Macroeconomics Canadian 13th Edition

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Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) In the event of a sudden loss in confidence in the ability of the commercial banks to redeem 1)
deposits, the Bank of Canada would probably
A) impose severe financial penalties on the commercial banks by charging them interest at
higher than the Bank rate.
B) offer to sell government bonds to the chartered banks.
C) take over the operation of any banks in severe difficulties.
D) suspend operation of the banking system until the panic subsided.
E) lend reserves to the commercial banks.
Answer: E
Explanation: A)
B)
C)
D)
E)

2) Canadian commercial banks maintain their reserves in the form of 2)

A) cash in their bank vaults.
B) deposits at other commercial banks that are immediately accessible.
C) cash in their bank vaults and deposits at the Bank of Canada.
D) gold in their bank vaults.
E) cash and foreign currency at the Bank of Canada.
Answer: C
Explanation: A)
B)
C)
D)
E)

3) If a majority of Canadian households and businesses refused to accept Canadian dollars in 3)

exchange for goods and services, the value of the Canadian dollar would
A) stay constant since its value is determined only by the Bank of Canada.
B) stay constant since its value is determined only by the Government of Canada.
C) fall.
D) stay constant since the value does not depend on its acceptability by people.
E) rise since less would be in circulation.
Answer: C
Explanation: A)
B)
C)
D)
E)

1
 4) Which of the following was the most important initial step in the evolution of paper currency? 4)
A) the issuance of currency by governments
B) the acceptance of goldsmiths' receipts
C) the use of the Gold Standard
D) the acceptance of metallic coins
E) the acceptance of bank notes
Answer: B
Explanation: A)
B)
C)
D)
E)

Consider the following situation in the Canadian banking system:

a) An investment dealer withdraws $10 million from its account at Bank XYZ to
purchase government securities from the Bank of Canada.
b) As a result, $10 million has been withdrawn from the Canadian banking system.
c) The target reserve ratio for all banks is 10 percent.
d) All commercial banks operate with no excess reserves.
e) There is no cash drain.

TABLE 27-3

5) Refer to Table 27-3. Assume that Bank XYZ has decreased its loans and re-established its target 5)
reserve ratio. The second-generation banks in this scenario will
A) not have to change their loan positions.
B) increase their loans by $9.0 million.
C) decrease their loans by $8.1 million.
D) increase their loans by $8.1 million.
E) decrease their loans by $9.0 million.
Answer: C
Explanation: A)
B)
C)
D)
E)

2
 Northern Bank: Balance Sheet
Assets Liabilities
Reserves $800 Deposits $10000
Loans $11200 Capital $2000
$12000 $12000

TABLE 27-4

6) Refer to Table 27-4. Assume that Northern Bank's target reserve ratio is 10 percent. What is its 6)
current level of excess reserves?
A) $400 B) $320 C) -$200 D) $0 E) -$320
Answer: C
Explanation: A)
B)
C)
D)
E)

7) The functions of the Bank of Canada include 7)

A) providing deposit insurance at Canadian commercial banks.
B) acting as the lender of last resort for the largest private corporations.
C) setting the exchange rate for the Canadian dollar on world markets.
D) acting as banker for the commercial banks.
E) regulating both the money market and stock market.
Answer: D
Explanation: A)
B)
C)
D)
E)

8) A new deposit to the banking system can result when 8)

A) the Bank of Canada buys a government security from a firm, which keeps the proceeds from
the sale in a company vault.
B) an individual stashes cash in a mattress.
C) the Bank of Canada buys a government security from a firm, which then deposits the
proceeds from the sale in its account at a commercial bank.
D) a new immigrant to Canada sends cash to his or her home country.
E) the Bank of Canada sells a government security to a firm which then maintains the asset in a
bank.
Answer: C
Explanation: A)
B)
C)
D)
E)

3
 9) Suppose the rare event occurs that a major Canadian commercial bank is on the verge of insolvency 9)
and collapse due to volatile world credit markets. The likely initial response is
A) the adoption of all of the bank's liabilities by the Bank of Canada as the "lender of last resort".
B) the provision of funds by the World Bank as the "lender of last resort".
C) a bankruptcy filing overseen by the Superintendent of Financial Institutions.
D) the provision of funds by the Bank of Canada as the "lender of last resort".
E) the sale of the bank's assets to the remaining commercial banks.
Answer: D
Explanation: A)
B)
C)
D)
E)

10) If the Bank of Canada enters the open market and purchases $1000 of government securities, what 10)
will be the eventual change in the money supply given a 10 percent target reserve ratio in the
commercial banking system?
A) decrease of $10 000
B) increase of $5000
C) decrease of $5000
D) decrease of $1000
E) increase of $10 000
Answer: E
Explanation: A)
B)
C)
D)
E)

11) Suppose that the cash drain in the banking system increases during holiday periods. As a result, 11)
A) the capacity of the banking system to create deposit money is increased during holiday
periods.
B) changes in reserves will result in no change in deposits during holiday periods.
C) commercial banks decrease their target reserve ratios.
D) the money supply will automatically increase.
E) the capacity of the banking system to create deposit money is dampened during holiday
periods.
Answer: E
Explanation: A)
B)
C)
D)
E)

4
12) The Canadian banking system is a 12)
A) treasury-bill reserve system.
B) target-reserve system.
C) gold-reserve system.
D) asset-backed reserve system.
E) fractional-reserve system.
Answer: E
Explanation: A)
B)
C)
D)
E)

13) Debit cards that are issued by commercial banks can be characterized as 13)
A) an example of near money.
B) deposit money.
C) an electronic version of a cheque.
D) a store of value.
E) flat money.
Answer: C
Explanation: A)
B)
C)
D)
E)

14) Suppose you come into possession of two "silver" dollars, one minted in the 1950s which contains a 14)
lot of silver, the other minted in the 1990s which contains no silver at all. The legal exchange rate
between the coins is fixed at one for one. According to Gresham's law, the 1950s silver dollar:
A) will drive out of circulation the 1980s silver dollar.
B) is less likely to be used as a store of value because it will appear old fashioned.
C) is more likely to be used as a medium of exchange.
D) is less likely to be used as a medium of exchange.
E) is considered "bad" money.
Answer: D
Explanation: A)
B)
C)
D)
E)

