The Following Is a Simplified Consolidated Balance Sheet for the Chartered

question 26

Multiple Choice

The following is a simplified consolidated balance sheet for the chartered banking system and the Bank of Canada.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 sells $2 in securities directly to the chartered banks.As a result of this transaction, the supply of money:

• A)will directly increase by $2 and the money-creating potential of the chartered banking system will increase by $38.
• B)will directly decrease by $2 and the money-creating potential of the chartered banking system will decrease by $40.
• C)is not directly affected, but the money-creating potential of the chartered banking system will decrease by $40.
• D)will decrease by $2, but the money-creating potential of the chartered banking system will not be affected.

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Definitions:

Debt-To-Equity Ratio

A metric outlining the balance of shareholder equity and debt in the financial composition for supporting a company's assets.

Equity Multiplier

A financial leverage ratio that indicates the portion of a company's assets that are financed by shareholders' equity.

Net Profit Margin

A financial metric that shows the percentage of revenue remaining after all operating expenses, interest, taxes, and preferred stock dividends have been deducted from total revenue.

Gross Margin

The difference between sales revenue and the cost of goods sold, representing the profit before deducting operating expenses.