Financial Innovation and Bank of Canada Overview

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Questions and Answers

What is the main goal of any bank?

To ensure loans generate profit

To balance profit and prudence

To maximize the wealth of its owners (correct)

To maximize the wealth of its depositors

Under which Act are credit unions typically organized?

Trust and Mortgage Loan Companies Act

Financial Institutions Act of Canada

Cooperative Credit Association Act of 1991 (correct)

Bank Act of 1991

What distinguishes a caisse populaire from a regular credit union?

Caisse populaires are not cooperative organizations

Caisse populaires are based in Quebec (correct)

Caisse populaires do not receive deposits

Caisse populaires operate under the Bank Act of 1991

How do banks balance profit and prudence?

By ensuring deposit interest rates exceed loan interest rates Signup and view all the answers

What kind of organization is a credit union?

Cooperative organization Signup and view all the answers

What is the economic function of banks?

Creating money Signup and view all the answers

What is the main role of the Bank of Canada?

Setting monetary policy Signup and view all the answers

In the context of money, what does 'unit of account' refer to?

A measure for stating prices Signup and view all the answers

What problem does barter face, making it less efficient than using money?

Double coincidence of wants Signup and view all the answers

How does money simplify comparisons according to Table 8.1?

By providing an agreed measure for prices Signup and view all the answers

What is the primary purpose of money as a store of value?

To be held for a time and later exchanged Signup and view all the answers

What happens to the interest rate when the quantity of money is increased by 10 percent according to the text?

Falls Signup and view all the answers

How does the real interest rate change when people buy bonds?

Falls Signup and view all the answers

What happens to consumption expenditure and investment when the real interest rate falls?

Increase Signup and view all the answers

In the new long-run equilibrium after a 10 percent rise in the price level, what has not changed according to the text?

Real GDP Signup and view all the answers

According to the quantity theory of money, what does an increase in the quantity of money bring in the long run?

Equal percentage increase in price level Signup and view all the answers

Which formula is used to represent the velocity of circulation according to the text?

$V = PY ÷ M$ Signup and view all the answers

What is the primary aim of financial innovation in the context of depository institutions?

To lower the cost of deposits Signup and view all the answers

What are the two main influences on financial innovation according to the text?

Economic environment and technology Signup and view all the answers

What role does the Bank of Canada play as the lender of last resort?

It makes loans when the banking system is lacking reserves Signup and view all the answers

Why is the Bank of Canada considered the sole issuer of bank notes?

Because it has a monopoly on issuing bank notes Signup and view all the answers

Which assets make up the Bank of Canada's balance sheet as mentioned in the text?

Government securities and reserve loans Signup and view all the answers

In what capacity does the Bank of Canada act as a banker, as stated in the text?

Banker to depository institutions and the government Signup and view all the answers

What are the largest and most important assets on the Bank of Canada's balance sheet?

Canadian government securities Signup and view all the answers

Which of the following forms the monetary base according to the text?

Bank of Canada notes outside the Bank of Canada Signup and view all the answers

What is an open market operation according to the text?

Purchase or sale of government securities by the Bank of Canada in the open market Signup and view all the answers

Which entity holds newly created reserves when the Bank of Canada buys securities?

Banks Signup and view all the answers

What are the main policy tools used by the Bank of Canada to achieve its objectives?

Open market operations and Bank rate Signup and view all the answers

According to Table 8.3 in June 2017, what are the sources of the monetary base?

Bank of Canada's assets Signup and view all the answers

Study Notes

Money is any commodity accepted as a means of payment, with functions including medium of exchange, unit of account, and store of value.
Depository institutions in Canada include chartered banks, credit unions, and trust and mortgage loan companies, which aim to maximize wealth by balancing profit and prudence.
The Bank of Canada serves as the central bank, regulating depository institutions, controlling the quantity of money, and acting as the sole issuer of bank notes.
The Bank of Canada's balance sheet consists of assets such as government securities and liabilities like bank notes and deposits.
The monetary base is formed by the Bank of Canada's liabilities, including bank notes, deposits, and coins, with open market operations used to change the monetary base.
The Bank of Canada uses policy tools like open market operations and the bank rate to achieve its objectives.
The quantity theory of money states that an increase in the money supply leads to a proportional increase in the price level in the long run, based on the velocity of circulation and the equation of exchange.

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Description

This quiz covers the concepts of financial innovation and the role of the Bank of Canada as the central bank. Topics include the aim of financial innovation, influences on financial innovation, and the functions of the Bank of Canada.