ECON 2000 Lecture Notes - Lecture 97: Overnight Rate, Deposit Account, Money Supply

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14 May 2018

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ECON 2000

Lecture 97

- Bank rate – interest rate that BoC uses to determine how much it

charges if ever has to lend reserves to chartered banks

- Decrease in the Bank Rate is a signal that banks can afford to

expand loans and that the monetary policy is expansionary

- Increase in Bank Rate is increase in chartered bank cost so signal

that banks will be cutting back loans and money supply is shrinking

- Canada has only a few banks with offices all around, so rarely have

to borrow reserves from BoC

- Increase in the bank rate has no direct effect on chartered bank costs

- When cheques are cleared, represent instructions for banks to

transfer funds to each other

- Banks make these transfer on a net basis by writing cheques to each

other against their own deposit account at the BoC

- Total of these accounts is known as the quantity of settlement

balances

- Banks aren’t allowed to end day with negative balance in their

settlement account

- BoC uses deposit-switching to alter overall quantity of settlement

balances and so affect ability of charter banks to make loans

- Overnight lending rate is the rate at which chartered banks and other

participants in the money market borrow from and lend to each other

one-day funds

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Document Summary

Bank rate interest rate that boc uses to determine how much it charges if ever has to lend reserves to chartered banks. Decrease in the bank rate is a signal that banks can afford to expand loans and that the monetary policy is expansionary. Increase in bank rate is increase in chartered bank cost so signal that banks will be cutting back loans and money supply is shrinking. Canada has only a few banks with offices all around, so rarely have to borrow reserves from boc. Increase in the bank rate has no direct effect on chartered bank costs. When cheques are cleared, represent instructions for banks to transfer funds to each other. Banks make these transfer on a net basis by writing cheques to each other against their own deposit account at the boc. Total of these accounts is known as the quantity of settlement balances. Banks aren"t allowed to end day with negative balance in their settlement account.

Related Questions

Q30. The higher the reserve requirement,
a. the more the money supply can expand
b. the more interest the bank will earn on its reserve account
c. the less the money supply can expand
d. both the more the money supply can expand and the more interest the bank will earn on its reserve account

Q31. If depositors withdraw their funds and create a shortage of reserves, bankers
a. have no alternative but to call in outstanding loans
b. can borrow reserves from the Fed
c. must close their operations until their reserves increase
d. must sell bank stock to replenish reserves

Q32. If a bank has excess reserves,
a. its reserves are greater than its liabilities
b. it can make a loan if it wishes
c. it cannot make a loan if it wishes
d. it must borrow from the Fed

Q33. Which of the following is most influenced by changes in the discount rate?
a. the interest rate paid on savings
b. the commercial loan rate
c. the installment loan rate
d. the mortgage loan rate

Q34. The Federal Reserve System is built around
a. four regional banks
b. six regional banks
c. twelve district banks
d. one bank with several branches

Q35. The interest rate at which banks borrow excess reserves from each other is known as the
a. prime rate
b. federal funds rate
c. discount rate
d. T-bill rate

Q36. If the U. S. government increases spending, the U. S. Treasury
a. has the legal right to issue currency to pay for the spending
b. does not have the legal right to issue currency to pay for the spending
c. usually pays for the spending by selling bonds directly to the Fed
d. seldom pays for the spending by selling bonds to the public

Q37. Forces within the economy that naturally tend to counteract recessions and inflation are known as
a. discretionary stabilizers
b. automatic stabilizers
c. demand-management policies
d. fiscal dividends

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QUESTION 31

The Board of Governors of the Federal Reserve System is

		composed of seven members who are appointed by the President and approved by the Senate.
		composed of 12 members of the Senate and the U.S. House of Representatives.
		elected by the general public.
		composed of representatives from the country's 12 largest commercial banks.

1.11 points

QUESTION 32

The Fed is said to be the "lender of last resort" in that

		it charges a higher interest rate to borrowers than does any other bank.
		it functions as the government's bank only when commercial banks fail to do so.
		it makes loans to individuals whom commercial banks do not believe are credit-worthy.
		it stands ready to lend to any depository institution that it has decided should not fail.

1.11 points

QUESTION 33

The Federal Reserve System acts as the government's fiscal agent by

		providing checking account services for the government.
		preparing the budget the President presents to Congress every year.
		determining how to finance a deficit.
		auditing taxpayers.

1.11 points

QUESTION 34

The Federal Reserve System was established in which year?

		1913.
		1929.
		1865.
		1941.

1.11 points

QUESTION 35

By serving as the lender of last resort,

		the Fed provides check clearing services.
		the Fed aids in the sale of government securities.
		the Fed supervises depository institutions.
		the Fed can prevent bank failures.

1.11 points

QUESTION 36

Depository institutions must

		use and pay for the services of the Federal Reserve System.
		set their interest rates according to schedules established by the Federal Reserve System.
		keep a certain percentage of their deposits as reserves.
		turn over a percentage of their profits to the Federal Reserve System as payment for services provided by the Fed.

1.11 points

QUESTION 37

The Federal Reserve System has

		50 district banks.
		24 district banks.
		12 district banks.
		7 district banks.

1.11 points

QUESTION 38

The part of the Federal Reserve System (the Fed) that holds the reserve balances of depository institutions is

		the Board of Governors.
		the Federal Advisory Committee.
		the Federal Open Market Committee.
		the Federal Reserve district banks.