5
 15) Which of the following entries would appear on the liabilities side of the Bank of Canada's balance 15)
sheet?
A) advances to commercial banks
B) deposits of commercial banks
C) Government of Canada securities
D) shareholders' equity
E) savings deposits
Answer: B
Explanation: A)
B)
C)
D)
E)

Northern Bank: Balance Sheet

Assets Liabilities
Reserves $800 Deposits $10000
Loans $11200 Capital $2000
$12000 $12000

TABLE 27-4

16) Refer to Table 27-4. Northern Bank extends credit to its customers in the form of household 16)
mortgages and lines of credit. Under which category of the balance sheet do these fall?
A) reserves B) loans C) capital D) deposits E) liabilities
Answer: B
Explanation: A)
B)
C)
D)
E)

17) A desire by ________ has no effect on the ability of the banking system to create bank deposits, for a 17)
given amount of reserves in the banking system.
A) households to increase the fraction of their money held in the form of currency
B) banks to delay making loans in expectation of higher future interest rates
C) firms to reduce their desired level of borrowing from banks
D) households to hold more money in safety-deposit boxes
E) the government to increase its level of spending
Answer: E
Explanation: A)
B)
C)
D)
E)

6
 18) Other things being equal, the purchasing power of money is 18)
A) directly related to the price level.
B) directly related to the level of aggregate demand.
C) inversely related to the level of aggregate demand.
D) directly related with the cost of living.
E) inversely related to the price level.
Answer: E
Explanation: A)
B)
C)
D)
E)

19) "Excess reserves" for a commercial bank refer to 19)

A) any surplus of chequable deposits.
B) any reserves (cash or deposits with the Bank of Canada) that the bank holds over and above
its desired reserves.
C) reserves (cash or deposits with the Bank of Canada) that the Bank of Canada requires the
bank to hold.
D) any surplus in the bank's supply of gold.
E) excess demand for money from that bank.
Answer: B
Explanation: A)
B)
C)
D)
E)

Northern Bank: Balance Sheet

Assets Liabilities
Reserves $800 Deposits $10000
Loans $11200 Capital $2000
$12000 $12000

TABLE 27-4

20) Refer to Table 27-4. Assume that Northern Bank's target reserve ratio is 10%. What is it's actual 20)
reserve ratio?
A) 9.1% B) 6.67% C) 8.0% D) 7.1% E) 10.0%
Answer: C
Explanation: A)
B)
C)
D)
E)

7
21) Suppose an economy has two types of money -- gold and silver coins -- that are both legal tender 21)
but have different non-monetary values. Gresham's law has come into effect when
A) people use the higher-valued coins for exchange and the lower-valued for savings.
B) the higher-valued coin is taken out of circulation.
C) people refuse to use the coins of lesser value.
D) the value of the coins is in the same ratio as their non-monetary values.
E) the lower-valued coin is taken out of circulation.
Answer: B
Explanation: A)
B)
C)
D)
E)

22) Consider a new deposit of $10 000 to the Canadian banking system. The commercial bank that 22)
initially receives this deposit will find itself with
A) no excess reserves if there is no reserve requirement.
B) $1 000 of excess cash reserves if its target reserve ratio is 10 percent.
C) $2 000 of excess cash reserves if its target reserve ratio is 2 percent.
D) $9 000 of excess cash reserves if its target reserve ratio is 10 percent.
E) $98 000 of excess cash reserves if its target reserve ratio is 2 percent.
Answer: D
Explanation: A)
B)
C)
D)
E)

23) Commercial banks hold a fraction of their deposits in cash in their vaults (or as deposits with the 23)
central bank). This fraction is known as
A) the excess reserve ratio.
B) the required reserve.
C) the reserve ratio.
D) the fractional reserve.
E) the target reserve.
Answer: C
Explanation: A)
B)
C)
D)
E)

8
Consider the following situation in the Canadian banking system:

a) An investment dealer withdraws $10 million from its account at Bank XYZ to
purchase government securities from the Bank of Canada.
b) As a result, $10 million has been withdrawn from the Canadian banking system.
c) The target reserve ratio for all banks is 10 percent.
d) All commercial banks operate with no excess reserves.
e) There is no cash drain.

TABLE 27-3

24) Refer to Table 27-3. As a result of this withdrawal from the banking system, the Canadian banking 24)
system would eventually
A) decrease its loans by $90 million.
B) decrease its loans by $100 million.
C) increase loans by $100 million.
D) decrease its loans by $10 million.
E) increase loans by $90 million.
Answer: B
Explanation: A)
B)
C)
D)
E)

25) Historically, when gold and silver coins were used as money, their debasement resulted in 25)
A) a decrease in the money supply.
B) an increase in the amount of gold bullion.
C) deflation
D) an increase in the desire to store wealth by holding coins.
E) an increase in the supply of money.
Answer: E
Explanation: A)
B)
C)
D)
E)

9
Consider the following situation in the Canadian banking system:

· The Bank of Canada purchases $5 million worth of government securities

from an investment dealer with a cheque drawn on the Bank of Canada.
· The dealer deposits this cheque at Bank XYZ, a commercial bank.
· The target reserve ratio for all banks is 25 percent.
· All commercial banks operate with no excess reserves.
· There is no cash drain.

TABLE 27-2

26) Refer to Table 27-2. Suppose, in addition, that the public decides to hold 15 percent of their 26)
deposits in cash. As a result of the new deposit, the money supply would eventually
A) increase by $12.50 million.
B) decrease by $20.00 million.
C) decrease by $12.50 million.
D) increase by $ 3.75 million.
E) not change.
Answer: A
Explanation: A)
B)
C)
D)
E)

27) The largest component of the liabilities of the Bank of Canada is 27)
A) Government of Canada deposits.
B) Canadian dollars in circulation.
C) deposits of commercial banks and other financial institutions.
D) Government of Canada securities.
E) loans to private individuals.
Answer: B
Explanation: A)
B)
C)
D)
E)

28) If the target reserve ratio in the banking system is 1 percent, there is no cash drain, and there are no 28)
excess reserves, a new deposit of $1 will lead to an expansion of the money supply of
A) $0.01 B) $1.10 C) $1.00 D) $10.00 E) $100.00
Answer: E
Explanation: A)
B)
C)
D)
E)

