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Homework answers / question archive / Money and Banking Essay Practice Question 1) What are the three functions of money?     2

Money and Banking Essay Practice Question 1) What are the three functions of money?     2

Economics

Money and Banking Essay Practice Question

1)

What are the three functions of money?

 

 

2.

Distinguish between M1 and M2.

 

 

3.

Define the term target reserve ratio.

 

 

4.

What gives the Canadian dollar its value?

 

 

5.

How does a banking system create money?

 

 

6.

Which function of money is in each of the following cases demonstrating?

(1) You pay $10 for a movie ticket.

(2) You deposit your tax refund check in your saving account.

(3) A restaurant manager sets the prices of meals she serves in dollars.

(4) A restaurant manager places the day's receipts in the safe.

(5) McDonald's announces that a Big-Mac now costs only $1.00.

(6) Bill Gates has a net worth of $50 billion.

 

 

7.

“Credit cards make a difference in how much money people hold, but they are not money.” Explain this statement.

 

 

8.

A story often told is that banks first emerged from the activities of goldsmiths, who stored gold for a fee. Briefly describe this story.

 

 

9.

What are bank reserves? What is the reserve ratio?

 

10.

Economists use the terms save and invest in a way that is somewhat different from their common language usage. Explain the special meaning of these terms as used by economists.

 

 

11.

The following table shows the balance sheet of the Bank of Manitoba.

 

Assets

 

Liabilities/Equity

 

Reserves

$45

Demand deposits

$400

Loans

250

Shareholders' equity

   60

Securities

95

 

 

Fixed Assets

70

 

 

Totals

$460

Totals

$460

 

By how much is the Bank of Manitoba over- or under- reserved if the target reserve ratio is as follows:

 

 a) 2%

b) 5%

c) 12%

d) 20%

 

 

 

12.

The following table shows the balance sheet for the Senators' Bank, which has a target reserve ratio of 8 percent.

 

Assets

 

Liabilities/Equity

 

Reserves

$2900

Demand deposits

$30 000

Loans

26 000

Shareholders' equity

   5 000  

Securities

4200

 

 

Fixed Assets

1900

 

 

Totals

$35 000

Totals

$35 000

 

a)

By how much is the Senators' Bank over- or under-reserved?

b)

If the bank makes a loan in an amount equal to the excess reserves and the borrower writes a cheque (for the full amount of the loan) to another customer of the bank who then deposits it, what will be the new amount of excess reserves?

c)

If instead, the cheque written by the borrower is cleared against the Senators' Bank (the cheque was written to a customer of another bank), what will now be the amount of excess reserves?

 

 

 

13.

The following table shows the balance sheet for all banks combined in the banking system.  All banks have a target reserve ratio of 12.5 percent.

 

Assets

 

Liabilities/Equity

 

Reserves

$180 000

Demand deposits

$1 200 000

Loans

900 000

Shareholders' equity

200 000

Securities

220 000

 

 

Fixed Assets

100 000

 

 

Totals

$1 400 000

Totals

$1 400 000

 

a)

What is the amount of excess reserves.

b)

What is the maximum amount that loans and deposits can be increased?

c)

If the banking system were fully loaned up, by how much will the money supply have increased?

 

 

 

14.

Answer the questions below based on the data in the following table.  (All figures are in $ billions.)

         

Total currency issued by the Bank of Canada

$45

Total personal savings deposits & personal term deposits

270

Total demand deposits

65

Deposits of the federal government at the Bank of Canada

54

Currency held by the commercial banks

8

Government bonds owned by the public

165

Nonpersonal fixed-term deposits (certificates of deposit)

105

 

a)

What is the amount of currency in circulation?

b)

How much larger is M1 than the amount of currency in circulation?

c)

How much larger is M2 than M1?

d)

How much larger is M3 than M2?

 

 

 

15.

Fill in the blanks in the balance sheet of the Orion Bank shown below assuming that the value of fixed assets is the same as shareholders' equity and that the bank is fully loaned up.  The target reserve ratio is 6 percent.

 

Assets

 

Liabilities/Equity

 

Reserves

 

Demand deposits

$400 000

Loans

 

Shareholders' equity

 

Securities

80 000

 

 

Fixed Assets

 

 

 

Totals

$460 000

Totals

$460 000

 

 

 

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