8.7: Exercises for Chapter 8

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Exercises for Chapter 8

EXERCISE 8.1

What are the functions of money? What is money in Canada today? What is the money supply in Canada today? Are debit cards and credit cards money?

EXERCISE 8.2

Since both central banks and commercial banks can create money what is the key difference between a central bank, like the Bank of Canada, and the many commercial banks in the financial industry?

EXERCISE 8.3

Suppose the banks receive $100 cash from a new deposit of funds previously held outside the banking system. If banks operate with a 5% reserve ratio, use simple balance sheets to show by how much this new cash would affect lending and deposits of all banks in the system.

EXERCISE 8.4

If banks have a 10% reserve ratio how much lending and deposit creation can they undertake after they receive a new $1,000 cash deposit? Would it be in the banks' interest to find ways to reduce any cash balances the public holds? Why?

EXERCISE 8.5

What protection does the Canadian Deposit Insurance Corporation provide for your money if your bank is unable to pay cash to its depositors?

EXERCISE 8.6

Define the money multiplier and explain how it might be used.

EXERCISE 8.7

Suppose a crisis in financial markets, like the collapse of public willingness to hold large denomination term deposits in 2007 and 2008, increases the risk banks attach to lending and the non-bank public attaches to all bank deposits. What are the implications for the desired reserve ratio, the money supply multiplier, and the money supply?

EXERCISE 8.8

Using a diagram illustrate and explain the determinants of the position and slope of the money supply function assuming an initial monetary base of $1,000 when . If the monetary base were to increase by 10% how would the money supply and the money supply function in your diagram change?