10
 29) In order for money to be successfully used as a medium of exchange, it must 29)
1) be readily acceptable;
2) be easily divisible;
3) have a high value-weight ratio.
A) 1 only B) 2 only C) 3 only D) 1, 2, and 3 E) 1 and 2
Answer: D
Explanation: A)
B)
C)
D)
E)

Bank North's Balance Sheet

Assets Liabilities
Reserves $300 Deposits $2000
Loans $2200 Capital $500
$2500 $2500

TABLE 27-1

30) Refer to Table 27-1. What are the income-earning assets for Bank North? 30)
A) Liabilities B) Deposits C) Reserves D) Loans E) Capital
Answer: D
Explanation: A)
B)
C)
D)
E)

31) If the target reserve ratio in the banking system is 10 percent, there is no cash drain, and there are 31)
no excess reserves, a new deposit of $1 will lead to an eventual expansion of the money supply of
A) $0.01 B) $0.10 C) $1.00 D) $10.00 E) $100.00
Answer: D
Explanation: A)
B)
C)
D)
E)

11
 32) A central bank can "create" money by 32)
A) increasing the rate of inflation.
B) purchasing government securities on the open market.
C) selling government Treasury bills to the commercial banks.
D) issuing its own Central Bank bonds.
E) selling some of its foreign-currency reserves for domestic currency.
Answer: B
Explanation: A)
B)
C)
D)
E)

33) Which of the following illustrates the use of fiat money? 33)
A) exchanging money-market funds for gold
B) bartering goods for services
C) exchanging money-market funds for insurance
D) keeping gold as a hedge against inflation
E) exchanging Canadian dollars for a T-shirt
Answer: E
Explanation: A)
B)
C)
D)
E)

Northern Bank: Balance Sheet

Assets Liabilities
Reserves $800 Deposits $10000
Loans $11200 Capital $2000
$12000 $12000

TABLE 27-4

34) Refer to Table 27-4. Northern Bank holds cash in its vault and has some deposits in its account at 34)
the central bank. Under which category on its balance sheet are these funds included?
A) reserves B) liabilities C) loans D) capital E) deposits
Answer: A
Explanation: A)
B)
C)
D)
E)

12
35) The use of money in an economy does which of the following? 35)
A) creates the necessity for a double coincidence of wants.
B) promote specialization and the division of labour.
C) creates a problem of trading a portion of indivisible commodities such as a ship.
D) solves the problem of inflation.
E) promotes the use of barter.
Answer: B
Explanation: A)
B)
C)
D)
E)

36) Suppose a commercial bank has a target reserve ratio of 1 percent, but has an actual reserve ratio of 36)
0.8 percent. This bank will likely
A) allow fewer cash withdrawals by the bank's customers.
B) maintain its new, higher reserve ratio because it is more profitable.
C) expand its portfolio of loans.
D) buy government securities from the Bank of Canada.
E) contract its portfolio of loans.
Answer: E
Explanation: A)
B)
C)
D)
E)

37) Suppose you found a $100 bill that was lost for several years under your grandmother's mattress 37)
and you decided to deposit this money in a commercial bank. If the target reserve ratio were 20
percent and all excess reserves were lent out, your new deposit of $100 would lead to an eventual
expansion of the money supply of
A) $120. B) $200. C) $500. D) $1200. E) $2000.
Answer: C
Explanation: A)
B)
C)
D)
E)

38) The concept of "near money" refers to 38)

A) cheques on demand deposits.
B) assets that fulfill the medium-of-exchange function but not the store of value function.
C) financial assets whose capital values are too unstable for them to be classified as money.
D) money substitutes such as credit cards.
E) assets that fulfill the temporary store-of-value function but not the medium-of-exchange
function.
Answer: E
Explanation: A)
B)
C)
D)
E)

13
39) Fiat money has value because it 39)
A) has intrinsic value equal to its face value.
B) is only fractionally backed by gold.
C) is generally accepted.
D) can be manufactured at will by the issuing government.
E) is fully backed by gold at a fixed ratio.
Answer: C
Explanation: A)
B)
C)
D)
E)

40) The Canada Deposit Insurance Corporation (CDIC) was set up to protect 40)
A) depositors with Canadian dollar accounts in any Canadian financial institution for up to a
maximum of $100 000 per institution.
B) depositors of any currency in any Canadian financial institution for up to a maximum of $100
000 per institution.
C) depositors with Canadian dollar accounts in member institutions for up to a maximum of
$100 000 per eligible deposit.
D) member financial institutions in case of non-payment of loans from the government.
E) member financial institutions in case of non-payment of loans from borrowers.
Answer: C
Explanation: A)
B)
C)
D)
E)

41) Suppose Bank ABC has a target reserve ratio of 10 percent, no excess reserves, and it receives a new 41)
deposit of $500 000. This bank will initially expand its loans by
A) $500 000.
B) $5 million.
C) $50 000.
D) $450 000.
E) $4.5 million.
Answer: D
Explanation: A)
B)
C)
D)
E)

14
 42) As a measure of the Canadian money supply, M2+ is defined as currency in circulation plus 42)
A) term deposits, money market funds and personal savings accounts.
B) term deposits and money market funds at all financial institutions.
C) all chequable deposits.
D) chequable and non-chequable deposits at all financial institutions.
E) savings deposits at the chartered banks and non-bank financial institutions.
Answer: D
Explanation: A)
B)
C)
D)
E)

Bank North's Balance Sheet

Assets Liabilities
Reserves $300 Deposits $2000
Loans $2200 Capital $500
$2500 $2500

TABLE 27-1

43) Refer to Table 27-1. Assume that Bank North is operating at its target reserve ratio and has no 43)
excess reserves. If Bank North receives a new deposit of $400, it can immediately expand its loans
by ________ while maintaining its target reserve ratio.
A) $260 B) $272 C) $400 D) $340 E) $700
Answer: D
Explanation: A)
B)
C)
D)
E)

