Quiz #39

• 1. A 10 per cent increase in bank reserves will increase the banks' capacity to make loans by a lesser amount because the banks always keep a minimum volume of reserves to allow the payments system to function efficiently.
• False
• True
• 2. When bank reserves overall are in excess of the minimum requirements determined by the banks, the commercial banks can profitably eliminate the excess by lending between themselves on the interbank market although this behaviour will drive the overnight interest rate down.
• False
• True
• 3. Under certain conditions, increasing bank credit can be inflationary. In this regard, as the world economy improves, the central bank will eventually need to reduce the reserves in the banking system to constrain the ability of banks to lend.
• False
• True
• 4. Central banks have a choice when attempting to stabilise aggregate demand and control inflation. They can set the price of money (via the interest rate) or control the volume of money. In recent years, they have been setting the price and allowing the volume to fluctuate.
• False
• True
• 5. Quantitative easing involves buying one type of financial asset (private bonds holdings) in exchange for another (reserve balances) with no change in net financial assets in the private sector. This may be inflationary, however, if the increased demand for long maturity assets held in the private sector reduces long-term interest rates and the demand for loans increases.
• False
• True