Podcast
Questions and Answers
What happens to the money supply when a bank withdraws money?
What happens to the money supply when a bank withdraws money?
- The money supply increases significantly.
- The money supply remains unchanged.
- The money supply decreases more than the withdrawal amount. (correct)
- The money supply becomes unstable.
Banks can always effectively loan out all their excess reserves.
Banks can always effectively loan out all their excess reserves.
False (B)
What effect does a loan have on the creation of money?
What effect does a loan have on the creation of money?
It creates money through the multiplier effect.
The assumption that banks want to loan out money is affected by high __________ rates.
The assumption that banks want to loan out money is affected by high __________ rates.
Match the following terms to their definitions:
Match the following terms to their definitions:
Which scenario would likely prevent banks from lending money effectively?
Which scenario would likely prevent banks from lending money effectively?
A cash drain can occur when money is spent on imports.
A cash drain can occur when money is spent on imports.
What is the primary consequence of withdrawing money from a bank?
What is the primary consequence of withdrawing money from a bank?
What was the main challenge of bartering before the invention of money?
What was the main challenge of bartering before the invention of money?
Fiat money has intrinsic value based on the materials used to make it.
Fiat money has intrinsic value based on the materials used to make it.
What percentage of the money supply is typically backed by bills and coins?
What percentage of the money supply is typically backed by bills and coins?
Cattle and livestock were used as a form of _____ before the creation of money.
Cattle and livestock were used as a form of _____ before the creation of money.
Match the following functions of money with their definitions:
Match the following functions of money with their definitions:
Which of the following statements about commodity money is true?
Which of the following statements about commodity money is true?
Inflation can enhance the store of value function of money.
Inflation can enhance the store of value function of money.
What is the role of money as a 'standard for future payments'?
What is the role of money as a 'standard for future payments'?
What is the effective amount of excess reserves based on a deposit of $42,000 with a reserve ratio of 12%?
What is the effective amount of excess reserves based on a deposit of $42,000 with a reserve ratio of 12%?
A bank can create money by only accepting deposits.
A bank can create money by only accepting deposits.
What amount of new money is created if the initial deposit is $100,000 at a reserve ratio of 10%?
What amount of new money is created if the initial deposit is $100,000 at a reserve ratio of 10%?
The excess reserves for a deposit of $530,193.1 with a reserve ratio of 13.5% is _____ dollars.
The excess reserves for a deposit of $530,193.1 with a reserve ratio of 13.5% is _____ dollars.
What is the double coincidence of wants?
What is the double coincidence of wants?
Match the following deposits with their corresponding excess reserves:
Match the following deposits with their corresponding excess reserves:
Excess reserves refer to the money that banks do not lend out under any circumstances.
Excess reserves refer to the money that banks do not lend out under any circumstances.
How is new money calculated if the total new deposits are $1,000,000 and the initial deposit is $100,000?
How is new money calculated if the total new deposits are $1,000,000 and the initial deposit is $100,000?
If all the money created through excess reserves is taken out, it puts a strain on the banking system.
If all the money created through excess reserves is taken out, it puts a strain on the banking system.
What is the typical reserve ratio for banks in Canada?
What is the typical reserve ratio for banks in Canada?
A bank can use excess reserves to __________ or give out loans.
A bank can use excess reserves to __________ or give out loans.
What happens to the money once it is loaned out in the banking system?
What happens to the money once it is loaned out in the banking system?
In a limited bank system with a deposit of $100,000 and a reserve ratio of 10%, how much can be loaned out?
In a limited bank system with a deposit of $100,000 and a reserve ratio of 10%, how much can be loaned out?
Banks prefer to keep their excess reserves rather than loaning them out.
Banks prefer to keep their excess reserves rather than loaning them out.
What does loaning money imply for borrowers?
What does loaning money imply for borrowers?
Which of the following is NOT one of the big six banks in Canada?
Which of the following is NOT one of the big six banks in Canada?
The Canadian banking system has experienced a major bank failure since the Great Depression.
The Canadian banking system has experienced a major bank failure since the Great Depression.
What is a key advantage of the U.S. unit banking system?
What is a key advantage of the U.S. unit banking system?
In Canada, up to $______ is insured by the CDIC for account holders.
