1.Indicate [i.e. state either ‘yes’ or ‘no’] whether each of the following is co
ID: 1190146 • Letter: 1
Question
1.Indicate [i.e. state either ‘yes’ or ‘no’] whether each of the following is considered by economists to be money in
Canada.
[a] A cheque you write against deposits you have at the Royal Bank.
[b] Japanese yen.
[c] The available credit you have on your MasterCard.
[d] Reserves held by banks at the Bank of Canada.
[e] Gold bullion.
[f] Grocery store coupons.
2. There are three types of money: commodity money, commodity-backed money, and fiat money. Which type of
money is used in each of the following situations:
[a] Bottles of rum were used to pay for goods in colonial Australia.
[b] Salt was used in many European countries as a medium of exchange.
[c] For a brief time, Germany used paper money [the "Rye Mark"] that could be redeemed for a certain amount of rye, a type of grain.
[d] The city of Kamloops, British Columbia, prints its own currency, the Kamloops dollar, which can be used to purchase local goods and services.
3. Indicate whether each of the following is counted in the M2 measure of the money supply [i.e. indicate “yes” or “no”]:
[a] The coins in a person’s pocket.
[b] The deposit money in a person’s chequing account
[c] The deposit money in person’s savings account.
[d] The funds in a person’s term deposit account.
[e] The available balance on a person’s credit card.
4. You are given the following information about a country's fractional reserve banking system:
All bank accounts are chequing accounts containing deposit money [D]
Banking system reserves [R] = $50 billion
Banking system desired reserve ratio [r] = 0.05 [i.e. 5 percent]
All citizens initially wish to hold their money in deposit money form, currency held by the public [C] is initially $0
[a] Based on the provided information, calculate the following values:
[i] Total D created by the banking system
[ii] Total loans [L] issued by the banking system
[iii] Size of the country's money supply [M2]
[b] Assume the banking system's desired reserve ratio increases to 10 percent. Assuming complete system adjustment to the new ratio, calculate the following values:
[i] Total L
[ii] Total M2
[c] Alternatively[1], assume citizens wish to hold $10 billion as currency, and withdraw funds from the banking
system. Assuming complete system adjustment to the loss of funds, calculate the following values:
[i] Total L
[ii] Total M2
[d] Alternatively, assume the country's central bank undertakes a $8 million open market bond purchase. Assuming complete system adjustment, calculate the following values:
[i] Total L
[ii] Total M2
5. “The Bank of Canada, commercial banks, and the Canadian public all influence the size of the Canadian money
supply.” True, false, or uncertain? Briefly explain your reasoning.
[1] “Alternatively” means that you are to work with the initial information provided in the question; that is, ignore the
changes introduced in question [b].
Explanation / Answer
Q.1-a- yes
b-yes
c-yes
d-yes
e-yes
f-no
Q.2-commodity money because it has a value that is independent of its value as money. Gold, for instance, is extensively used in jewelry, and silver has many industrial uses.
b-commodity money
c- commodity backed money because it can be exchanged for a fixed amount of a valuable commodity.
d- fiat money because it is authorised bt the govt decree but itself has no intrinsic value.
Q.3 M2 is a measure of money supply that includes cash and checking deposits (M1) as well as near money. “Near money" in M2 includes savings deposits, money market mutual funds and other time deposits, which are less liquid and not as suitable as exchange mediums but can be quickly converted into cash or checking deposits.
a- yess because it is a currency and currency is included in M1
b-yess beacuse it can easily converted into cash
c-yess because it is less liquid and can easily turn into cash
d- yess (reason is clear from the defination of m2 above)
e-no- because each credit card transaction creates a new loan from the credit card issuer. Eventually the loan needs to be repaid with a financial asset—money. To households, the line of credit associated with a credit card is not a financial asset, only a convenient vehicle for borrowing to finance a purchase.
Q.4.A- desired reserve ratio= 5% and total reserves= 50$billion
i- deposit multiplier= 1/ DRR=1/0.05=20
thus the total deposits expanded to is 20 times the original reserves i.e (20).(50)=$1000billion
ii- total loan = 1-DRR/DRR=1-0.05/0.05=19
thus the total loans expanded to is 19 times the original reserves i.e (19).(50)=$950billion
iii- M2=total deposits because public does not hold money in cash=1000$ billion
B- if DRR increases to 10% then
deposit multiplier= 1/r= 1/0.1=10
total deposit =( 10)(50)=500$ billion
L multiplier= 1-DRR/DRR= 1-0.1/0.1=9
totatal L= (9)(50)=450$ billion
M2= total deposits=$500 billion
C- amount of fund withdrwan =$10
therfore=50$-10$=$40
DRR is 5% therefore total L will be (19).(40)=760$ billion and total D will be 800$ billion
M2= total deposits= 800$ billion
C-if $8 billion open market pucgase is done it will increase the liquidity in the hamds of public and will increase the money supply by 8$ billion.
now the TR=50+8=58
deposit multiplier is 20 and K multiplier is 19 , therefore TD(total deposits)= (58).(20)=1160$ billion
and TL= (58).(19)=1102$ billion
M2= total deposits= 1160$.
Q.5-the above statement is true because
1. bank of canada is the central bank of canada .it has the power to controll the size of money supply through its various tools both like open market operation, bank rate etc and etc , therefore it can easily influence canadian money supply
2. commercial banks are the credit creator .They by guving loans expand the size of canadian money .Therfore they can also influence canadian money supply
3.canadian public by large deposits in the comm.bank can help the comm.bank to create more money by the process of credit
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