ECON 206

Sample MC Questions
Midterm 2

1) Trust and mortgage loan companies are usually ________.

A) operating under a charter issued by either the federal government or one of the provincial
governments
B) investors in commercial loans
C) more profitable than chartered banks and credit unions and caisses populaires
D) regulated and supervised by the TML

2) So-called fallen angels differ from junk bonds in that ________.

A) junk bonds refer to newly issued bonds with low credit ratings, whereas fallen angels refer
to previously bonds that have had their credit ratings fall below Baa
B) junk bonds refer to previously bonds that have had their credit ratings fall below Baa,
whereas fallen angels refer to newly issued bonds with low credit ratings
C) junk bonds have ratings below Baa, whereas fallen angels have ratings below C
D) fallen angels have ratings below Baa, whereas junk bonds have ratings below C

3) Trust and mortgage loan companies are usually ________.

A) operating under a charter issued by either the federal government or one of the provincial
governments
B) investors in commercial loans
C) more profitable than chartered banks and credit unions and caisses populaires
D) regulated and supervised by the TML

4) The development of money market mutual funds contributed to the growth of ________
since the money market mutual funds need to hold liquid, high-quality, short-terms assets.
A) the commercial paper market
B) the municipal bond market
C) the corporate bond market
D) the junk bond market

5) The six largest chartered banks in Canada together hold ________ of the assets in the
industry.
A) over 90 percent
B) nearly 75 percent
C) just over 50 percent
D) 25 percent

6) Credit unions are usually ________.

A) more profitable than Schedule I banks
B) regulated by the OSFI
C) regulated by a central bank
D) investors in mortgage loans

7) Which of the following are reported as liabilities on a bank's balance sheet?

A) Reserves
B) Demand and notice deposits
C) Loans
D) Deposits with other banks

8) Large-denomination CDs are ________, so that like a bond they can be resold in a ________
market before they mature.
A) nonnegotiable; secondary
B) nonnegotiable; primary
C) negotiable; secondary
D) negotiable; primary

9) Holding all else constant, when a bank receives the funds for a deposited cheque, ________.
A) cash items in the process of collection fall by the amount of the cheque
B) bank assets increase by the amount of the cheque
C) bank liabilities decrease by the amount of the cheque
D) bank reserves increase by the amount of desired reserves

10) When $1 million is deposited at a bank, the desired reserve ratio is 20 percent, and the bank
chooses not to hold any excess reserves but makes loans instead, then, in the bank's final
balance sheet, ________.
A) the assets at the bank increase by $800,000
B) the liabilities of the bank increase by $1,000,000
C) the liabilities of the bank increase by $800,000
D) reserves increase by $160,000

Assets Liabilities
Rate-sensitive $20 million $50 million
Fixed-rate $80 million $50 million

11) If interest rates rise by 5 percentage points, say, from 10 to 15 percent, bank profits
(measured using basic gap analysis) will ________.
A) decline by $0.5 million
B) decline by $1.5 million
C) decline by $2.5 million
D) increase by $1.5 million

12) When a $10 cheque written on the First National Bank is deposited in an account at CIBC,
then ________.
A) the reserves of the First National Bank decrease by $10
B) the reserves of the First National Bank increase by $10
C) the reserves of CIBC decrease by $10
D) the assets of CIBC decrease by $10

13) If a bank has $100,000 of demand deposits, a desired reserve ratio of 20 percent, and it
holds $40000 in reserves, then the maximum deposit outflow it can sustain without altering its
balance sheet is ________.
A) $30000
B) $25000
C) $20000
D) $10000

14) Which of the following functions does the Bank of Canada perform?
A) Bank note issue
B) Municipal government fiscal policy management
C) Provincial government fiscal policy management
D) Advise the Federal Reserve

15) The benefit of the Ban k of Canada's role as the lender-of-last-resort include ________.
A) easing liquidity problems of any financial institution
B) deterring bank runs and panics
C) reducing the monetary base to increase liquidity
D) A and B only

16) Bank of Canada started operations in ________.

A) 1935
B) 1925
C) 1915
D) 1945

17) The three players in the money supply process include ________.
A) banks, depositors, and the Department of Finance
B) banks, depositors, and borrowers
C) banks, depositors, and the central bank
D) banks, borrowers, and the central bank

18) The monetary liabilities of the Bank of Canada include ________.

