Deck 8: Money, the Price Level, and Inflation

Question 1

If you can find someone to swap what you have for what you want, then

A)there exists a double system of money.
B)money is necessary for the exchange to work.
C)there exists a monetary exchange system.
D)there exists a double coincidence of wants.
E)specialization is impossible in the society in which you live.

Answer 1

there exists a double coincidence of wants.

Question 2

Which of the following assets is the most liquid?

A)a line of credit
B)a credit card
C)a Van Gogh painting
D)a house
E)cash

Answer 2

cash

Question 3

Money is

A)any commodity or token that is generally acceptable as a means of payment.
B)the same as gold.
C)equivalent to barter.
D)any commodity that can act as a store of value.
E)currency plus credit cards plus debit cards.

Answer 3

any commodity or token that is generally acceptable as a means of payment.

Question 4

Which one of the following items is not included in the M1 definition of money?

A)currency outside banks.
B)personal chequable deposits
C)non- personal chequable deposits
D)fixed term deposits
E)Neither C nor D are part of M1.

Question 5

The higher and more unpredictable the changes in the monetary unit, the

A)lower the opportunity cost of using it as a standard of deferred payment.
B)less likely barter exchange will replace it.
C)lower the opportunity cost of using it as a store of value.
D)higher the opportunity cost of using it as a store of value.
E)lower the opportunity cost of using it as a medium of exchange.

Question 6

Money's function as a store of value can best be described as

A)an agreed- upon measure for stating the prices of goods and services.
B)a generally acceptable exchange system.
C)an efficient means of writing contracts over a long time period.
D)a guarantee of a double coincidence of wants.
E)something that can be held and exchanged later for goods and services.

Question 7

Which of the following best fits the definition of money?

A)any medium of exchange
B)an obligation between the parties to a transaction
C)gold
D)any commodity or token that is generally acceptable as a means of payment
E)any unit of account

Question 8

Which one of the following is not a store of value?

A)a credit card
B)a fixed term deposit
C)a non- personal chequable deposit
D)a personal chequable deposit
E)a non- chequable deposit

Question 9

If the prices of goods and services are stated in terms of kilograms of salt, then salt is

A)a renewable resource.
B)a medium of exchange.
C)a store of value.
D)a unit of account.
E)quasi- money.

Question 10

The official definitions of money can include all of the following except

A)personal chequable deposits.
B)fixed term deposits.
C)non- chequable deposits.
D)deposits owned by the Government of Canada.
E)currency outside banks.

Question 11

The largest component of M1 is

A)personal chequable deposits.
B)currency outside banks.
C)fixed term deposits.
D)non- personal chequable deposits.
E)non- personal non- chequable deposits.

Question 12

Which one of the following is not a function of money?

A)unit of account
B)medium of exchange
C)means of payment
D)store of value
E)measure of liquidity

Question 13

Which of the following is not considered money in Canada today?

A)deposits at banks
B)debit cards
C)Bank of Canada notes
D)coins
E)deposits at credit unions

Question 14

Using a credit card can best be likened to

A)withdrawing money from a savings account.
B)using any other form of money, because you can immediately take the goods you purchase home.
C)writing a cheque on your chequable deposit.
D)taking out a loan.
E)a barter exchange.

Question 15

Money can take the form of any one of the following except

A)coins.
B)a non- chequable deposit.
C)Bank of Canada notes.
D)a credit card.
E)a chequable deposit.

Question 16

The higher and more unpredictable the changes in a monetary unit, the

A)more confidence people will have in holding it for the future.
B)more likely it will be used as a store of value.
C)less likely it will be used as a store of value.
D)more likely it will be used as a standard of deferred payment.
E)less likely contracts will be written to counterbalance the uncertainty of its value in the future.

Question 17

Without money to act as a medium of exchange,

A)all exchanges that take place under a monetary system would still take place.
B)the standard of living in the economy would increase.
C)barter exchange would allow for a much simpler yet increased standard of living.
D)the increased transactions costs associated with trading would prohibit some trades from taking place.
E)independence in production would lead to a proliferation of new products.

Question 18

Which one of the following is a component of M2 but not of M1?

A)currency in a bank vault
B)personal chequable deposits
C)non- personal chequable deposits
D)personal non- chequable deposits
E)currency outside banks

Question 19

Which of the following is a function of money?

