2. Fill in the blanks. In case you get stuck, I’ve provided a list of all the mi

Question

2. Fill in the blanks. In case you get stuck, I’ve provided a list of all the missing words in alphabetical order at the end of the question. The main institutions in the Canadian banking system are the Bank of Canada, which is the ________________________, and the set of private deposit taking institutions, including ________________________, ________________________, and savings/trusts and mortgage lenders. These private institutions are called ________________________ because they serve as the “middle-man” between borrowers and lenders in the economy. They reduce ________________________and ________________________involved in financial transactions, ensuring that there is a ready source of savings available for investors to borrow – a crucial ingredient for economic growth. Economists model the deposit-taking institutions as ________________________ by assuming that bank managers would like to lend out as much money as possible in exchange for interest income. However, their desire to create ________________________ by lending is tempered by their need to maintain sufficient reserve funds to service their customers withdrawal requests (customer deposits are ________________________ for the bank). In order to balance these two objectives, the bank manager pursues a ________________________. When new funds are deposited in a bank, the bank’s reserves, which include ________________________ and a reserve account held at the central bank, grow. Managers will keep a small part of these new reserves but lend the rest out to customers. The potential for ________________________, where many or all customers try to simultaneously withdraw their deposits from the bank and find the bank cannot meet all of its obligations is an important vulnerability of such ________________________ banking systems. Another interesting implication of this system is ________________________. Since banks leverage reserve funds to create new deposits (via lending), a new addition of reserves to the system has a bigger than one-to-one impact on the money supply. Changes in the so-called money-base, which includes cash and reserves at the Bank of Canada, are subject to a ________________________ in their ultimate impact to the national money supply.

Assets

Bank runs

Central bank

Chartered banks

CUCPs

Financial intermediaries

Fractional reserve

Information asymmetries

Liabilities

Money multiplier

Multiple deposit expansion

Profit-maximizing

Reserves

Target reserve ratio

Transaction costs

Vault cash

Assets

Bank runs

Central bank

Chartered banks

CUCPs

Financial intermediaries

Explanation / Answer

The main institutions in the Canadian banking system are the Bank of Canada, which is the _________Central Bank_______________, and the set of private deposit taking institutions, including _________chartered banks_______________, __________CUCPs______________, and savings/trusts and mortgage lenders. These private institutions are called ______financial intermediaries__________________ because they serve as the “middle-man” between borrowers and lenders in the economy. They reduce _______information assymetries_________________and ____________transaction costs____________involved in financial transactions, ensuring that there is a ready source of savings available for investors to borrow – a crucial ingredient for economic growth. Economists model the deposit-taking institutions as _______profit-maximizing_________________ by assuming that bank managers would like to lend out as much money as possible in exchange for interest income. However, their desire to create __________assets______________ by lending is tempered by their need to maintain sufficient reserve funds to service their customers withdrawal requests (customer deposits are _______liabilities_________________ for the bank). In order to balance these two objectives, the bank manager pursues a ________target-reserve ratio________________. When new funds are deposited in a bank, the bank’s reserves, which include ________vault cash________________ and a reserve account held at the central bank, grow. Managers will keep a small part of these new reserves but lend the rest out to customers. The potential for __________bank runs______________, where many or all customers try to simultaneously withdraw their deposits from the bank and find the bank cannot meet all of its obligations is an important vulnerability of such _________fractional reserve_______________ banking systems. Another interesting implication of this system is _______multiple deposit expansion_________________. Since banks leverage reserve funds to create new deposits (via lending), a new addition of reserves to the system has a bigger than one-to-one impact on the money supply. Changes in the so-called money-base, which includes cash and reserves at the Bank of Canada, are subject to a ________money multiplier________________ in their ultimate impact to the national money supply.

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