Deck 11: Banking, Money and Interest Rates

Question 1

A bank has excess liquid assets to lend but is unable to find anyone to borrow the money. This will the size of the money multiplier.

A) have no effect on
B) increase
C) double
D) reduce

Answer 1

D

Question 2

When financial institutions securitise debt and sell it to other financial institutions the level of risk in the financial sector may due to an excessive _ in lending.

A) increase; decrease
B) increase; increase
C) decrease; increase
D) decrease; decrease

Answer 2

B

Question 3

The capital adequacy ratio requirement for Australian banks is:

A) 10 percent
B) 5 percent
C) 12 percent
D) 8 percent

Answer 3

D

Question 4

Suppose all financial intermediaries in the financial sector have a liquidity ratio of 20%. If a new deposit of $1000 is made, total deposits can increase by:

A) $6000
B) $1000
C) $5000
D) $4000

Question 5

The central bank of Australia is known as the:

A) Commonwealth Bank
B) Department of the Treasury
C) Reserve Bank of Australia
D) money market

Question 6

Money demand is a function of all the following variables except the:

A) level of nominal national income
B) speculation about future asset prices
C) frequency with which people are paid
D) it depends on ALL of the above

Question 7

Suppose all financial intermediaries in the financial sector have a liquidity ratio of 25%. If a new deposit of $10 000 is made, total deposits can increase by a maximum of:

A) $25 000
B) $10 000
C) $40 000
D) $50 000

Question 8

Mike makes excellent cheesecake and Sue is very good at changing the oil in a car. Sue agrees to change the oil in Mike's car, if he makes her a cheesecake. This is an example of:

A) barter
B) commodity money
C) fiat money
D) legal tender

Question 9

The banking system has deposits of $100 million and no excess liquidity. Suppose all the banks decide to reduce their liquidity ratio from 25% to 20%. If there are no leakages from the banking system, the banking system:

A) could make additional loans up to $25 million
B) could make additional loans up to $20 million
C) could not make any additional loans because it has not received any new deposits
D) could make additional loans up to $5 million

Question 10

In calculating its capital adequacy ratio, a bank allocates its cash reserves a risk factor of:

A) zero
B) 1.5
C) 1.0
D) 0.5

Question 11

Lucy works at the World Bank. She values the vegetables produced for home consumption by small farmers in Fiji in Fiji dollars to better estimate the value of total production in Fiji. This is an example of money serving as:

A) a medium of exchange
B) a means of evaluation
C) an investment good
D) a store of value

Question 12

Oz Bank has $500 million in deposits. Oz Bank is meeting its liquidity ratio requirement and has no excess liquidity. It has $125 million in liquid assets. Oz Bank has a liquidity ratio of:

A) 25%
B) 4%
C) 20%
D) 1.25%

Question 13

To be suitable as a medium of exchange money must be:

A) divisible
B) difficult to forge
C) portable
D) all of the above

Question 14

Assume that banks become more conservative in their lending policies, and start holding some excess liquid assets. Compared to a situation in which banks are not holding excess reserves, the size of the money multiplier will be:

A) zero
B) smaller
C) the same
D) larger

Question 15

A medium of exchange is:

A) what sellers generally accept and buyers generally use to pay for goods and services
B) an asset that can be used to transport purchasing power from one period of time to another
C) the ability to buy something today but to defer payment to the future
D) a standard unit that provides a consistent way of quoting price

Question 16

Assume that some people who receive bank loans do not deposit the full amount of the loan into a bank. This will cause the money multiplier to be the bank deposits multiplier.

A) smaller than
B) greater than
C) neither greater than or smaller than
D) the same as

Question 17

Which of the following statements is correct?

A) A rise in money supply causes a fall interest rates; this causes a fall in the exchange rate; this causes a rise in exports and fall in imports.
B) A rise in money supply causes a fall interest rates; this causes a fall in the exchange rate; this causes a fall in exports and rise in imports.
C) A rise in money supply causes a rise interest rates; this causes a fall in the exchange rate; this causes a fall in exports and rise in imports.
D) A rise in money supply causes a fall interest rates; this causes a rise in the exchange rate; this causes a fall in exports and rise in imports.

Question 18

The market in which the equilibrium level of the interest rate is determined is the:

A) bond market
B) labour market
C) goods market
D) money market

Question 19

Which of the following will cause a movement along the demand for money curve?

A) growing expectations that share prices will fall
B) a fall in nominal GDP
C) a rise in bond prices
D) people believe that foreign interest rates will fall, while domestic interest rates will be unchanged

Question 20

Floral Plus, a wholesale supplier of real and silk flowers, has 200 different products in inventory. Floral Plus reports its inventory is worth $500 000. This is an example of using money as:

A) a standard of deferred payment
B) a store of value
C) a medium of exchange
D) a means of evaluation

Question 21

The Reserve Bank of Australia is not responsible for which of the following?