A)a means of reducing transactions costs
B)tool for barter
C)a medium of exchange
D)a measure of liquidity
E)a means of pooling risk

Question 20

Money's function as a unit of account can best be described as

A)a generally accepted medium of exchange.
B)a commodity that can be exchanged for another commodity.
C)an entry in an accounting ledger.
D)an agreed- upon measure for stating the prices of goods and services.
E)a method of recording transactions.

Question 21

Consider the following data from the economy of Adanac:
• Currency outside banks: $15 billion
• Personal and non- personal chequable deposits: $40 billion
• Personal non- chequable deposits: $50 billion
• Non- personal non- chequable deposits: $125 billion
• Fixed term deposits: $200 billion
The value of MI is $_______ billion and the value of M2 is $_______ billion.

A)55; 230
B)55; 430
C)110; 235
D)105; 230
E)60; 430

Question 22

Use the information below to answer the following questions.
Fact 8.1.2
Currency held by individuals and businesses is $57 billion; chequable deposits owned by individuals and businesses are $211 non- chequable personal deposits are $163 billion; non- chequable business deposits are $29 billion; and fixed term deposits are $303 billion.
Consider Fact 8.1.2.M2 is

A)$268 billion.
B)$57 billion.
C)$763 billion.
D)$460 billion.
E)$431 billion

Question 23

Which one of the following is not a depository institution?

A)The Bank of Montreal
B)a caisse populaire
C)The Bank of Canada
D)Canada Trust
E)a credit union

Question 24

Which one of the following is most liquid?

A)chequable deposits
B)government bonds
C)real estate
D)cheques
E)debit cards

Question 25

Which one of the following is not a depository institution?

A)a caisse populaire
B)a trust and mortgage loan company
C)a car insurance company
D)a credit union
E)a foreign- owned chartered bank

Question 26

A financial firm that takes deposits from households and firms is

A)a usurer.
B)a central bank.
C)a depository institution.
D)a pawn shop.
E)a credit company.

Question 27

Liquidity is

A)the degree of uncertainty about the price of a financial asset.
B)the net flow of gold into the Bank of Canada.
C)the risk encountered by holding a financial asset.
D)the degree of stability of the banking system.
E)the property of being easily convertible into a means of payment without loss in value.

Question 28

Barter can only take place if there is

A)low transaction costs.
B)money.
C)a double coincidence of wants.
D)no inflation.
E)a double coincidence of money.

Question 29

In a world with no money, costs are expressed in terms of other goods.If one video game costs two hamburgers, and a hamburger costs three pops, how many pops would it take to buy a video game?

A)5
B)3
C)3/2
D)1/6
E)6

Question 30

Which one of the following is considered to be money?

A)a Van Gogh painting
B)a cheque
C)a credit card
D)currency
E)a debit card

Question 31

Use the information below to answer the following questions.
Fact 8.1.2
Currency held by individuals and businesses is $57 billion; chequable deposits owned by individuals and businesses are $211 non- chequable personal deposits are $163 billion; non- chequable business deposits are $29 billion; and fixed term deposits are $303 billion.
Consider Fact 8.1.2.M1 is

A)$57 billion.
B)$460 billion.
C)$763 billion.
D)$431 billion
E)$268 billion.

Question 32

Use the information below to answer the following question.
Fact 8.1.1
The information describes a banking system.All banks are holding their desired reserves.

Refer to Fact 8.1.1.The quantity of money as measured by M1 is equal to

A)$1,500.
B)$6,500.
C)$6,000.
D)$2,500.
E)$7,000.

Question 33

Which one of the following is considered to be money?

A)a debit card
B)a blank cheque
C)a lottery ticket
D)a credit card
E)a chequable deposit

Question 34

Which of the following items is money in Canada today?

A)gold
B)your loan to pay for school fees
C)Bank of Canada dollar bills in your wallet
D)cash in CIBC's cash machines
E)your Visa card

Question 35

During a period of severe inflation, which function of money is most seriously affected?

A)barter
B)unit of account
C)store of value
D)medium of exchange
E)means of payment

Question 36

If Wolfgang transfers $1,000 out of his non- chequable deposit account and places it in his chequable deposit account,

A)M1 and M2 fall.
B)M1 rises and M2 remains the same.
C)M1 falls and M3 rises.
D)M1 falls and M2 rises.
E)M1 falls and M2 remains the same.

