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If a central bank wanted to increase the money supply, which of the following would it most likely do?


A) It would make open market purchases and lower the bank rate.
B) It would make open market sales and lower the bank rate.
C) It would make open market purchases and raise the bank rate.
D) It would make open market sales and raise the bank rate.

E) All of the above
F) B) and C)

Correct Answer

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Which of the following lists contains only actions that increase the money supply?


A) lower the bank rate; raise the reserve requirement ratio
B) lower the bank rate; lower the reserve requirement ratio
C) raise the bank rate; raise the reserve requirement ratio
D) raise the bank rate; lower the reserve requirement ratio

E) B) and C)
F) B) and D)

Correct Answer

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If the reserve ratio is 100 percent, how much will the money supply eventually increase if there is a deposit of $500 of paper money in a bank?


A) $5000
B) $1000
C) $500
D) $0

E) A) and B)
F) All of the above

Correct Answer

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In order for currency to be widely used as a medium of exchange, it is sufficient for the government to designate it as legal tender.

A) True
B) False

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Use the balance sheet for the following questions. Table 29-3 Use the balance sheet for the following questions. Table 29-3 -Refer to Table 29-3. If the reserve requirement is 30 percent, what is this bank's reserve position? A) It has $29 000 of excess reserves. B) It needs $10 000 more in reserves to meet its reserve requirements. C) It needs $29 000 more in reserves to meet its reserve requirements. D) It just meets its reserve requirement. -Refer to Table 29-3. If the reserve requirement is 30 percent, what is this bank's reserve position?


A) It has $29 000 of excess reserves.
B) It needs $10 000 more in reserves to meet its reserve requirements.
C) It needs $29 000 more in reserves to meet its reserve requirements.
D) It just meets its reserve requirement.

E) A) and C)
F) C) and D)

Correct Answer

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Suppose a bank has $200 000 in deposits and $180 000 in loans. What is its reserve ratio?


A) 1 percent
B) 5 percent
C) 10 percent
D) 18 percent

E) A) and D)
F) All of the above

Correct Answer

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In a fractional reserve banking system with no excess reserves and no currency holdings, suppose the central bank buys $100 million of bonds. Which of the following best describes the effects of this open market operation?


A) Reserves and the money supply increase by less than $100 million.
B) Reserves increase by $100 million and the money supply increases by $100 million.
C) Reserves increase by $100 million and the money supply increases by more than $100 million.
D) Both reserves and the money supply increase by more than $100 million.

E) None of the above
F) All of the above

Correct Answer

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Who appoints the members of the Board of Directors at the Bank of Canada?


A) the Governor General
B) the Minister of Finance
C) the Director of the IMF
D) the Prime Minister

E) All of the above
F) B) and C)

Correct Answer

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What is the role of the Minister of Finance with respect to the Bank of Canada or the banking system?


A) to control all activities of the Bank of Canada
B) to issue the Governor of Bank of Canada a written directive to resign
C) to issue currency
D) to maintain the stability of the banking system

E) A) and D)
F) None of the above

Correct Answer

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Which of the following is a characteristic of paper money?


A) It has a high intrinsic value.
B) It is used in a barter economy.
C) It is valuable because it is generally accepted in trade.
D) It is valuable only because of the legal tender requirement.

E) C) and D)
F) B) and C)

Correct Answer

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During wars, the public tends to hold relatively more currency and relatively fewer deposits. Which of the following best describes the effects of this increase in currency holdings?


A) Reserves would decrease, and the money supply would increase.
B) Reserves and the money supply would decrease.
C) Reserves would increase, but the money supply would be unchanged.
D) Reserves would decrease, but the money supply would be unchanged.

E) None of the above
F) B) and D)

Correct Answer

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During recessions, banks typically choose to hold more excess reserves relative to their deposits. Which of the following best describes the effects of the increase in reserves?


A) The money multiplier increases, and the money supply increases.
B) The money multiplier decreases, and the money supply decreases.
C) The money multiplier does not change, but the money supply increases.
D) The money multiplier does not change, but the money supply decreases.

E) B) and D)
F) B) and C)

Correct Answer

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Is there tradeoff between inflation and unemployment?


A) There is a short-run tradeoff between inflation and unemployment.
B) There is a long-run tradeoff between inflation and unemployment.
C) There is a tradeoff between inflation and unemployment both in the short-run and long-run.
D) There is no relationship between inflation and unemployment.

E) A) and B)
F) A) and C)

Correct Answer

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Which of the following best illustrates the unit of account function of money?


A) You list prices for candy sold on your Web site, www.sweettooth.com, in dollars.
B) You pay for your NHL tickets with dollars.
C) You keep $10 in your backpack for emergencies.
D) You sell a used copy of your textbook for $40.

E) B) and D)
F) B) and C)

Correct Answer

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Use the balance sheet for the following questions. Table 29-3 Use the balance sheet for the following questions. Table 29-3 -Refer to Table 29-3. If the reserve requirement is 10 percent and then someone deposits $50 000 into the bank, what is the bank's reserve position? A) It will have $57 000 in excess reserves. B) It will have $52 000 in excess reserves. C) It will need to raise reserves by $5000. D) It will have excess reserves of $2000. -Refer to Table 29-3. If the reserve requirement is 10 percent and then someone deposits $50 000 into the bank, what is the bank's reserve position?


A) It will have $57 000 in excess reserves.
B) It will have $52 000 in excess reserves.
C) It will need to raise reserves by $5000.
D) It will have excess reserves of $2000.

E) A) and D)
F) A) and C)

Correct Answer

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Suppose the value of bank notes issued by the Bank of Canada as of 31 December, 2009, was $56 billion, while the money supply (M2+) was about $1.3 trillion. a.Assuming that half of the bank note value is in the hands of the population and the other half in banks' reserves, what must have been the money multiplier? b.What is the average bank reserve ratio corresponding to the money multiplier calculated at point (b)? c.Now, let us assume that people hold one-tenth of their money (cash plus deposits) in cash and nine-tenths in bank deposits. With the reserve ratio calculated above, what is the value of the bank notes in the banks' reserves?d.What is the value of the bank notes in circulation, if the bank reserves are equal to the number you calculated c?

Correct Answer

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a.Let M be the money multiplier. This nu...

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