A) aiming to keep the rate of inflation in Australia between 2% and 3%
B) holding foreign currency reserves
C) acting as a lender of last resort to banks and non- bank institutions
D) issuing coins

Question 22

The interest rate is determined in the:

A) goods market and has no influence on the money market
B) goods market and influences the level of planned investment and thus the money market
C) money market and has no influence on the goods market
D) money market and influences the planned level of investment and thus the goods market

Question 23

When economists speak of the "demand for money", which of the following questions are they asking?

A) What proportion of your financial assets do you want to hold in the form of money?
B) How much cash do you wish you could have?
C) How much wealth would you like?
D) How much income would you like to earn?

Question 24

If the ABC Farmer's Bank has total assets of $100 million, of which $20 million are in liquid form, the bank's liquidity ratio is:

A) 100 percent
B) 20 percent
C) 10 percent
D) 50 percent

Question 25

The main reason that people hold money to buy things is referred to as the:

A) precautionary motive
B) speculation motive
C) transactions motive
D) assets motive

Question 26

An increase in nominal GDP will cause:

A) a movement down along the demand for money curve
B) a leftward shift in the demand for money curve
C) a rightward shift in the demand for money curve
D) a movement up along the demand for money curve

Question 27

M3 is equal to:

A) deposits with banks plus borrowings by non- bank financial intermediaries
B) coins and notes held by the public
C) currency, bank deposits and borrowings by non- bank financial intermediaries
D) currency plus current deposits and other deposits with banks

Question 28

The ABC Farmer's Bank has the following assets: which is the most liquid?

A) certificates of deposit
B) mortgage loans
C) deposits with the Reserve Bank of Australia
D) ten- year loans to farmers for capital and machinery

Question 29

If output increases and the interest rate remains constant, there will be:

A) a decrease in the quantity of money supplied
B) a decrease in the quantity of money demanded
C) an increase in the quantity of money supplied
D) an increase in the quantity of money demanded

Question 30

A fall in the money supply is likely to cause the interest rate to and investment expenditure to .

A) increase, increase
B) decrease, decrease
C) increase, decrease
D) decrease, increase

Question 31

Which of the following is NOT a non- bank financial intermediary?

A) Heritage Building Society
B) Unisuper superannuation fund
C) Westpac
D) The Maritime, Mining and Power Credit Union

Question 32

If the liquidity ratio is 10%, the bank multiplier is:

A) 10
B) 9
C) 0.1
D) 1

Question 33

If the liquidity ratio is 20%, the bank multiplier is:

A) 10
B) 0.2
C) 0.8
D) 5

Question 34

If people start to sell a currency and buy gold it suggests that they distrust that currency as:

A) a standard for payments over time
B) a medium of exchange
C) a means of adding up assets
D) a store of value

Question 35

If there is an endogenous money supply, this means that:

A) the money supply depends on the rate of interest and the demand for money
B) the money supply depends on the rate of interest, but not on the demand for money
C) the money supply curve is vertical
D) the supply of money is independently determined

Question 36

Assume that some people who receive bank loans do not deposit the full amount of the loan into a bank. This will cause the money multiplier to be than it would have been if all loans are deposited in banks.

A) smaller than
B) the same as
C) either greater than or smaller than
D) greater than

Question 37

A loan made by a bank is considered of that bank.

A) an investment
B) a liability
C) capital
D) an asset

Question 38

Which of the following is NOT a role or function of financial intermediaries?

A) they always channel funds to receive low but safe returns
B) they are involved in maturity transformation
C) they can reduce risk involved in lending money
D) they improve allocative efficiency in the economy

Question 39

A deposit made into a bank is considered _ _ of that bank.

A) capital
B) a liability
C) an investment
D) an asset

Question 40

An increase in aggregate output causes the demand for money to and the interest rate to .

A) decrease, decrease
B) increase, decrease
C) increase, increase
D) decrease, increase

Question 41

Which of the following activities is one of the responsibilities of the Reserve Bank of Australia?

A) administration of the indirect taxation system
B) ensuring sufficient funds are available to the banking sector
C) advising on income tax rates
D) auditing the various agencies and departments of the federal government

Question 42

Why are profitability and liquidity conflicting goals for financial institutions?

Question 43

When firms hold some of their money because of differences in timing between receipts and payments, this is the:

A) assets motive
B) speculation motive
C) transactions motive
D) precautionary motive

Question 44

A decrease in aggregate output causes the demand for money to _ and the interest rate to .

A) decrease, decrease
B) increase, increase
C) decrease, increase
D) increase, decrease

Question 45

What is meant by the term 'maturity transformation'?

