1(a). First, distinguish between an income/expenditure statement and a flow-of-funds statement; then, suppose you are given the following information on the revenues, expenses, assets and liabilities of a hypothetical Canadian chartered bank for the year 2018, determine the bank's profit position in terms of its return on assets (ROA), and its return on equity (ROE) positions. Then, using the CAMELS rating procedure, calculate the bank's capital adequacy ratio (sometimes called, the leverage ratio); its asset quality ratio; its management efficiency (competency) ratio; its earnings ratios of ROA and ROE; its liquidity ratio (sometimes called, the liquid asset ratio); its sensitivity to market risk ratio and its equity multiplier [EM]. Lastly, construct BOTH the bank's balance sheet statement for the end of the year, 2018 and its income-expenditure statement for that year:

Salaries and employee benefits..... $180,000; Interest on deposits..... $270,000; Interest income from loans..... $320,000; Investment income from Government of Canada bonds.....$75,000; Interest on non-deposit borrowing.....$30,000; Applicable income taxes..... $150,000; Occupancy costs.....$21,000; Provision for loan losses.....$52,000; Miscellaneous expenses..... $8,000; Interest on municipal securities..... $86,000; Service charges on deposits.... $210,000; Miscellaneous operating revenues..... $130,000; Bank equity capital.....$70 million; Demand (checking) deposits accounts .....$100 million; Savings deposit accounts.....$150 million; Time (fixed term) deposit accounts.....$300 million; Advances (loans) from the central bank.....$12 million; Cash reserves.....$20 million; Other assets.....$150 million; Real estate[i.e., mortgage] loans.....$80 million. Government of Canada securities.....$25 million; Commercial and industrial loans.....$300 million; Other liabilities.....$38 million; Municipal securities.....$55 million; Loans to individuals.....$40 million.

1(b). In a hypothetical economy with a competitive banking system in which banks produce only demand deposits, the narrow money supply (M1) in existence is $1750 million; the idle excess reserves drain coefficient (e ) is 3%, the customary cash reserve ratio (r ) for demand deposits is 8%, and the currency/deposit ratio (cr ) is 30%. Using the multiplier model discussed in class or chapter 15 of the textbook, determine and calculate: (i) the equilibrium level of the monetary base (MB); (ii) the equilibrium level of demand deposits (D); (iii) the total amount of desired cash reserves held by banks (BCR), the amount of currency (C )held by the non-bank public; (iv) the amount of bank loans (BL and the values of the deposit (dm) and money multipliers (mm). Use diagrams to ILLUSTRATE your answers, where necessary.

The economy, however, faces a situation of unemployment pressures. To alleviate these pressures in the economy, the monetary authorities implement a macroeconomic policy package (consisting of both expansionary monetary policy and expansionary fiscal policy) to increase the monetary base by 25% and reduce taxes which, in turn, causes the currency/deposit ratio to decline by 25%. Other things being equal, (i) calculate the percentage change in the equilibrium level of the money supply after the policy change and illustrate your answer with an appropriate diagram.

Lastly, assume that the money demand function in the above economy stays the same after the policy change. What is the expected short-run effect of the change in the money supply on the equilibrium interest rate? Explain carefully and illustrate with appropriate diagram(s).

(iii) What is the expected short-run effect on the equilibrium levels of income, employment, and the exchange rate? Explain carefully and use diagrams to illustrate your answers, where necessary.

1(c). Imagine an economy made up of the people and commodities in the Table 1 below. Each column refers to the commodity listed at the top and each row to the person listed at the left. A positive entry indicates the number of units of the commodity that someone has and is willing to sell. A negative entry indicates the number of units of the commodity that the person wants to buy. Each of these entries refers either to the quantities supplied or demanded given a price of ten dollars per unit of each commodity. For example, Elizabeth has two bushels of potatoes to sell. She wants to buy two hours of child guidance services for her daughter.

Table 1: A hypothetical 331 economy

Potatoes Dance Lessons Child guidance

Elizabeth, the potato farmer +2 0 -2

Anthony, the dance instructor -2 +2 0

Hassan, the child psychologist 0 -2 +2

Notice that all the rows and columns add up to zero. That means we have an equilibrium price system. Each person is able to trade for what is wanted and the quantities demanded and supplied are equal at the given prices.

(i) Assume Elizabeth has twenty dollars. Construct a set of money-using trades that clear the market. Comment on your answer.

(ii) Construct a set of barter or indirect barter transactions that clears the market. Hint: Remember that services such as dance lessons or child guidance cannot be passed through an intermediary. Comment on your answer.

1 (d). Suppose mortgage rates in the country rise from 5% to 10% but the expected rate of increase in housing prices rises from 2% to 9%, would you be more or less likely to buy a house. Explain.

2(a). From January 28, 2014, to October 28, 2014, Delaney's Fine Shoes Company achieved a saving position of $400,000, and experienced the following changes in its assets and liabilities of interest: the company invested in $475,000 worth of renovations and purchases of new equipment at both its Montreal and Toronto facilities, sold $100,000 worth of another company's stocks and bought $50,000 worth of Canada savings bonds. It also decreased its bank deposits by $50,000 and had to pay off a short-term debt of $25,000 that had become due at the time.

(i) Using the flow-of-funds equation, determine how much new borrowing the company might have contracted to achieve the stated changes in its financial position. (ii) Using the TWO METHODS discussed in class, set up the company's flow-of-funds statements for the stated period in 2014?

(iii) Determine if the company was a net debtor or net creditor during the stated period and calculate by how much such an amount might have been.

2(b). If all depositors tried to convert their deposits into cash at once, they would find that there are not sufficient reserves in the system to permit all of them to do this at the same time. Why then do we not still have panicky runs on the banks? Would it be better for the Bank of Canada and the federal government to impose a 100% reserve requirement? What effect would such a reserve requirement have on the banking system's ability to create deposit money? Would it preclude any possibility of a panic?

3(a) First, explain the practice of "fractional reserves banking" and briefly show how it provides the capacity for banks to create deposit money through debt monetization (i.e., through the process of payments intermediation). Do you think that this is a "good way" to create money? Then, carefully describe the basic functions of banks as private deposit-taking institutions; Finally, EVALUATE the statement that: "Whenever currency is withdrawn from the accounts of the private deposit-taking institutions, cash goes into circulation and, as a result, the supply of money is increased". Do you agree? Why? Why not? Explain carefully.

3(b). First, distinguish between primary deposits and derivative (secondary) deposits, making sure to indicate the significance of each in terms of the money supply model discussed in class. Then, evaluate the statement that "Canada will become cash-less society if the Canadian payments system evolved into full scale Electronic funds transfer with widespread use of mobile phones as mobile wallets or portable deposit accounts".

4(a). Write short explanatory notes on three (3) of the following, making sure to indicate the relative economic significance of each.

a) Asymmetric information problems in financial markets

b) Off-balance sheet activities of banks

c) The foreign exchange rate and the domestic exchange rate and the factors that may be used to explain fluctuations in currency values.

d) The Monetary Base [i.e., high-powered money].

e) Hawala.

f) Crypto-currency system and the block chain technology.

g) S.W.I.F.T.

4(b). Distinguish between open market operations and quantitative easing or tightening as tools of monetary policy and briefly comment on the usefulness of "forward guidance" as a new tool of monetary policy.