44) Developments in the financial industry in recent years have resulted in a multitude of types of 44)
deposits. For the purposes of studying the money supply, the most important distinction is between
chequing and savings deposits which are ________ and term deposits and other financial assets
which are ________.
A) media of exchange; not media of exchange
B) money substitutes; near money
C) a unit of account; not a unit of account
D) a store of value; not a store a value
E) a component of the money supply; not a component of the money supply
Answer: A
Explanation: A)
B)
C)
D)
E)

15
45) A bank run is unlikely to occur in Canada today because, 45)
A) the commercial banks are required by law to maintain 100 percent of their deposits in cash.
B) there is relatively little demand for cash at present.
C) if necessary, the central bank can provide all the reserves that are necessary to avoid this
situation.
D) the commercial banks hold enough government securities that are convertible into cash.
E) banking is done mostly electronically.
Answer: C
Explanation: A)
B)
C)
D)
E)

46) Commercial banks in Canada 46)

A) have a reserve ratio of 100 percent.
B) never have excess reserves.
C) have a reserve ratio of zero.
D) have a positive reserve ratio.
E) are required by the Bank Act to hold required reserves.
Answer: D
Explanation: A)
B)
C)
D)
E)

47) Doug compares the unit price of chocolate bars in order to get the "best buy". This represents using 47)
money as
A) a unit of deferred payment.
B) a medium of exchange.
C) a unit of account.
D) a store of value.
E) a money substitute.
Answer: C
Explanation: A)
B)
C)
D)
E)

16
 48) Which of the following examples constitutes a new deposit to the Canadian commercial banking 48)
system?
A) an individual immigrates to Canada and maintains his existing deposits in a foreign bank.
B) an individual transfers money from Ship Shape Credit Union to Scotiabank.
C) the Bank of Canada buys government securities from a Canadian commercial bank.
D) an individual puts cash in a safety-deposit box.
E) the Bank of Canada buys foreign currency from abroad.
Answer: C
Explanation: A)
B)
C)
D)
E)

Bank North's Balance Sheet

Assets Liabilities
Reserves $300 Deposits $2000
Loans $2200 Capital $500
$2500 $2500

TABLE 27-1

49) Refer to Table 27-1. Assume that Bank North is operating at its target reserve ratio and has no 49)
excess reserves, and that all commercial banks have the same target reserve ratio. If a new deposit
to the Canadian banking system of $400 is deposited at Bank North, the total new deposits created
in the banking system can be calculated as follows:
A) 400/.15 = $2666.67
B) 300/.136 = $2205.88
C) 700/.12 = $5833.33
D) 400/.12 = $3333.33
E) not enough information to determine
Answer: A
Explanation: A)
B)
C)
D)
E)

50) A commercial bank's target reserve ratio is the 50)

A) fraction of its deposit liabilities that are backed by gold.
B) fraction of its deposit liabilities that it wishes to holds as reserves, either as cash or as deposits
with the Bank of Canada.
C) fraction of its deposit liabilities that it actually holds as cash in its own vaults.
D) ratio of chequable deposits to term deposits that the bank holds on its books.
E) ratio of Canadian dollars to foreign currencies that the bank holds on its books.
Answer: B
Explanation: A)
B)
C)
D)
E)

17
 51) If most individuals accept paper currency in transactions, and paper currency is convertible into 51)
gold, then banks can safely issue
A) paper currency equal to the bank's commercial debt divided by their gold reserves.
B) as much paper currency as they please.
C) more paper currency than the value of the gold they hold.
D) no more paper currency than the value of the gold they hold.
E) paper currency equal to a fraction of the gold they hold.
Answer: C
Explanation: A)
B)
C)
D)
E)

Consider the following situation in the Canadian banking system:

· The Bank of Canada purchases $5 million worth of government securities

from an investment dealer with a cheque drawn on the Bank of Canada.
· The dealer deposits this cheque at Bank XYZ, a commercial bank.
· The target reserve ratio for all banks is 25 percent.
· All commercial banks operate with no excess reserves.
· There is no cash drain.

TABLE 27-2

52) Refer to Table 27-2. Bank XYZ is immediately in a position to expand its loans by 52)
A) $1.25 million.
B) $3.75 million.
C) $5 million.
D) $20 million.
E) $15 million.
Answer: B
Explanation: A)
B)
C)
D)
E)

53) The M2++ and M3 definitions of the money supply include financial assets 53)
A) that are easily convertible into a medium of exchange.
B) such as a credit card.
C) such as term deposits at non-bank financial institutions.
D) such as a government Treasury bill.
E) such as term deposits at the chartered banks.
Answer: A
Explanation: A)
B)
C)
D)
E)

18
54) Other things being equal, a rise in the price level will 54)
A) stabilize the value of money.
B) increase the purchasing power of money.
C) have no effect on the value of money
D) increase the value of money.
E) decrease the purchasing power of money.
Answer: E
Explanation: A)
B)
C)
D)
E)

55) In order to be considered "money", paper currency must be 55)

A) impossible to counterfeit.
B) convertible into a precious metal.
C) issued by a government agency.
D) generally acceptable as a medium of exchange.
E) issued by a chartered bank.
Answer: D
Explanation: A)
B)
C)
D)
E)

56) Doug is saving money in order to purchase a new snowboard next winter. This represents using 56)
money as
A) a medium of deferred payment.
B) method of barter.
C) a store of value.
D) a medium of exchange.
E) a unit of account.
Answer: C
Explanation: A)
B)
C)
D)
E)

19
57) Suppose the Canadian banking system jointly has $20 million in reserves (cash and deposits at the 57)
Bank of Canada), all banks have a target reserve ratio of 20 percent, and there are no excess
reserves. What is the amount of deposits in the banking system?
A) $100 million
B) $4 million
C) $80 million
D) $40 million
E) $120 million
Answer: A
Explanation: A)
B)
C)
D)
E)

58) The major problem of a currency that is fractionally backed and convertible into a precious metal is 58)
that of
A) clipping, which debases the metal coins.
B) maintaining its convertability into the metal.
C) perennial shortages of paper currency.
D) paper money being less durable than gold.
E) counterfeiting.
Answer: B
Explanation: A)
B)
C)
D)
E)

59) The currency that is in circulation in Canada today is 59)

A) fully backed by gold held at the central bank.
B) not officially backed by anything.
C) backed by the U.S. dollar.
D) backed by the euro.
E) fractionally backed by gold.
Answer: B
Explanation: A)
B)
C)
D)
E)