Question 37

Anything can be money as long as it

A)has low transactions costs.
B)is acceptable as a medium of exchange.
C)meets the double coincidence of wants.
D)has intrinsic worth.
E)is not too bulky.

Question 38

Which of the following is a store of value?

A)fresh fruit and vegetables
B)a cheque
C)a debit card
D)a fixed term deposit
E)a credit card

Question 39

Which one of the following is not money?

A)a credit card
B)a chequable deposit
C)Canadian currency
D)a fixed term deposit
E)a non- chequable deposit

Question 40

If Wolfgang transfers $1,000 out of his chequable deposit account and places it in his non- chequable deposit account,

A)M1 falls and M2 rises.
B)M1 and M2 fall.
C)M1 rises and M2 remains the same.
D)M1 falls and M2 remains the same.
E)M1 falls and M3 rises.

Question 41

When the Bank of Canada sells government securities to a bank, how are the Bank of Canada's assets affected?

A)Bank of Canada notes increase.
B)The bank's reserves held at the Bank of Canada increase.
C)The amount of the Bank of Canada's government securities decreases.
D)The amount of the Bank of Canada's government securities increases.
E)The bank's reserves held at the Bank of Canada decrease.

Question 42

Which of the following statements about depository institutions is false?

A)They borrow at lower interest rates and lend at higher rates.
B)They keep reserves to meet cash withdrawals.
C)They create liquidity by borrowing long and lending short.
D)They pool, and therefore reduce, risk.
E)A credit union is an example of a depository institution.

Question 43

Which one of the following is not an economic benefit provided by depository institutions?

A)pooling risk
B)providing a place for reserve account deposits
C)lowering the cost of monitoring borrowers
D)lowering the cost of borrowing
E)creating liquidity

Question 44

The Bank of Canada does not do which of the following?

A)act as a lender of last resort to banks
B)issue bank notes
C)lend money to the public
D)hold government of Canada securities
E)supervise chartered banks

Question 45

Pooling risk

A)refers to the lower cost of obtaining funds from a depository institution.
B)is now illegal under the Nuisance Act of 2014.
C)occurs when one person lends to an entire group or pool of borrowers.
D)refers to a default contract made by a bank to other banks.
E)refers to spreading the risk of loan default among all the depositors within the depository institution.

Question 46

When the Bank of Canada makes an open market purchase, its assets _______ and its liabilities _______.

A)decrease; increase
B)increase; increase
C)decrease; decrease
D)increase; decrease
E)decrease; do not change

Question 47

_______ is the interest rate that the Bank of Canada charges on short- term loans that it makes to major depository institutions when the banking system is temporarily short of reserves.

A)The Treasury bill rate
B)Bank rate
C)The overnight loans rate
D)Prime
E)The federal funds rate

Question 48

The reserves of a bank include

A)the cash in its vault plus any deposits held on account with the Bank of Canada plus the value of any government bonds that it holds.
B)the cash in its vault plus the value of its chequable deposits.
C)the cash in its vault plus any deposits held on account at the Bank of Canada.
D)the cash in its vault plus any gold held for the bank at the Bank of Canada.
E)all of its common stock holdings, the cash in its vault, and all deposits held on account with the Bank of Canada.

Question 49

Choose the statement that is incorrect.

A)100 percent reserve banking is a system in which banks keep the full amount of their depositors' funds as a cash reserve.
B)Fractional- reserve banking was invented by gold prospectors in the Canadian Yukon during the gold rush.
C)Fractional- reserve banking is a system in which banks keep a fraction of their depositors' funds as a cash reserve and lend the rest.
D)The Austrian School of economists say that fractional- reserve banking violates property rights because the bank has no legal right to lend a deposit to someone else.
E)The requirement to hold 100 percent reserves lowers bank profits.

Question 50

The monetary base is the sum of

A)Bank of Canada notes held within the Bank of Canada, bank deposits at the Bank of Canada, and coins held by banks.
B)Bank of Canada notes held within the Bank of Canada, bank deposits at the Bank of Canada, and coins held by banks and the public.
C)Bank of Canada notes held outside the Bank of Canada, bank deposits at the Bank of Canada, and notes and coins held by banks.
D)Bank of Canada notes held outside the Bank of Canada, bank deposits at the Bank of Canada, and coins held by banks and the public.
E)Bank of Canada notes held outside the Bank of Canada, the desired reserves of chartered banks, and coins held by banks.

