chapter 13 sample questions and answers PDF

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Economics Today: The Macro View, 5Ce (Miller) Practice Quiz Chapter 13 Money Creation and Deposit Insurance 1) Fractional reserve banking refers to a banking system in which A) bank deposits are less than bank reserves. B) bank reserves are only a fraction of total deposits. C) bank reserves are only a fraction of desired reserves. D) bank loans are less than bank reserves. Answer: B 2) Economists generally agree that there is a relationship between the rate of growth of the money supply and A) government spending. B) planned investment. C) the Toronto stock exchange. D) inflation. Answer: A 3) Goldsmiths were able to practice an early form of fractional reserve banking because they knew that A) people were relatively unsophisticated in their financial transactions. B) gold was the major form of money. C) not all depositors would claim their gold at the same time. D) gold did not serve as a unit of account. Answer: C 4) Most economists would argue that a significant increase in the supply of money will A) decrease technological change. B) reduce the price level. C) be inflationary. D) help the manufacturing sector at the expense of the service sector. Answer: C 5) Which of the following is a TRUE statement? A) Decreases in the money supply lead to increases in the inflation rate. B) Increases in the money supply lead to a decrease in the price level. C) Changes in the rate of growth of the money supply lead to increases in the inflation rate. D) There is no relationship between money supply and inflation. Answer: C 6) Desired reserves consist of A) deposits in the Bank of Canada plus vault currency cash. B) deposits in the Bank of Canada only. C) vault cash only. D) savings and chequing accounts only. Answer: A

Table 13-1 ABC Bank Balance Sheet Assets Reserves Desired Excess Loans Total Assets

Liabilities $25,000 $20,000 5,000 75,000 $100,000

Demand Deposits

$100,000

Total Liabilities

$100,000

7) According to Table 13-1, the desired reserve ratio for the ABC Bank is A) 5 percent. B) 15 percent. C) 20 percent. D) 10 percent. Answer: C 8) In Table 13-1, suppose that $10,000 in new deposits is received by the bank. If there were no other changes in the balance sheet, then the bank would be in a position to make new loans in the amount of A) $13,000. B) $15,000. C) $10,000. D) $8,000. Answer: A 9) With the fractional banking system in Canada, a commercial bank with $1,000 of deposits generally would A) maintain $1,000 of cash reserves. B) have no reserves. C) maintain less than $1,000 but more than $0 in cash reserves. D) maintain more than $1,000 of cash reserves. Answer: C 10) Actual reserves are A) stocks and bonds that depository institutions are desired by law to hold as reserves. B) anything that depository institutions are allowed to hold as reserves. C) the same thing as desired reserves. D) the percentage of total deposits that depository institutions are allowed to loan out. Answer: B 11) A bank with $200 million in deposits keeps $20 million of cash in the bank vault, $10 million in deposits at the Bank of Canada, and $5 million in government securities in the bank vault. Its

actual reserves equal A) $10 million. B) $20 million. C) $30 million. D) $35 million. Answer: C 12) Suppose that the desired reserve ratio is 20 percent and that a bank is just meeting that requirement when $10,000 in cash is withdrawn from a demand deposit. The bank must now A) decrease its reserves by $2,000. B) increase its reserves by $8,000. C) make $200,000 in new loans. D) do nothing since both its assets and liabilities are affected equally. Answer: B 13) A commercial bank with negative excess reserves A) cannot legally make additional loans. B) has deposited too much money at the Bank of Canada. C) should loan reserves to other banks. D) is technically bankrupt. Answer: A 14) A bank with deposits of $200 million keeps $20 million in cash in its vault, $15 million of deposits at the Bank of Canada, and $10 million in government securities. The desired reserve requirement is 15 percent. The bank has excess reserves of A) 0. B) $5 million. C) $15 million. D) $20 million. Answer: B 15) Banks have an incentive to A) minimize excess reserves because the bank has to pay a fee to the Bank of Canada for holding excess reserves. B) minimize excess reserves because reserves produce no income. C) hold substantial excess reserves in case there is an unexpectedly heavy demand for withdrawals. D) hold substantial excess reserves because the bank's profits come from excess reserves. Answer: B 16) The desired reserve ratio is 10 percent. A bank with $10 million in deposits has $700,000 in vault cash and $200,000 on deposit with the Bank of Canada. A person deposits a cheque for $1 million in the bank. The excess reserves of the bank are now A) $1 million. B) $900,000. C) $800,000.

D) -$100,000. Answer: C 17) A bank holding only deposits of $800 and loans of $1000 would have a net worth of A) -$200. B) $200. C) $1,000. D) $1,800. Answer: B 18) Following a new deposit of $200, a commercial bank subject to a 15 percent desired reserve ratio will have what eventual change to its balance sheet? A) increases in reserves of $30, in loans of $170, and in demand deposits of $200 B) increases in loans of $200 and in demand deposits of $200 C) increases in loans of $850, in reserves of $150 and in deposits of $1000 D) increases in reserves of $170, in demand deposits of $200 and in net worth of $30 Answer: A 19) The reason that the commercial banking system can generate a multiple expansion or contraction of the money supply is that A) banks desire to hold only a fraction of their deposit liabilities as reserves. B) most banks maintain a relatively large stock of excess reserves. C) banks hold reserves equal to their net worth. D) banks generally have surplus funds on deposit with other banks. Answer: A 20) The actual change in the money supply equals A) the actual change in excess reserves. B) the change in excess reserves times the money multiplier. C) the change in required reserves times the money multiplier. D) the change in reserves times the reserve requirement ratio. Answer: B 21) If the desired reserve requirement is raised, the money multiplier A) is lowered. B) is increased. C) stays the same. D) is doubled. Answer: A 22) The larger the desired reserve ratio, A) the greater the increase in the money supply for an increase in bank deposits. B) the more apt there will be currency drains. C) the smaller the maximum money multiplier. D) the more difficult for the Bank of Canada to control the money supply. Answer: C

23) The more people decide to hold currency, the A) larger the actual money multiplier. B) smaller the actual money multiplier. C) larger the money supply. D) greater control the Bank of Canada has over the money supply. Answer: B 24) The Canadian Deposit Insurance Corporation insures A) banks against lawsuits. B) the federal funds market. C) the deposits held in member banks. D) the deposits held in the Bank of Canada. Answer: C 25) If depository insurance exists, bank managers may make riskier loans than they would have otherwise, which is an example of A) regulatory lag. B) irrational behaviour. C) moral hazard. D) adverse selection. Answer: C...