The Following Are Simplified Consolidated Balance Sheets for the Chartered

question 49

Multiple Choice

The following are simplified consolidated balance sheets for the chartered banking system and the Bank of Canada.Do not cumulate your answers; that is, do return to the data given in the original balance sheets in answering each question.Assume a desired reserve ratio of 5 percent for the chartered banks.All figures are in billions of dollars.CONSOLIDATED BALANCE SHEET: CHARTERED BANKING SYSTEM BALANCE SHEET: BANK OF CANADA
Refer to the above information.Suppose the Bank of Canada buys $2 in securities from the public.As a result of this transaction, the supply of money will:

• A)directly increase by $2 and the money-creating potential of the chartered banking system will increase by $38.
• B)directly increase by $40 and the money-creating potential of the chartered banking system will increase by $800.
• C)directly increase by $2 and the money-creating potential of the chartered banking system will be unaffected.
• D)be unaffected but the money-creating potential of the chartered banking system will increase by $40.

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Definitions:

Transfer

The act of moving or conveying property, title, or rights from one entity or person to another.

Negotiable Instrument

A document in writing that ensures the payment of a certain sum of money, either when requested or at a predetermined date, with the document explicitly naming the individual responsible for payment.

Holder in Due Course

A party who has acquired a negotiable instrument in good faith and for value, and thus has certain protections against defects in the instrument and previous parties.

Payable on Demand

A financial term indicating that a debt or other financial obligation is due for payment as soon as the lender requests it.