20
60) Basic functions of the Bank of Canada include 60)
1) acting as lender of last resort to private non-financial corporations;
2) acting as banker for the chartered banks.
3) regulating the money supply.
A) 2 only B) 3 only C) 1, 2, and 3 D) 2 and 3 E) 1 only
Answer: D
Explanation: A)
B)
C)
D)
E)

61) Credit cards are considered to be "money substitutes" instead of money because 61)
A) they cannot serve as a temporary medium of exchange.
B) they are not acceptable to pay for purchases.
C) money must eventually be used to pay for the transaction.
D) credit card accounts are not chequable.
E) the only function of money they can perform is to serve as a store of value.
Answer: C
Explanation: A)
B)
C)
D)
E)

62) For a country to be on a "gold standard", it must 62)

A) use gold coins as money and promise never to debase its coins.
B) use gold as money, but not necessarily in the form of gold coins.
C) make its currency convertible into gold at a fixed rate of exchange.
D) use gold as fiat money.
E) use gold coins as money.
Answer: C
Explanation: A)
B)
C)
D)
E)

63) Gresham's law predicts that 63)

A) good money drives out bad money.
B) money is neutral in the long run.
C) undebased money will be driven from circulation.
D) debased money will be driven from circulation.
E) debased money will circulate with undebased money.
Answer: C
Explanation: A)
B)
C)
D)
E)

21
 64) Without a central bank, commercial banks in Canada would probably hold ________ reserves than 64)
they do now, resulting in a ________ money supply than at present.
A) more; larger
B) more; smaller
C) less; larger
D) less; smaller
E) the same; the same
Answer: B
Explanation: A)
B)
C)
D)
E)

65) Suppose a student deposits into a downtown bank a $200 cheque that she received from her 65)
parents in the suburbs. This transaction alone would
A) decrease the money supply.
B) decrease the money supply by $1000 if the target reserve ratio was 20 percent.
C) increase the money supply by an indeterminate amount.
D) not change the money supply.
E) increase the money supply by $1000 if the target reserve ratio was 20 percent.
Answer: D
Explanation: A)
B)
C)
D)
E)

Northern Bank: Balance Sheet

Assets Liabilities
Reserves $800 Deposits $10000
Loans $11200 Capital $2000
$12000 $12000

TABLE 27-4

66) Refer to Table 27-4. Assume that Northern Bank's target reserve ratio is 10 percent. In order to 66)
achieve its target reserve ratio, Northern Bank must ________ and ________.
A) increase its reserves by $400; increase its loans by $800
B) increase its reserves by $200; decrease its loans by $200
C) not change its reserves; not change its deposits
D) increase its reserves by $400; decrease its deposits by $400
E) increase its reserves by $200; decrease its deposits by $200
Answer: B
Explanation: A)
B)
C)
D)
E)

22
 67) The expansion of deposits resulting from an injection of cash to the banking system can be 67)
calculated as follows:
A) the change in deposits is equal to the change in loans divided by the sum of the target reserve
ratio.
B) the change in deposits is equal to the change in reserves divided by the cash-deposit ratio.
C) the change in deposits is equal to the change in reserves divided by the sum of excess reserves
and cash drain.
D) the change in deposits is equal to the change in reserves divided by the sum of the target
reserve ratio and the cash-deposit ratio.
E) the change in deposits is equal to the change in reserves divided by the target reserve ratio.
Answer: D
Explanation: A)
B)
C)
D)
E)

68) A commercial bank's actual reserve ratio is the 68)

A) fraction of its deposit liabilities that it actually holds as reserves, either as cash or as deposits
with the Bank of Canada.
B) ratio of chequable deposits to term deposits that it holds on its books.
C) fraction of its deposit liabilities that it actually holds as gold, other precious metal or cash in
its own vaults.
D) fraction of its deposit liabilities that are backed by gold.
E) ratio of Canadian dollars to foreign currencies that it holds on its books.
Answer: A
Explanation: A)
B)
C)
D)
E)

Bank North's Balance Sheet

Assets Liabilities
Reserves $300 Deposits $2000
Loans $2200 Capital $500
$2500 $2500

TABLE 27-1

69) Refer to Table 27-1. If Bank North receives a new deposit of $400, its actual reserve ratio 69)
immediately becomes
A) 25% B) 7% C) 35% D) 29% E) 15%
Answer: D
Explanation: A)
B)
C)
D)
E)

23
70) Consider a new deposit of $10 000 to the Canadian banking system. The bank that initially receives 70)
this deposit will find itself with
A) no excess reserves if there is no reserve requirement.
B) $1000 of excess cash reserves if its target reserve ratio is 10 percent.
C) $2000 of excess cash reserves if its target reserve ratio is 10 percent.
D) $8000 of excess cash reserves if its target reserve ratio is 20 percent.
E) $10 000 of excess cash reserves if its target reserve ratio is 100 percent.
Answer: D
Explanation: A)
B)
C)
D)
E)

71) If all the commercial banks in the banking system collectively have $300 million in cash reserves 71)
and are satisfying their target reserve ratio of 20 percent, what is the amount of deposits they have?
A) $1500 million
B) $0
C) $600 million
D) $2000 million
E) $60 million
Answer: A
Explanation: A)
B)
C)
D)
E)

72) Suppose Bank ABC has a target reserve ratio of 10 percent. If Bank ABC receives a new deposit of 72)
$100 000 it will immediately find itself with
A) excess cash reserves of $90 000.
B) excess cash reserves of $10 000.
C) excess cash reserves of $100 000.
D) no excess cash reserves.
E) excess cash reserves equal to 10 percent of its deposits.
Answer: A
Explanation: A)
B)
C)
D)
E)

73) If the target reserve ratio in the banking system is 20 percent, there is no cash drain, and there are 73)
no excess reserves, a new deposit of $1 will lead to an eventual expansion of the money supply of
A) $0.20 B) $1.20 C) $2.00 D) $5.00 E) $20.00
Answer: D
Explanation: A)
B)
C)
D)
E)