Question 51

Choose the statement that is incorrect.

A)A chartered bank is a private firm, chartered under the Bank Act of 1991 to receive deposits and make loans.
B)A caisse populaire is similar to a credit union.
C)Trust and mortgage loan companies receive deposits, make loans, and act as trustee for pension funds and for estates.
D)A credit union is a cooperative organization that operates under the Co- operative Credit Association Act of 1991.
E)Trust and mortgage loan companies have the bulk of the deposits in M1 and M2.

Question 52

Who bears the ultimate responsibility for regulation of depository institutions?

A)The Office of the Superintendent of Financial Institutions
B)The Canada Deposit Insurance Corporation
C)The Department of Finance
D)The Bank of Canada
E)The Federal Reserve

Question 53

When the Bank of Canada makes an open market sale, its assets _______ and its liabilities _______.

A)decrease; increase
B)decrease; do not change
C)decrease; decrease
D)increase; increase
E)increase; decrease

Question 54

Which of the following does not affect the size of the monetary base?

A)the amount of coins issued by the Canadian Mint
B)the amount of notes issued by the Bank of Canada
C)the amount of chartered bank deposits at the Bank of Canada
D)the amount of loans issued by chartered banks
E)none of the above

Question 55

The riskiest assets for a chartered bank are

A)securities.
B)Government of Canada Treasury bills.
C)reserves.
D)loans.
E)Government of Canada bonds.

Question 56

The Bank of Canada is the lender of last resort.This means banks may borrow money from the Bank of Canada

A)overnight.
B)whenever they are short of reserves.
C)to finance a sudden and dramatic increase in overseas reserves.
D)if they have sufficient securities to support the loan.
E)if the banking system as a whole is short of reserves.

Question 57

The Bank of Canada makes an open market purchase to

A)decrease the monetary base.
B)increase the monetary base.
C)increase Bank of Canada notes.
D)raise interest rates.
E)decrease bank reserves.

Question 58

Bank of Canada notes are

A)an asset of the chartered banks.
B)part of M1 when they are held in a bank's vault.
C)a liability of the Bank of Canada.
D)a liability of the chartered banks.
E)an asset of the Bank of Canada.

Question 59

Which of the following is an economic function of a chartered bank?

A)conducting monetary policy
B)supervising financial markets
C)supervising the payments system
D)pooling risk
E)issuing bank notes

Question 60

Which of the following is an asset of the Bank of Canada?

A)depository institution deposits
B)deposits of private Canadian citizens
C)loans to private Canadian citizens
D)loans to depository institutions
E)Bank of Canada notes

Question 61

Whenever actual reserves exceed desired reserves, the bank

A)will raise the interest rate on its loans.
B)will borrow funds from another bank.
C)needs to call in loans.
D)will go out of business.
E)can make new loans.

Question 62

The money creation process begins when

A)desired reserves increase because of an increase in deposits.
B)the quantity of money increases.
C)banks have excess reserves.
D)banks lend reserves.
E)bank deposits increase.

Question 63

Excess reserves are

A)desired reserves minus actual reserves.
B)required reserves minus desired reserves.
C)actual reserves minus desired reserves.
D)liquidity funds minus actual reserves.
E)required reserves minus actual reserves.

Question 64

If the desired reserve ratio is 3 percent and deposits are $5.75 billion, banks hold

A)$0.1725 million in excess reserves.
B)$192 million in reserves.
C)$0.1725 million in reserves.
D)$172.5 million in excess reserves.
E)$172.5 million in reserves.

Question 65

Whenever desired reserves exceed actual reserves, the bank

A)is in a profit- making position.
B)can make new loans.
C)will go out of business.
D)will call in loans.
E)has excess reserves.

Question 66

When the nominal interest rate rises, the opportunity cost of holding money

A)falls and people hold less money.
B)rises and people hold more money.
C)rises and people hold less money.
D)falls and people hold more money.
E)does not change.

Question 67

Use the information below to answer the following questions.
Fact 8.4.2
The Bank of Hobbiton has chosen the following initial balance sheet:

Refer to Fact 8.4.2.Based on the Bank of Hobbiton's initial balance sheet, what is its desired reserve ratio?

