Question 1

Suppose the reserve requirement is 20%. If you deposit $1000 in your chequing account and banks hold no excess reserves, what is the maximum possible increase in the money supply?

Accepted Answer

$4000

Question 2

A bank has assets of $1000 and liabilities of $950. What is the bank's capital?

Accepted Answer

$50

Question 3

If the Bank of Canada wants to decrease the money supply, which of the following actions should it take?

Accepted Answer

Sell government bonds to the public

Question 4

The money multiplier is given by $\frac{1}{R}$, where $R$ is the reserve ratio. If $R = 0.25$, what is the money multiplier?

Accepted Answer

$4$

Question 5

A bank has capital of $200 and a leverage ratio of 5. If the value of the bank's assets declines by 10%, what is the new value of the bank's capital?

Accepted Answer

$100

Question 6

Which of the following best describes 'leverage' in banking?

Accepted Answer

The use of borrowed money to supplement existing funds for investment

Question 7

If the Bank of Canada increases the overnight rate, what is the likely effect on the money supply?

Accepted Answer

The money supply decreases

Question 8

Which of the following is NOT a tool of monetary control used by the Bank of Canada?

Accepted Answer

Changing the income tax rate

Question 9

If the Bank of Canada buys $100 million U.S. in the foreign exchange market for $150 million Canadian, what happens to the Canadian money supply?

Accepted Answer

It increases by $150 million

Question 10

What is the process of sterilization in monetary policy?

Accepted Answer

Offsetting foreign exchange market operations with open-market operations to neutralize the effect on the money supply

Question 11

If the reserve ratio is 10%, and the central bank injects $200 million in new reserves, what is the maximum possible increase in the money supply?

Accepted Answer

$2,000 million

Question 12

Which of the following would increase the money multiplier?

Accepted Answer

A decrease in the reserve requirement

Question 13

If a bank's assets fall by 5% and its leverage ratio is 20, what percentage of its capital is lost?

Accepted Answer

100%

Question 14

Which of the following best describes 'quantitative easing'?

Accepted Answer

The purchase and sale by the central bank of government securities with long maturity terms

Question 15

If the Bank of Canada lowers the reserve requirement, what is the expected effect on the money supply?

Accepted Answer

The money supply increases

Question 16

A bank has $200 in reserves, $700 in loans, and $100 in securities. Its deposits are $800, debt is $150, and capital is $50. What is the value of the bank's total assets?

Accepted Answer

$1,000

Question 17

Which of the following statements about the overnight rate is correct?

Accepted Answer

It is the interest rate on very short-term loans between commercial banks

Question 18

If the Bank of Canada sells foreign currency from its reserves and receives Canadian dollars in exchange, what is the effect on the Canadian money supply?

Accepted Answer

The money supply is reduced

Question 19

Which of the following would NOT be a direct result of an increase in the Bank of Canada's capital requirement for commercial banks?

Accepted Answer

An increase in the money multiplier

Question 20

If the Bank of Canada wants to encourage more borrowing and increase the money supply, which policy should it implement?

Accepted Answer

Lower the overnight rate

Chapter 10: The Monetary System (Part 2) – Commercial Banks, Money Supply, and Central Bank Tools

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