203 Econ Tutorial #6 and Answers
Date: Week of Feb. 27-Mar.4
Coverage: Chapter 8 Money, Banking and the Money Supply
Part I: Multiple-Choice Questions
1. Under the barter system, one person must want what the other has and vice versa. This is called:
A)
the terms of trade.
B)
the medium of exchange.
C)
double coincidence of wants.
D)
double-counting.
2. Suppose that for some reason, the price of copper rose to such a level that the copper contained in a penny was worth
more than the coin, this would cause:
A)
pennies to be hoarded and taken out of circulation.
B)
the penny to no longer be offered for a penny's worth of goods and services.
C)
the penny to no longer serve as a token money.
D)
all of the above to occur.
3. Suppose that you win $5,000 in a poker game and stuff the currency in your mattress. The money is being used:
A)
as a unit of account.
B)
as a store of value.
C)
as a medium of exchange.
D)
as a standard of value.
4. The stock of the medium of exchange in circulation is known as:
A)
token money.
B)
the gold standard.
C)
the money supply.
D)
the fiduciary issue.
5. When we say that the Canadian banking system is fractional reserve system, it means:
A)
chartered banks loan out only a small fraction of their deposits.
B)
chartered banks have to keep a large percentage of their deposit to meet everyday cash withdrawals.
C)
chartered banks loan out the entire deposits and do not have to meet their everyday cash withdrawal.
D)
chartered banks keep cash equal to just a small percentage of their deposits to meet everyday withdrawals.
6. Bank reserves are:
A)
currency and customer chequing deposits in the banks.
B)
currency, customer chequing and savings deposits in the banks.
C)
cash balances held by the banks to meet withdrawals by customers or payments to customers.
D)
financial assets held by the banks obtained from savers and lent to borrowers.
7. The most distinctive feature of a commercial bank is that:
A)
it makes loans.
B)
it provides a passbook to depositors.
C)
it acknowledges the funds it receives by issuing a claim against itself.
D)
its debt circulates as money.
8. If the reserve/deposit ratio (rr) is 0.2 and the currency ratio (cr) is zero, then the money multiplier is:
A)
zero
B)
0.2
C)
2
D)
5
9. The currency ratio (cr) is:
A)
the ratio of currency held by the public to their loans.
B)
the ratio of currency held by the public to their deposits.
C)
the ratio of currency in circulation to the government bonds outstanding.
D)
the ratio of cash reserves held by the banks to their deposit liabilities.
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10.
Consider a situation where the reserve ratio is 20% and the cash-ratio is zero. If the cash-reserves in the banking system
are $10 billion with zero excess reserves, then:
A)
the total loans in the banking system are $50 million.
B)
the total deposits in the banking system are $50 million
C)
the total loans in the banking system are $60 million.
D)
the total deposits in the banking system are $60 million
11. Consider a situation where the reserve ratio is 20% and the cash-ratio is zero. If the cash-reserves in the banking system are
$10 billion with zero excess reserves, then:
A)
the total loans in the banking system are $50 million.
B)
the total loans in the banking system are $40 million
C)
the total loans in the banking system are $60 million.
D)
the total deposits in the banking system are $60 million
12.
Assume that reserve ratio is 0.1 and cash-ratio is 0.1. An initial deposit of $1000 will lead eventually to one of the
following outcomes:
A)
Total loan-creation of $10,000.
B)
Total deposit-creation of $10,000.
C)
Total loan-creation of $5,500.
D)
Total deposit-creation of $5,500.
13.
Suppose, the current reserve ratio is 20% and the current cash-drain is zero. Currently, the banking system has cash
reserves of $10 billion. If the banking system reduces its reserve ratio to 10%, while cash-drain remains zero, eventually it
will lead to one of the following outcomes:
A)
Excess reserves of $10 billion
B)
Excess reserves of $5 billion
C)
Excess reserves of $1 billion
D)
Excess reserves of $0.1 billion
14. Suppose, the current reserve ratio is 20% and the current cash-drain is zero. Currently, the banking system has cash
reserves of $10 billion. If the banking system reduces its reserve ratio to 10%, while cash-drain remains zero, eventually it
will lead to one of the following outcomes:
A)
Excess reserves worth $10 billion
B)
Additional deposit-creation worth of $100 billion
C)
Additional deposit-creation worth of $40 billion
D)
Additional loan-creation worth $50 billion
15. If the money supply is $400 billion and the money multiplier is 2, then the monetary base is:
A)
$800 billion
B)
$400 billion
C)
$200 billion
D)
$2 billion
16. If excess reserves of $1000 can generate the money supply by $20,000, the desired reserve ratio (rr) requirement is:
A)
0.50
B)
0.10
C)
0.05
D)
0.01
17. Suppose Jack deposits $600. Later that day Jane borrows $1200 from the same bank. As a result, the money supply will
A)
increase by $1200.
B)
increase by $600.
C)
decrease by $600.
D)
stay constant.
18. If the banks' desired reserve ratio is 5%, the immediate effect of a $5,000 cheque drawn and cleared against the Zebina
bank is to reduce:
A)
deposits by $5,000 and have no effect on reserves.
B)
deposits and reserves by $5,000.
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C)
D)
deposits by $5,000 and reserves by $250.
deposits and reserves by $200.
19. If the public's currency ratio (cr) is 5% and the banks' desired reserve ratio (rr) is 5% the money supply multiplier will be:
A)
20.
B)
10.
C)
10.5.
D)
5.
Part II: Short Questions
1.
The process of money creation in an economy.
(i)
Suppose that Person A deposits $150 (cash) at the TD Bank.
TD Bank:
Assets
Liabilities
Suppose now TD Bank realizes that, on average, its customers only withdraw a portion of their deposits, and so it can
lend out some money to other customers. TD Bank now chooses the reserve ratio to be 25% or 0.25. TD Bank lends
out the remaining amount of money as loans to Person B. Record this transaction on TDs balance sheet above.
(ii)
Person B borrows this money as loans and pays to Person C, his landlord. Suppose Person C deposits this amount
with his bank, CIBC. CIBC, similar to TD, also realizes that its customers only withdraw a portion of their deposits,
so CIBC can also choose a reserve ratio of 0.25 and issue the remaining money as loans to Person D. Record these
transactions on the CIBCs balance sheet.
CIBC:
Assets
Liabilities
(iii)
Write down the different amounts of deposits generated by TD and CIBC as a result of the initial $150 deposited.
Show how these amounts of deposits are related to (1+0.75+(0.75)2+(0.75)3+..).
(iv)
What is the money multiplier? Use the money multiplier to find the new money supply and the amount of money
created.
(v)
Suppose the reserve ratio is now 0.4. If Person A had deposited his $150 NOW, what would be the amount of money
being created NOW? Explain.