24
74) The major advantage of using money rather than barter is that 74)
A) money is universally accepted.
B) in the barter system there is no way to express values of commodities.
C) money is the only convenient way to store one's wealth.
D) the use of money significantly reduces transactions costs.
E) money stays where you put it, whereas a cow often has to be fenced in.
Answer: D
Explanation: A)
B)
C)
D)
E)

75) Suppose Bank ABC has a target reserve ratio of 2 percent. If Bank ABC receives a new deposit of 75)
$50 million it will immediately find itself with
A) excess cash reserves of $10 million.
B) no excess cash reserves.
C) excess cash reserves of $49.5 million.
D) excess cash reserves of $49 million.
E) excess cash reserves of $1 million.
Answer: D
Explanation: A)
B)
C)
D)
E)

76) The money supply in Canada is measured using M1, M2, M2+, and M3. The reason there are so 76)
many measures of the money supply is that
A) it is a convenient way for provincial and federal governments to hide their budgetary
surpluses.
B) only the newer and broader measurements are correct but the older measurements are still
used so that historical comparisons are possible.
C) the Bank of Canada wants to confuse the general public.
D) different kinds of bank accounts represent different functions of money, and so the various
measures are used to reflect these different functions.
E) the money supply is too large to have only one measurement.
Answer: D
Explanation: A)
B)
C)
D)
E)

25
 Bank North's Balance Sheet
Assets Liabilities
Reserves $300 Deposits $2000
Loans $2200 Capital $500
$2500 $2500

TABLE 27-1

77) Refer to Table 27-1. Assume that Bank North is operating with no excess reserves. What is their 77)
actual reserve ratio?
A) 15% B) 20% C) 25% D) 13.67% E) 12%
Answer: A
Explanation: A)
B)
C)
D)
E)

78) When metal coins, such as gold and silver, were used as money, a technique which helped to 78)
prevent the reduction of their value through clipping was
A) milling.
B) sweating.
C) debasement.
D) re-minting.
E) basing.
Answer: A
Explanation: A)
B)
C)
D)
E)

26
Consider the following situation in the Canadian banking system:

· The Bank of Canada purchases $5 million worth of government securities

from an investment dealer with a cheque drawn on the Bank of Canada.
· The dealer deposits this cheque at Bank XYZ, a commercial bank.
· The target reserve ratio for all banks is 25 percent.
· All commercial banks operate with no excess reserves.
· There is no cash drain.

TABLE 27-2

79) Refer to Table 27-2. Suppose, in addition, that the public decides to hold 5 percent of their deposits 79)
in cash. As a result of the new deposit, the money supply would eventually
A) increase by $16.67 million.
B) decrease by $20 million.
C) increase by $20 million.
D) decrease by $16.67 million.
E) decrease by $ 8.33 million.
Answer: A
Explanation: A)
B)
C)
D)
E)

80) Most Canadians accept Canadian dollars in payment for goods and services in Canada because 80)
they have confidence that the dollar
A) is accepted by foreigners as more stable than their own currency.
B) is fully convertible into gold.
C) is fully convertible into American dollars at a set exchange rate.
D) will be accepted in the future.
E) is fully backed by the British pound sterling.
Answer: D
Explanation: A)
B)
C)
D)
E)

27
Consider the following situation in the Canadian banking system:

· The Bank of Canada purchases $5 million worth of government securities

from an investment dealer with a cheque drawn on the Bank of Canada.
· The dealer deposits this cheque at Bank XYZ, a commercial bank.
· The target reserve ratio for all banks is 25 percent.
· All commercial banks operate with no excess reserves.
· There is no cash drain.

TABLE 27-2

81) Refer to Table 27-2. The maximum creation of new deposits by the banking system, including the 81)
dealer's original deposit at Bank XYZ, is
A) $25 million.
B) $22.5 million.
C) $20 million.
D) $15 million.
E) $5 million.
Answer: C
Explanation: A)
B)
C)
D)
E)

82) The main distinction between M2 and M2+ is that M2+ also includes 82)
A) coins in circulation.
B) deposits at financial institutions other than the chartered banks.
C) deposits at trust companies, caisse populaires and foreign-currency accounts.
D) paper currency.
E) money market mutual funds held by the Bank of Canada.
Answer: B
Explanation: A)
B)
C)
D)
E)

28
83) An example of the use of money as a medium of exchange is: 83)
A) Mike gets a friend to give him a beer today in return for promising to give the friend two beer
when Mike gets paid at the end of the month.
B) Judy lends her car to a friend who signs a promissory note that she will pay Judy $10 a day
for the use of the car after she returns the car to Judy.
C) ABC Investments Inc. enters in its account books that it owes Nallai $20 for his last month's
investment income.
D) Dave keeps $250 in his drawer for a 'rainy day'.
E) Barry pays $275 with his bank debit card for tickets for an NHL play-off game.
Answer: E
Explanation: A)
B)
C)
D)
E)

84) Until recently, and for many years, the common definition of the money supply used by the Bank 84)
of Canada was M1, which included currency in circulation plus
A) savings accounts and demand loans.
B) chequable deposits and savings accounts at the chartered banks.
C) chequable deposits at the chartered banks.
D) chequable deposits at all financial institutions.
E) term deposits and money market funds.
Answer: C
Explanation: A)
B)
C)
D)
E)

85) Commercial banks in Canada are prohibited by law from 85)

A) lending money to households and firms.
B) issuing paper currency.
C) settling inter-bank debts through a clearinghouse.
D) accepting demand deposits.
E) accepting term deposits.
Answer: B
Explanation: A)
B)
C)
D)
E)

29
86) If all the banks in the banking system collectively have $20 million in cash reserves, and have a 86)
target reserve ratio of 5 percent, the maximum amount of deposits the banking system can support
is
A) $4 million.
B) $40 million.
C) $80 million.
D) $100 million.
E) $400 million.
Answer: E
Explanation: A)
B)
C)
D)
E)

87) Suppose that the excess reserves in Toronto Dominion Bank increase by $700. Given a target 87)
reserve ratio of 1.0 percent and no cash drain, the maximum change in deposits for the entire
banking system would be
A) $28 000.00.
B) $700.00.
C) $682.50.
D) $17 500.00.
E) $70 000.00.
Answer: E
Explanation: A)
B)
C)
D)
E)

