer

All depositors attempt to withdraw their funds simultaneously

Question 6

What is the main difference between commodity money and fiat money?

Accepted Answer

Commodity money has intrinsic value, fiat money is valuable by institutional decree

Question 7

If the money supply grows at 8% per year and real GDP grows at 3% per year, what is the predicted inflation rate according to the Quantity Theory of Money (assuming velocity is constant)?

Accepted Answer

$$8\% - 3\% = 5\%$$

Question 8

Which of the following is a plausible reason why the real-world deposit multiplier is often less than the theoretical simple deposit multiplier?

Accepted Answer

Consumers keep some currency outside the banking system

Question 9

What role do shadow banks play in the modern financial system?

Accepted Answer

They amplify money creation by purchasing securitized loans and recycling capital

Question 10

According to the Quantity Theory of Money, which equation represents the relationship between money supply, velocity, price level, and real output?

Accepted Answer

$$M 	imes V = P 	imes Y$$

Question 11

During hyperinflation, what typically happens to the velocity of money?

Accepted Answer

Velocity spikes as people spend money quickly before it loses value

Question 12

Which of the following best describes the process of securitization?

Accepted Answer

Banks bundle loans and sell them as tradeable securities to investors

Question 13

If a bank receives a new deposit of $100,000 and the reserve ratio is 10%, what is the maximum total amount of deposits that can be created in the banking system?

Accepted Answer

$$100,000 	imes \frac{1}{0.10} = 1$$,000,000$

Question 14

Which of the following is NOT included in the M1+ measure of money supply in Canada?

Accepted Answer

Non-chequable deposits

Question 15

What is the main risk associated with fiat money compared to commodity money?

Accepted Answer

Fiat money relies entirely on collective trust and institutional backing

Question 16

Which historical event best illustrates the Quantity Theory of Money in action?

Accepted Answer

The Price Revolution in Europe following the influx of gold and silver from the Americas

Question 17

If the velocity of money increases rapidly while the money supply remains constant, what is the likely effect on the price level according to the Quantity Theory of Money?

Accepted Answer

The price level will increase

Question 18

Which of the following is a plausible consequence of banks holding excess reserves above the regulatory minimum?

Accepted Answer

The money multiplier will decrease

Question 19

What is the main reason why credit card balances that are rolled over contribute to money creation?

Accepted Answer

They create new deposits in the banking system

Question 20

Which of the following best explains why hyperinflation can cause people to burn banknotes for heat, as seen in historical photos?

Accepted Answer

Banknotes lose their value so rapidly that they become less valuable than basic goods like firewood

Money and the Banking System: Foundations, Measurement, and Macroeconomic Implications

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