If the currency-to-deposit ratio increases, what effect, if any, does this have on the monetary base, the money supply, total deposits, and economic growth?© BrainMass Inc. brainmass.com October 16, 2018, 9:09 pm ad1c9bdddf
The response addresses the queries posted in 486 words with references.
//Before lettering about the effect of currency-to-deposit ratio, we have to first be aware of the currency-to-deposit ratio and its various aspects that bring change. So, firstly, I will write about the concept of currency-to-deposit ratio. //
It is the amount of currency that people hold relative to their deposits. In currency-deposit ratio, currency is divided by deposits. The ratio shows the behavior and preference of public in an economy. If currency-deposit ratio increases, there is a decrease in money supply. Decrease in currency deposit ratio leads to increase in money supply.
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Multiple choice/ short answer questions : multiplier model, recession, automatic stabilizers, budget deficit, money, reserve ratio, currency to deposit ratio, Monetary policy, stimulate aggregate demand, expansionary monetary policy, AS/AD model, Countercyclical monetary policy, nominal interest rates, real interest rates, recessionary gap, autonomous expenditures, Crowding out, Automatic stabilizer, Money multiplier, Open market operations, Budget deficit, money supply, tight (restrictive) monetary policy.
1. According to the multiplier model, the best way to reduce inflation is to
a. increase aggregate demand by cutting government spending or raising taxes.
b. increase aggregate demand by raising government spending or cutting taxes.
c. decrease aggregate demand by cutting government spending or raising taxes.
d. decrease aggregate demand by raising government spending or cutting taxes.
2. If the economy goes into a recession, automatic stabilizers will do all of the following except
a. increase income tax revenues.
b. increase the budget deficit.
c. increase unemployment insurance.
d. increase welfare payments.
Refer to the following table as you answer the next question.
Year Surplus or deficit (-)
billions of dollars
3. Which statement is true?
a. The budget deficit in 1950 was $2.3 billion.
b. From 1946 to 1950, the debt was $2.3 billion.
c. From 1945 to 1950, the debt rose by $2.3 billion.
d. In 1950, the debt was $2.3 billion.
4. Money can be many things, but it is not
a. a financial liability.
b. a financial asset.
5. A reserve ratio of 0.10 means that a bank loans out __________ percent of its_______
a. 10; deposit liabilities
b. 10; excess reserves
c. 90; deposit liabilities
d. 90; excess reserves
6. In the real world, the currency to deposit ratio is
c. greater than 0 but less than or equal to 1.
d. greater than 1.
7. Monetary policy affects
a. inflation only.
b. output only.
c. both inflation and output.
d. neither inflation nor output.
8. If the Bank of Canada wanted to stimulate aggregate demand, it could
a. raise the target range for the overnight financing rate, thereby reducing interest rates throughout the economy.
b. raise the target range for the overnight financing rate, thereby increasing interest rates throughout the economy.
c. lower the target range for the overnight financing rate, thereby reducing interest rates throughout the economy.
d. lower the target range for the overnight financing rate, thereby increasing interest rates throughout the economy.
9. Which of the following is an example of an expansionary monetary policy?
a. Raising the bank rate.
b. Raising the overnight financing rate.
c. Selling bonds.
d. Buying bonds.
10. Bank of Canada sales of government bonds ________ bank reserves, and _______ the money supply.
a. increase; increase
b. decrease; decrease
c. decrease; increase
d. increase; decrease
11. In the AS/AD model, an expansionary monetary policy
a. increases aggregate demand by reducing interest rates.
b. increases aggregate demand by raising interest rates.
c. reduces aggregate demand by reducing interest rates.
d. reduces aggregate demand by raising interest rates.
12. Countercyclical monetary policy in the AS/AD model involves
a. contractionary monetary policy throughout the business cycle.
b. expansionary monetary policy throughout the business cycle.
c. contractionary monetary policy during boom periods and expansionary monetary policy during recession.
d. contractionary monetary policy during recession and expansionary monetary policy during boom periods.
13. Which of the following gives the correct relationship between nominal and real interest rates?
a. real interest rate = nominal interest rate + expected inflation rate
b. nominal interest rate = real interest rate + expected inflation rate
c. expected inflation rate = nominal interest rate + real interest rate
d. nominal interest rate = real interest rate ? expected inflation rate
14. Suppose an expansionary monetary policy reduces nominal interest rates. If this is the case, it follows that the expansionary monetary policy must have
a. reduced expected inflation.
b. increased expected inflation.
c. increased expected inflation less than it reduced real interest rates.
d. reduced real interest rates less than it increased expected inflation
15. Suppose the Japanese economy faces a recessionary gap of 120. If mpc is 0.6 and the price level is constant, the government should increase autonomous expenditures
a. by 20
b. by 48
c. by 72
d. by 120
Questions 16 and 17 (Short Answer)
16. Define and briefly explain the significance of each of the following terms.
a. Crowding out
b. Automatic stabilizer
c. Money multiplier
d. Open market operations
e. Budget deficit
17. Explain how the Bank of Canada can influence interest rates and the money supply in Canada. Be specific about the tools that the Bank of Canada has available for these purposes, and describe how these tools would be used in the case of a tight (restrictive) monetary policy.
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