In Canada, up to $______ is insured by the CDIC for account holders.
Match the following banking systems with their main features:
Match the following banking systems with their main features:
What is a disadvantage of the Canadian banking system?
What is a disadvantage of the Canadian banking system?
The U.S. banking system offers the same identical rates across different banks.
The U.S. banking system offers the same identical rates across different banks.
How many banks are there approximately in the United States banking system?
How many banks are there approximately in the United States banking system?
Flashcards
Barter
Barter
A system where people exchange goods or services directly without using money. This requires both parties to want what the other has, which is difficult to find.
Double Coincidence of Wants
Double Coincidence of Wants
This occurs when both parties involved in a barter exchange want the goods that the other party has.
Commodity Money
Commodity Money
Money that has inherent value, like gold or silver. Its worth is tied to the value of the commodity itself.
Fiat Money
Fiat Money
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Bank Deposit Money
Bank Deposit Money
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Medium of Exchange
Medium of Exchange
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Measure of Value
Measure of Value
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Store of Value
Store of Value
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Excess Reserves
Excess Reserves
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Reserve Ratio
Reserve Ratio
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How Banks Create Money
How Banks Create Money
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Credit
Credit
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Bank Lending
Bank Lending
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Interest Rate Setting
Interest Rate Setting
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Limited Bank System
Limited Bank System
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Reserve Requirement (R.R.)
Reserve Requirement (R.R.)
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Excess Reserves (ER)
Excess Reserves (ER)
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Money Creation Process
Money Creation Process
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Amount of New Deposits
Amount of New Deposits
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Amount of New Money
Amount of New Money
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Money Creation Stops
Money Creation Stops
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Multibank System
Multibank System
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No Cash Strain
No Cash Strain
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Branch Banking
Branch Banking
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Big Six Banks
Big Six Banks
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Unit Banking
Unit Banking
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Specialization and Competition
Specialization and Competition
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Risk of Bank Failure
Risk of Bank Failure
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Canadian Deposit Insurance Corporation (CDIC)
Canadian Deposit Insurance Corporation (CDIC)
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FDIC (Federal Deposit Insurance Corporation)
FDIC (Federal Deposit Insurance Corporation)
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Oligopoly in Banking
Oligopoly in Banking
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Cash Drains
Cash Drains
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Assumption of Excess Reserves
Assumption of Excess Reserves
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Multiplier Effect
Multiplier Effect
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Replenishing Reserves
Replenishing Reserves
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Study Notes
History of Money
- Before money, people bartered—exchanging goods/services.
- Bartering relied on a "double coincidence of wants."
- Early money forms included cattle, livestock, and commodity-based currencies.
- Commodity money had value based on intrinsic worth (e.g., gold, silver).
- Fiat money is now used; its value comes from government decree.
Functions of Money
- Medium of Exchange: Generally accepted by everyone, solves the "double coincidence of wants" issue.
- Measure of Value: Allows assigning specific values to items.
- Store of Value: Enables saving and transferring wealth across generations.
- Standard for Future Payments: Allows for future payments and paying for goods/services in increments.
How Banks Create Money
- Excess Reserves (ER): Money banks hold beyond what's needed to meet regular demands.
- Reserve Ratio (R.R): Specifies the percentage of funds a bank must hold in reserve.
- Banks loan out ER to create new money.
- Banks may have a reserve requirement set by the government.
- The multiplier effect amplifies the initial deposit into a larger sum of money.
Bank Systems
- Limited Bank System: A system where a cash shortage can stop the money creation cycle.
- Multibank System: System where the full amount of new money creation occurs.
- New deposits can be calculated using the reserve ratio.
US vs. Canadian Banking Systems
- Canadian: Branch Banking System, numerous branches across the country, high degree of security, and risk is distributed.
- United States: Unit Banking System, one bank per area; specialization, competition for rates, but a risk of bankruptcy due to the unit nature and lack of redundancy.
- CDIC (Canada) insures deposits up to $100,000; similar insurance schemes exist in the US.
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Description
Explore the evolution of money from bartering to fiat systems, and understand the key functions money serves in today's economy. This quiz will also cover how banks create money through reserve ratios and excess reserves. Test your knowledge on these essential economic concepts!