1.11 points

QUESTION 39

The potential for a financial breakdown at one financial institution to spread throughout the financial system is known as a

		systemic risk.
		liquidity risk.
		lending risk.
		moral hazard.

1.11 points

QUESTION 40

A system in which depository institutions hold reserves that are less than the amount of total deposits is called

		fiat money banking.
		required reserve banking.
		fractional reserve banking.
		central banking system.

1.11 points

QUESTION 41

Total reserves of private banks are

		all customer deposits.
		the minimum amount banks need to hold against time deposits.
		federal reserve notes.
		deposits held at the Fed and vault cash.

1.11 points

QUESTION 42

A statement of assets and liabilities of any business entity is called

		a cash flow statement.
		an income statement.
		a balance sheet.
		a statement of net worth.

1.11 points

QUESTION 43

Which of the following actions has no effect on the total money supply?

		The Federal Open Market Committee buys government securities.
		There is a transfer of deposits from one bank to another bank.
		There is change in the money multiplier.
		The Federal Open Market Committee sells government securities.

1.11 points

QUESTION 44

Given a required reserve ratio of 20 percent, a commercial bank that has received a new deposit of $100 can make additional loans of

		$80.
		$0.
		$400.
		$20.

1.11 points

QUESTION 45

The Federal Open Market Committee has responsibility for

		appointing members to the Board of Governors of the Federal Reserve system.
		issuing orders to buy or sell government securities for the Fed.
		advising the Treasury Department on monetary policy.
		printing money.

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QUESTION 46

When the Fed buys a U.S. bond in the open market

		its action has no effect on the total reserves or the money supply because the check it writes increases reserves at one bank but they fall at another.
		its action expands total reserves and the money supply.
		its action contracts total reserves and the money supply.
		total reserves increase by the amount of the purchase but the money supply stays the same.

1.11 points

QUESTION 47

When the Fed sells government securities,

		reserves increase, leading to a decrease in the money supply by an amount more than the sale of the government securities.
		reserves decrease, leading to a decrease in the money supply by an amount more than the sale of the government securities.
		reserves increase, leading to a increase in the money supply by an amount more than the sale of the government securities.
		reserves decrease, leading to a increase in the money supply by an amount more than the sale of the government securities.

1.11 points

QUESTION 48

The maximum potential money multiplier is equal to

		the reserve ratio.
		one minus the reserve ratio
		the inverse of the required reserve ratio.
		the number of dollars on reserve.

1.11 points

QUESTION 49

The potential money multiplier gives us

		the growth in the money supply when income increases.
		the growth in real national income when the money supply increases.
		the maximum potential change in the money supply due to a change in income.
		the maximum potential change in the money supply due to a change in reserves.

1.11 points

QUESTION 50

An increase in the reserve ratio

		increases the money multiplier.
		will cause banks to make more loans.
		has an expansionary effect on the money supply.
		has a contractionary effect on the money supply.

1.11 points

QUESTION 51

The Federal Deposit Insurance Corporation insures

		banks against lawsuits.
		the deposits held in member banks.
		the deposits held in the Fed.
		the federal funds market.

1.11 points

QUESTION 52

Bank runs are a possibility because

		in difficult times people want currency instead of demand deposits.
		the FDIC is inefficient.
		banks do not keep enough reserves to cover all their depository liabilities.
		bankers are often poor businesspeople.

1.11 points

QUESTION 53

The manner in which FDIC deposit insurance is set up in the United States encourages banks to

		make riskier loans than they otherwise would.
		reject some loans that probably would be profitable.
		maintain excess reserves that are too great.
		be too conservative in their lending practices.

1.11 points

QUESTION 54

The Federal Deposit Insurance Corporation

		discourages banks from engaging in excessive risk taking.
		was established after the Panic of 1907.
		only insures deposits in money-center banks.
		increases the stability of the banking system by reducing the likelihood of bank runs.

1.11 points

QUESTION 55

What are the two features of money that distinguish it from all other goods in the economy?

		Money is government issued and it is redeemable for gold or silver.
		Money is part of every barter transaction and it is divisible.
		Money is accepted as a medium of exchange and it is the common unit of account used to express prices.
		Money is a common unit of account and it is also can be traded for other currencies at a guaranteed exchange rate.

1.11 points

QUESTION 56

Holding money to meet unplanned expenditures and emergencies is known as

		asset demand.
		precautionary demand.
		aggregate demand.
		transactions demand.

1.11 points

QUESTION 57

When people want to hold money to make regular planned expenditures, this is

		the transaction demand for money.
		the spending demand for money.
		the asset demand for money.
		the precautionary demand for money.

1.11 points

QUESTION 58

When interest rates rise, the transactions demand for money usually

		decreases.
		increases.
		decreases initially and then increases to the original position.
		does not change.

1.11 points

QUESTION 59

As nominal Gross Domestic Product (GDP) rises, the transactions demand for money

		increases, and the money demand curve shifts to the right.
		remains constant, and the money demand curve remains the same.
		decreases, and the money demand curve shifts to the left.
		increases, and the money demand curve shifts to the left.

1.11 points

QUESTION 60

One of the economic costs of holding currency is that

		it fulfills no precautionary role.
		it fulfills no transactions role.
		it earns no interest income.
		its real value always increases.

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ECON 2000 Lecture Notes - Lecture 97: Overnight Rate, Deposit Account, Money Supply

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