Q: A bank has $$110,000 in total reserves and 1$$,010,000 in chequable deposits. If the desired reserve ratio is 10%, what are the excess reserves?

$$110,000 - (0.10 \times 1,010,000) = 9$$,000$

Q: If a customer deposits $10,000 in a bank and the desired reserve ratio is 10%, what is the maximum amount the bank can lend out, assuming no currency drain or excess reserves?

$$10,000 - (0.10 \times 10,000) = 9$$,000$

Q: What is the formula for calculating excess reserves?

$$\text{Excess reserves} = \text{actual reserves} - \text{desired reserves}$$

Question 1

Which of the following best describes the 'medium of exchange' function of money?

Accepted Answer

Money is accepted by sellers as payment for goods and services and settlement of debt.

Question 2

Which of the following is NOT considered part of the narrowest measure of the money supply (M1)?

Accepted Answer

Personal savings deposits

Question 3

Suppose the desired reserve ratio is 10%. What is the potential money multiplier according to the formula?

Accepted Answer

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

Question 4

Which of the following is an example of commodity money?

Accepted Answer

Gold coins

Question 5

A bank has $$110,000 in total reserves and 1$$,010,000 in chequable deposits. If the desired reserve ratio is 10%, what are the excess reserves?

Accepted Answer

$$110,000 - (0.10 	imes 1,010,000) = 9$$,000$

Question 6

Which of the following best explains why barter is less efficient than using money?

Accepted Answer

Barter requires a double coincidence of wants, making transactions more difficult.

Question 7

If a customer deposits $10,000 in a bank and the desired reserve ratio is 10%, what is the maximum amount the bank can lend out, assuming no currency drain or excess reserves?

Accepted Answer

$$10,000 - (0.10 	imes 10,000) = 9$$,000$

Question 8

Which of the following assets is considered the most liquid?

Accepted Answer

Cash

Question 9

What is the main purpose of the Canada Deposit Insurance Corporation (CDIC)?

Accepted Answer

To insure deposits held in federally incorporated financial institutions in Canada

Question 10

Which of the following is a problem that arises due to asymmetric information before a financial transaction?

Accepted Answer

Adverse selection

Question 11

If the actual money multiplier is 5 and the change in total reserves is $20,000, what is the actual change in the money supply?

Accepted Answer

$$5 	imes 20,000 = 100,000$$

Question 12

Which of the following is NOT a function of money?

Accepted Answer

Increasing the total wealth of an economy

Question 13

What is the formula for calculating excess reserves?

Accepted Answer

$$	ext{Excess reserves} = 	ext{actual reserves} - 	ext{desired reserves}$$

Question 14

Which of the following would be considered a leakage in the money multiplier process?

Accepted Answer

Currency drain

Question 15

Why can't all depositors withdraw their funds simultaneously in a fractional reserve banking system?

Accepted Answer

Banks hold only a fraction of deposits as cash and lend out the rest.

Question 16

Which of the following best describes 'fiat money'?

Accepted Answer

Money whose value is based solely on public faith and is declared legal tender by the government.

Question 17

A bank run is most likely to occur when:

Accepted Answer

Depositors fear for the bank's solvency and attempt to withdraw their funds.

Question 18

Which of the following is an example of moral hazard in banking?

Accepted Answer

A bank takes on riskier loans after deposit insurance is provided.

Question 19

Which of the following is NOT a financial intermediary?

Accepted Answer

Households

Question 20

If the desired reserve ratio increases, what happens to the potential money multiplier?

Accepted Answer

It decreases, because $$	ext{Potential money multiplier} = \frac{1}{	ext{desired reserve ratio}}$$

Money and Banking: Principles of Macroeconomics Study Notes

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