$ \frac{1}{0.05} \times 2000 = 40 \times 2000 = 80,000 $

$ \frac{1}{0.1} \times 1000 = 10 \times 1000 = 10,000 $

Question 1

Which of the following is NOT a function of money?

Accepted Answer

Source of government revenue

Question 2

Which of the following assets is considered the most liquid?

Accepted Answer

Money (currency)

Question 3

Commodity money differs from fiat money in that:

Accepted Answer

Commodity money has intrinsic value, while fiat money does not.

Question 4

Which of the following is included in the Canadian money stock?

Accepted Answer

Demand deposits

Question 5

Suppose the reserve ratio is 20%. What is the money multiplier?

Accepted Answer

$ \frac{1}{0.2} = 5 $

Question 6

If the Bank of Canada increases the money supply, what is the most likely short-run effect?

Accepted Answer

Decrease in unemployment and increase in inflation

Question 7

Which of the following is NOT a responsibility of the Bank of Canada?

Accepted Answer

Setting fiscal policy

Question 8

In a fractional-reserve banking system, if a bank receives a $500 deposit and the reserve ratio is 10%, how much can the bank lend out?

Accepted Answer

$ 450 $

Question 9

Which of the following best describes the process of money creation in the banking system?

Accepted Answer

Banks create money by lending out a fraction of deposits, which are then redeposited and lent out again.

Question 10

If the reserve ratio is $ R $, the formula for the money multiplier is:

Accepted Answer

$ \frac{1}{R} $

Question 11

Which of the following is NOT considered money in the Canadian economy?

Accepted Answer

Credit card balances

Question 12

If the Bank of Canada sets the reserve ratio at 5%, what is the theoretical maximum money supply generated from an initial deposit of $2000?

Accepted Answer

$ \frac{1}{0.05} 	imes 2000 = 40 	imes 2000 = 80,000 $

Question 13

Which statement about the Bank of Canada is TRUE?

Accepted Answer

It is managed by a board of directors and is independent of the government in practice.

Question 14

What is the main difference between M1+ and M2 in the Canadian money stock?

Accepted Answer

M2 is larger and less liquid than M1+

Question 15

If a bank holds all deposits as reserves, what is the effect on the money supply?

Accepted Answer

The money supply does not increase beyond the initial deposit.

Question 16

Which of the following would most likely cause the money multiplier to decrease?

Accepted Answer

An increase in the reserve ratio

Question 17

Why are credit cards NOT considered money?

Accepted Answer

They do not represent a store of value or medium of exchange, but rather a means of deferring payment.

Question 18

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

Accepted Answer

Increase the reserve ratio

Question 19

Suppose the reserve ratio is 10%. If the initial deposit is $1,000, what is the total money supply that can be created?

Accepted Answer

$ \frac{1}{0.1} 	imes 1000 = 10 	imes 1000 = 10,000 $

Question 20

Which of the following best explains why the collapse of the gold standard led to the creation of the Bank of Canada?

Accepted Answer

There was a need to control the quantity of fiat money in the economy.

The Monetary System: Money, Banking, and Policy in Macroeconomics

Study Guide - Practice Questions