A) government securities and advances to banks
B) notes in circulation
C) government securities and reserves
D) notes in circulation and advances to banks

19) If a member of the nonbank public sells a government bond to the Bank of Canada in
exchange for currency, the monetary base will ________, but ________.
A) remain unchanged; reserves will fall
B) remain unchanged; reserves will rise
C) rise; currency in circulation will remain unchanged
D) rise; reserves will remain unchanged

20) For which of the following is the change in reserves necessarily different from the change
in the monetary base?
A) Open market purchases from a bank
B) Open market purchases from an individual who deposits the cheque in a bank
C) Open market purchases from an individual who cashes the cheque
D) Open market sale to a bank

21) When a member of the nonbank public withdraws currency from her bank account,
________.
A) both the monetary base and bank reserves fall
B) both the monetary base and bank reserves rise
C) the monetary base falls, but bank reserves remain unchanged
D) bank reserves fall, but the monetary base remains unchanged

22) All else the same, when the Bank calls in a $100 loan previously extended to the First
National Bank, reserves in the banking system ________.
A) increase by $100
B) increase by more than $100
C) decrease by $100
D) decrease by more than $100

23) There are two ways in which the Bank can provide additional reserves to the banking
system: it can ________ government bonds or it can ________ advances to banks to
commercial banks.
A) sell; extend
B) sell; call in
C) purchase; extend
D) purchase; call in

24) Subtracting borrowed reserves from the monetary base obtains ________.
A) reserves
B) high-powered money
C) the nonborrowed monetary base
D) the borrowed monetary base

25) The formula for the simple deposit multiplier can be expressed as ________.
A) R = T

B) D = R
C) r = T

D) R = D

26) When the nonborrowed monetary base is equal to $200 billion, the borrowed reserves are
equal to $100 billion, and the money supply is equal to $700 billion, the money multiplier is
________.
A) 2.33
B) 2.67
C) 2.23
D) 2.16

27) Which of the following are not assets on the Bank of Canada's balance sheet?
A) Advances to banks
B) Government of Canada deposits
C) Securities
D) Foreign deposits

28) If the Bank of Canada pays on deposits to LVTS participants an interest rate of 3.5 percent
then the operating target of the Bank's monetary policy is ________ and the bank rate is
________.
A) 3.75 percent; 4 percent
B) 4 percent; 4.25 percent
C) 3.25 percent; 3.5 percent
D) 3 percent; 3.25

29) LVTS participants with positive settlement balances at the end of the day ________.
A) are paid the bank rate
B) are paid the overnight rate
C) are paid the bank rate less 50 basis points
D) are paid the prime rate

30) The goal of the Bank of Canada's current monetary policy is to keep the inflation rate
within a target range of ________.
A) 2 percent to 3 percent
B) 1 percent to 3 percent
C) 1 percent to 4 percent
D) 2 percent to 4 percent

31) Core CPI excludes ________.

A) volatile components
B) headline items
C) indirect taxes
D) energy costs
32) If the Bank of Canada wants to relieve undesired upward pressure on the overnight interest
rate it will enter into a ________.
A) Special Purchase and Resale Agreement
B) Sale and Repurchase Agreement
C) Swap
D) Reverse Repo

33) The Bank of Canada neutralizes special PRA operations so as to ________.

A) not to leave the system in a surplus position at the end of the day
B) to leave the system in a surplus position at the end of the day
C) to leave the system changed at the end of the day
D) as to leave the system in a deficit position at the end of the day

34) Which of the following countries have hierarchical mandates?

A) Reserve Bank of New Zealand
B) Bank of Canada
C) Bank of England
D) all of the above

35) Which of the following is an advantage to inflation targeting?

A) There is a delayed signal about achievement of the target.
B) Inflation targets could impose a rigid rule on policymakers.
C) There is potential for larger output fluctuations.
D) The performance has been quite good.
Answer: D

36) If the central bank targets a monetary aggregate, it is likely to lose control over the interest
rate because ________.
A) of fluctuations in the demand for reserves
B) of fluctuations in the consumption function
C) bond values will tend to remain stable
D) of fluctuations in the business cycle