88) If the Bank of Canada enters the open market and sells $1000 of government securities, what will be 88)
the eventual change in the money supply given a 10 percent target reserve ratio in the commercial
banking system and a 10 percent cash drain?
A) decrease of $10 000
B) decrease of $5000
C) increase of $10 000
D) increase of $5000
E) decrease of $1000
Answer: B
Explanation: A)
B)
C)
D)
E)

30
89) Which of the following is an example of "near money"? 89)
A) mortgage on a house
B) Scotiabank credit card
C) 30-day Treasury bill
D) American Express card
E) car loan
Answer: C
Explanation: A)
B)
C)
D)
E)

90) In recent years, the use of debit cards issued by commercial banks has skyrocketed. When you pay 90)
for a purchase at a store using a debit card, you are
A) authorizing the transfer of cash from your bank account to the merchant's bank account.
B) authorizing an electronic transfer of deposit money from you to the merchant.
C) creating an electronic debt to the merchant.
D) authorizing the transfer of bank notes from you to the merchant.
E) authorizing an electronic transfer of a money substitute from you to the merchant.
Answer: B
Explanation: A)
B)
C)
D)
E)

91) The biggest disadvantage of a barter system compared to one that uses money is that 91)
A) it is difficult to find goods to trade in a barter system that satisfy the needs of society.
B) a standardized unit of account cannot exist in a barter system.
C) commodities are difficult to use as a store of value.
D) each trade requires a double coincidence of wants.
E) commodities are difficult to transport and therefore inefficient for exchange.
Answer: D
Explanation: A)
B)
C)
D)
E)

31
92) When you pay for your $74 purchase at the grocery store with a debit card, you are 92)
A) withdrawing $74 from your bank account with which you pay for your groceries.
B) transferring $74 of currency from your bank account to the grocery store's bank account.
C) transferring your claim on $74 worth of gold to the grocery store.
D) essentially promising the grocery store that your bank will pay them $74 at the end of the
month when debts are settled.
E) electronically transferring $74 of deposit money from your bank account to the grocery store's
bank account.
Answer: E
Explanation: A)
B)
C)
D)
E)

93) Consider a new deposit of $10 000 to the Canadian banking system. Assuming that all Canadian 93)
banks have a target reserve ratio of 2 percent, and that there is no cash drain, the banking system as
a whole could create ________ as a result of this single new deposit.
A) $10 000 of new deposits
B) $50 000 of new deposits
C) $500 000 of new deposits
D) $980 000 of additional loans
E) $1 000 000 of additional loans
Answer: C
Explanation: A)
B)
C)
D)
E)

94) Suppose you found a $100 bill that was lost for several years under your grandmother's mattress. If 94)
the banking system has a cash drain of 5 percent, its target reserve ratio is 20 percent, and all excess
reserves were lent out, your new deposit of the $100 bill would lead to an eventual expansion of the
money supply of
A) $20. B) $25. C) $200. D) $400. E) $500.
Answer: D
Explanation: A)
B)
C)
D)
E)

32
95) Which of the following entries would appear on the assets side of a commercial bank's balance 95)
sheet?
A) Government of Canada deposits
B) Government of Canada securities
C) savings deposits
D) chequable deposits
E) shareholders' equity
Answer: B
Explanation: A)
B)
C)
D)
E)

96) Suppose that the excess reserves in Toronto Dominion Bank increase by $700. Given a desired 96)
reserve ratio of 2.5 percent and no cash drain, the maximum change in deposits for the entire
banking system would be
A) $682.50.
B) $70 000.00.
C) $28 000.00.
D) $700.00.
E) $17 500.00.
Answer: C
Explanation: A)
B)
C)
D)
E)

97) Which of the following is consistent with the predictions of Gresham's law? 97)
A) The disappearance of U.S. coins circulating in Canada during periods when the Canadian
dollar is worth less than the U.S. dollar.
B) Increases in the money supply led to the hyperinflation of the 1920s in Germany.
C) Debasement of a metallic money will be followed by inflation.
D) The increased circulation of U.S. coins in Canada during periods when the Canadian dollar is
worth significantly less than the U.S. dollar.
E) An increase in the money supply will be followed by inflation.
Answer: A
Explanation: A)
B)
C)
D)
E)

33
 98) In reality, the reserve ratio for Canadian commercial banks is close to ________ percent, which 98)
means that the deposit creation process is ________.
A) 20; similar to that discussed in the text
B) 100; very weak
C) 0.1; extremely powerful
D) 5; powerful
E) 50; weak
Answer: D
Explanation: A)
B)
C)
D)
E)

99) When you are estimating your monthly income and expenses, money is being used as 99)
A) a unit of account.
B) a medium of exchange.
C) a money substitute.
D) a standard unit of deferred payment.
E) a store of value.
Answer: A
Explanation: A)
B)
C)
D)
E)

Consider the following situation in the Canadian banking system:

· The Bank of Canada purchases $5 million worth of government securities

from an investment dealer with a cheque drawn on the Bank of Canada.
· The dealer deposits this cheque at Bank XYZ, a commercial bank.
· The target reserve ratio for all banks is 25 percent.
· All commercial banks operate with no excess reserves.
· There is no cash drain.

TABLE 27-2

100) Refer to Table 27-2. If Bank XYZ increases its loans to the maximum extent possible with its new 100)
excess reserves, the second-generation banks will be able to expand their loans by
A) $3.75 million.
B) $1.00 million.
C) $0.94 million.
D) $2.81 million.
E) $1.50 million.
Answer: D
Explanation: A)
B)
C)
D)
E)

34
101) The financial crisis that occurred in 2007 and 2008 highlighted one of the crucial functions of 101)
commercial banks and other financial institutions in developed economies. A crucial function that
ceased to work smoothly during this time, and contributed to the global recession that began in
2008, was
A) the joint regulation of financial markets.
B) the provision of credit to firms and households.
C) cheque clearing and collection.
D) the clearing of electronic transfers.
E) the acceptance of deposits from firms and households.
Answer: B
Explanation: A)
B)
C)
D)
E)

102) The function of money in an economy is to serve as 102)

1) a unit of account;
2) a store of value;
3) a medium of exchange.
A) 1 and 2 B) 3 only C) 2 and 3 D) 1 and 3 E) 1, 2, and 3
Answer: E
Explanation: A)
B)
C)
D)
E)

