Question

1-Even on a gold standard, a central bank cannot go bankrupt.

True

False

2-The more layers there are in the banking system, the more the money supply can be expanded

True

False

3-If it wasn’t for their central bank, Canada would have been unable to survive the Great Depression

True

False

4-The problem with banks issuing their own bank notes is that this can cause inflation

True

False

Answer 1

1) False. Central bank can go bankrupt even on gold standard as conventional balance sheet of central bank is uninformative about financial resources at its disposal and ability to act as effective lender and market marker of last resort. Additionally there are limits to amount of real resources central bank can appropriate by increasing the issuance of nominal base money.

2) True. Banking system contains multiple layers today to cater to the specific and varied requirements of different customers and borrowers. So by touching rural population and other small areas reach of banking system can be increased and more money supply can be expanded.

3) True. Canada set up a concentrated banking system that controlled mortgage lending and investment banking under the watchful eye of a single, strong regulator. In Canada the banking system was created as a system of large financial institutions whose size and diversification enhanced their robustness.

4) True. A banknote is payable to the bearer on demand, and the amount payable is apparent on the face of the note. It is considered as a legal standard. As increase in issuance of higher denomination banknote increases inflation.