Question 46

The normal capital adequacy ratio actually maintained by Australian banks is:

A) sometimes above and sometimes below the required ratio
B) normally above the required ratio
C) always exactly equal to the required ratio
D) normally below the required ratio

Question 47

Correctly complete the following statements from the options below.
Statement
a() M1 is defined as:
b() Broad money is defined as:
c() M3 is defined as:
Answer

Question 48

Gold Bank has $120 000 in deposits and $37 000 in liquid assets. It has a liquidity ratio is 25%.
a. What is the value of this bank's excess liquidity?
b. What is the value of the additional loans that can be made by Gold Bank?
c. What is the bank multiplier?
d. By how much will total deposits expand if this bank lends all its excess reserves and there is no leakage from the banking system?

Question 49

The existence of secondary markets means Certificates of deposit are to the holder and to the issuer.

A) liquid; liquid
B) illiquid; illiquid
C) illiquid; liquid
D) liquid; illiquid

Question 50

Diana won $1000 at a bingo game. She deposits her $1000 winnings into a building society account so that she can use the money next year to pay her tuition fees. This is an example of money serving as:

A) a medium of exchange
B) a means of evaluation
C) a store of wealth
D) an investment good

Question 51

A special purpose vehicle is:

A) a sub- prime debt
B) a secure vehicle for transporting high risk individuals
C) a collateralised debt
D) a legal entity created to buy and sell collateralised debt

Question 52

Bendigo Bank had $600 million in deposits. The required liquidity ratio is 10%. Bendigo Bank must keep in liquid assets.

A) $100 million
B) $6 million
C) $160 million
D) $60 million

Question 53

The value by which total deposits can increase for every dollar increase in reserves is the:

A) liquidity ratio
B) credit limit
C) bank multiplier
D) none of the above

Question 54

Explain the difference between a financial intermediary's liquidity ratio and its capital adequacy ratio.

Question 55

Explain securitisation using mortgage loans as an example.

Question 56

A shopping guide quotes the price of good X at $12 and good Y at $18. This is an example of money serving as:

A) a medium of exchange
B) a means of storing wealth
C) a means of evaluation
D) an investment good

Question 57

What are the main functions of financial intermediaries?

Question 58

John received an income tax refund of $1500 in May 2010. He put this money in a shoebox in his wardrobe so that he could spend it when he went to on holiday to Fiji in July 2010. This is an example of money serving as:

A) a medium of exchange
B) a store of wealth
C) means of evaluation
D) an investment good

Question 59

The Reserve Bank of Australia is responsible for operating the government's monetary policy. Identify three other functions of the Reserve Bank of Australia.

Question 60

Why would households hold money in liquid form when this money could be earning returns in an investment?

Question 61

The assets motive for demanding money is related to the function of money as a medium of exchange.

Question 62

If financial intermediaries decide to increase their liquidity ratios, the money multiplier increases.

Question 63

All financial institutions face the twin but conflicting goals of liquidity and profitability.

Question 64

Coins and notes deposited in a bank are measured as a liability in the balance sheet of a bank.

Question 65

The effect of a change in the money supply on interest rates will be greater the steeper the demand for money curve.

Question 66

The Moneybags Bank has $1 million in deposits and $100 000 in actual liquid assets and its liquidity ratio is 8%. Moneybags Bank, therefore, has excess reserves of $20 000.

Question 67

The financial sector is necessary in a modern economy because it facilitates the flow of funds between lenders and borrowers.

Question 68

The bank multiplier is 1/(1- L) where L is the liquidity ratio.

Question 69

Kate deposits 10% of her wages into a savings account every month. This is an example of money serving as a medium of exchange.

Question 70

The banking industry in Australia would be classified as very competitive.

Question 71

Grant and Michelle receive the same annual income, but Grant, who gets paid monthly, will have a much higher demand for active balances than Michelle, who gets paid weekly.

Question 72

If the actual interest rate is above the equilibrium interest rate in the money market, how does the market return to equilibrium?

Question 73

Correctly complete the following statements from the options below.
Statement
a() GDP expressed in dollars represents money serving as a:
b() Money saved in a bank account represents money serving as a:
c() Money used to settle debt represents money serving as a:
Answer

Question 74

The most common measure of the money supply for policy purposes is M1.

Question 75

Higher interest rates encourage people to hold more money.

Question 76

Banks securitise mortgage loans to remove these assets from their balance sheets so they can hide them from the tax department.

Question 77

Changes in the interest rate restore equilibrium in the money market.

Question 78

The 'monetary base' is the usual measure that countries use for the money supply.

Question 79

If Bruce sells his shares in Qantas and buys shares in BHP Billiton, Bruce is buying and selling in a secondary market.

Question 80

The plastic notes used in Australia can be used as a store of wealth, but the paper notes used in most other nations cannot.