103) The largest component of the assets of the Bank of Canada is 103)
A) Government of Canada deposits.
B) loans to private individuals.
C) Government of Canada securities.
D) notes and coins in circulation.
E) loans to commercial banks.
Answer: C
Explanation: A)
B)
C)
D)
E)

35
104) Money is commonly defined as 104)
A) foreign-exchange reserves.
B) paper currency.
C) the Canadian dollar.
D) gold.
E) a generally accepted medium of exchange.
Answer: E
Explanation: A)
B)
C)
D)
E)

105) If all the banks in the banking system collectively have $20 million in cash reserves and have a 105)
target reserve ratio of 20 percent, the maximum amount of deposits the banking system can support
is
A) $4 million.
B) $40 million.
C) $80 million.
D) $100 million.
E) $400 million.
Answer: D
Explanation: A)
B)
C)
D)
E)

106) The M2 and M2+ definitions of the money supply concentrate on the ________ function of money. 106)
A) accounting
B) store of value
C) unit of account
D) medium-of-exchange
E) deposit-creation
Answer: D
Explanation: A)
B)
C)
D)
E)

36
 Northern Bank: Balance Sheet
Assets Liabilities
Reserves $800 Deposits $10000
Loans $11200 Capital $2000
$12000 $12000

TABLE 27-4

107) Refer to Table 27-4. Owners of Northern Bank contributed money to start the bank. Under which 107)
category of it's balance sheet do these funds fall?
A) capital B) assets C) reserves D) loans E) deposits
Answer: A
Explanation: A)
B)
C)
D)
E)

108) An example of "interbank activities" in the Canadian banking system is 108)

A) jointly regulating financial markets.
B) jointly regulating the money supply.
C) lender of last resort to the banking system.
D) banks lending money to each other in order to meet daily cash requirements.
E) banks pooling their money together to fund the operations of the Bank of Canada.
Answer: D
Explanation: A)
B)
C)
D)
E)

37
Consider the following situation in the Canadian banking system:

a) An investment dealer withdraws $10 million from its account at Bank XYZ to
purchase government securities from the Bank of Canada.
b) As a result, $10 million has been withdrawn from the Canadian banking system.
c) The target reserve ratio for all banks is 10 percent.
d) All commercial banks operate with no excess reserves.
e) There is no cash drain.

TABLE 27-3

109) Refer to Table 27-3. Bank XYZ is immediately in a position to 109)

A) decrease its loans by $100 million.
B) increase loans by $9 million.
C) decrease its loans by $10 million.
D) decrease its loans by $9 million.
E) increase loans by $10 million
Answer: D
Explanation: A)
B)
C)
D)
E)

110) Which of the following examples constitutes a new deposit to the Canadian commercial banking 110)
system?
A) an individual puts cash in a safety-deposit box
B) the Bank of Canada sells government securities to an individual or a firm
C) an individual transfers money from ShipShape Credit Union to Scotiabank
D) an individual immigrates to Canada and deposits money from abroad
E) the Bank of Canada buys foreign currency from abroad
Answer: D
Explanation: A)
B)
C)
D)
E)

111) The largest element of the Canadian money supply today is 111)
A) the debt of the federal government.
B) bank deposits.
C) paper money.
D) coins.
E) gold.
Answer: B
Explanation: A)
B)
C)
D)
E)

38
112) Suppose a commercial bank has a level of target reserves of $500 million and actual reserves of 112)
$575 million. This bank's ________ is/are $75 million.
A) reserve ratio
B) cash drain
C) profits
D) fractional reserves
E) excess reserves
Answer: E
Explanation: A)
B)
C)
D)
E)

113) Consider a new deposit of $100 000 to the Canadian banking system. The commercial bank that 113)
initially receives this deposit will find itself with
A) no excess reserves if there is no reserve requirement.
B) $1 000 of excess cash reserves if its target reserve ratio is 10 percent.
C) $2 000 of excess cash reserves if its target reserve ratio is 2 percent.
D) $10 000 of excess cash reserves if its target reserve ratio is 10 percent.
E) $98 000 of excess cash reserves if its target reserve ratio is 2 percent.
Answer: E
Explanation: A)
B)
C)
D)
E)

114) Assume that Bank ABC has a target reserve ratio of 10 percent. If Bank ABC receives a new deposit 114)
of $100 000, the largest new loan this bank could initially make, and maintain its target reserve
ratio, is
A) $900 000. B) $100 000. C) $ 90 000. D) $ 1000. E) $ 10 000.
Answer: C
Explanation: A)
B)
C)
D)
E)

115) One implication of an increase in the cash drain to the public is that the 115)
A) banking system's ability to create new money following a new deposit is reduced.
B) desired ratio is reduced.
C) desired reserve ratio is increased.
D) amount of new money that can be created from a new source of reserves is increased.
E) banking system cannot create any additional money following a new deposit.
Answer: A
Explanation: A)
B)
C)
D)
E)

39
Answer Key
Testname: C27

1) E
2) C
3) C
4) B
5) C
6) C
7) D
8) C
9) D
10) E
11) E
12) E
13) C
14) D
15) B
16) B
17) E
18) E
19) B
20) C
21) B
22) D
23) C
24) B
25) E
26) A
27) B
28) E
29) D
30) D
31) D
32) B
33) E
34) A
35) B
36) E
37) C
38) E
39) C
40) C
41) D
42) D
43) D
44) A
45) C
46) D
47) C
48) C
49) A
50) B
40
Answer Key
Testname: C27

51) C
52) B
53) A
54) E
55) D
56) C
57) A
58) B
59) B
60) D
61) C
62) C
63) C
64) B
65) D
66) B
67) D
68) A
69) D
70) D
71) A
72) A
73) D
74) D
75) D
76) D
77) A
78) A
79) A
80) D
81) C
82) B
83) E
84) C
85) B
86) E
87) E
88) B
89) C
90) B
91) D
92) E
93) C
94) D
95) B
96) C
97) A
98) D
99) A
100) D
41
Answer Key
Testname: C27

101) B
102) E
103) C
104) E
105) D
106) D
107) A
108) D
109) D
110) D
111) B
112) E
113) E
114) C
115) A

42