A)10 percent
B)5 percent
C)100 percent
D)20 percent
E)cannot be calculated with the available information

Question 68

Use the information below to answer the following questions.
Fact 8.4.1
The Bank of Speedy Creek has chosen the following initial balance sheet:

Refer to Fact 8.4.1.Based on the Bank of Speedy Creek's initial balance sheet, what is its desired reserve ratio?

A)25 percent
B)8 percent
C)40 percent
D)12.5 percent
E)4 percent

Question 69

If people decide to transfer their currency into their bank deposits then,

A)the quantity of money decreases.
B)the actual reserves of banks increase.
C)the quantity of money to increases immediately.
D)interest rates rise.
E)the inflation rate falls.

Question 70

In Canada

A)the money multiplier increases when the desired reserve ratio increases.
B)the M1 multiplier decreases over time.
C)the money multiplier increases when the currency drain ratio increases.
D)the M1 multiplier is less than the M2 multiplier.
E)the M2 multiplier decreases over time.

Question 71

Use the information below to answer the following questions.
Fact 8.4.1
The Bank of Speedy Creek has chosen the following initial balance sheet:

Refer to Fact 8.4.1.Huck Finn comes along and deposits $10.After Huck's deposit, but before any other actions occur, the total amount of money in the economy

A)has stayed the same, with its components unchanged.
B)has fallen, with currency decreasing and deposits staying the same.
C)has risen, with currency unchanged and deposits increasing.
D)has fallen, with currency decreasing and deposits unchanged.
E)has stayed the same, with currency decreasing and deposits increasing.

Question 72

The quantity of money that the banking system can create is limited by

A)the number of consumers who apply for loans.
B)the monetary base, desired reserves, and desired currency holdings.
C)bank managers' decisions.
D)the credit ratings of the consumers who are applying for loans.
E)the quantity of bank notes released by the Bank of Canada.

Question 73

The ratio of currency to deposits is the

A)monetary reserve ratio.
B)excess reserve ratio.
C)reserve ratio.
D)currency drain ratio.
E)currency ratio.

Question 74

Use the information below to answer the following questions.
Fact 8.4.2
The Bank of Hobbiton has chosen the following initial balance sheet:

Refer to Fact 8.4.2.Bilbo Baggins comes to the bank and deposits a $100 bill.After Bilbo's deposit, but before any other actions occur, the total quantity of money in the economy

A)has fallen, with currency decreasing and deposits unchanged.
B)has stayed the same, with its components unchanged.
C)has risen, with currency unchanged and deposits increasing.
D)has stayed the same, with currency decreasing and deposits increasing.
E)has fallen, with currency decreasing and deposits staying the same.

Question 75

The Canadian money multiplier is calculated as the

A)change in monetary base divided by the change in deposits.
B)change in quantity of bank notes divided by the change in monetary base.
C)change in the quantity of money divided by the change in the monetary base.
D)change in monetary base divided by the change in quantity of money.
E)change in monetary base divided by the change in currency holdings of households.

Question 76

Quantitative easing

A)is an open market purchase of securities by the U.S.Federal Reserve.
B)raises the nominal interest rate.
C)decreases bank reserves.
D)is an open market sale of securities by the U.S.Federal Reserve.
E)is an open market purchase of securities by the Government of Canada.

Question 77

A bank can create money by

A)converting reserves into securities.
B)lending its excess reserves.
C)selling some of its securities.
D)increasing its reserves.
E)printing more cheques.

Question 78

When the interest rate falls in the money market, the quantity of money demanded _______ and the quantity of money supplied _______.

A)increases; decreases
B)remains unchanged; decreases
C)increases; remains unchanged
D)remains unchanged; remains unchanged
E)decreases; increases

Question 79

The banks on Sunny Island have deposits of $4 million, reserves of $600,000, and loans of $2.4 million.The desired reserve ratio is 10 percent.The banks have _______ of desired reserves and _______ of excess reserves.

A)$200,000; $600,000
B)$200,000; $400,000
C)$600,000; $200,000
D)$400,000; $600,000
E)$400,000; $200,000

Question 80

Suppose that a country has $50 billion in bank reserves, $100 billion in currency held by the public, and $500 billion in bank deposits.The currency drain ratio is

A)30%.
B)10%.
C)50%.
D)20%.
E)18%.