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Exercises for Chapter 8

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  • 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 percent 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 percent reserve ratio and the public has a 10 percent currency ratio how much lending and deposit creation can the undertake after they receive a new $1,000 cash deposit. How much would the public’s holding of cash increase? Would it be in the banks’ interest to find ways to reduce the currency ratio? 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 the banks in the banking system find it prudent to maintain holdings of cash equal to 10 percent of their deposit liabilities, and people find it convenient to hold cash balances equal to 15 percent.

    (a) If the monetary base in the economy is $1,000, what is the size of the money supply?

    (b) Suppose the monetary base decreased by $100, would the money supply change? If so, by how much would it change?

    Exercise 8.8 Suppose a crisis in financial markets, like the collapse of the asset back commercial paper (ABCP) market in 2007 and 2008, increases the risk banks attach to lending and the non-bank public attaches to bank deposits. What are the implications for the desired reserve ratio, the currency ratio and the money supply multiplier and the money supply?

    Exercise 8.9 Using a diagram illustrate and explain the determinants of the position and slope of the money supply function assuming an initial monetary base of $1000, rr = 5% and cr = 10%. If the monetary base were to increase by 10% how would the money supply and the money supply function in your diagram change?

    Exercise 8.10 Suppose the currency ratio depends on the interest rate such that the non-bank public reduces their cash holdings relative to deposits (cr) as the interest rate rises. Use a diagram to illustrate what effect if any this condition would have on the money supply function.