Deck 12: Money, Banking and Interest

Question 1

A _____ lends to non-banks, including households and non-bank ?rms.

A) central bank
B) retail bank
C) wholesale bank
D) savings bank

Answer 1

retail bank

Question 2

Which of the following is true of risk pooling?

A) The cost of default by a single borrower usually outweighs the pro?table proceeds from risk pooling.
B) Risk pooling can lead to a bank failure if a single borrower defaults.
C) Risk pooling allows banks to fund projects that are too risky for a single individual.
D) Risk pooling involves choosing a correlated set of risks.

Answer 2

Risk pooling allows banks to fund projects that are too risky for a single individual.

Question 3

Which of the following is a moral hazard that a central bank could face?

A) Banks that are bailed out may have the incentive to take reckless decisions.
B) Banks may maintain a higher-than-proportionate quantity of risk-weighted assets.
C) Banks may accept large deposits from institutional investors.
D) Banks may lend to non-banks and households at high rates of interest.

Answer 3

Banks that are bailed out may have the incentive to take reckless decisions.

Question 4

Which of the following will determine the size of the money multiplier?

A) The willingness of individuals to deposit money in the bank.
B) The level of aggregate demand in the economy.
C) The equilibrium level of national output.
D) The market capitalization of the banking sector.

Question 5

What is meant by liquidity?

A) It is the ease with which an asset can be converted into cash.
B) It is the quantity of cash that the government holds with the central bank.
C) It is the amount of money banks require on a daily basis to meet their customers' needs.
D) It refers to the supply of money in an economy.

Question 6

Narrow measures of money will include _____.

A) banks' retail deposits
B) building societies' deposits and shares
C) cash in circulation
D) wholesale deposits

Question 7

Which of the following could lead to a credit crunch in an economy?

A) Banks' unwillingness to lend to other banks.
B) An increase in trading in assets like gold and government bonds.
C) Increased debt funding by the government.
D) A balance of payments surplus.

Question 8

_____ are current accounts which provide instant access to cash.

A) Time deposits
B) Recurring deposits
C) Term deposits
D) Sight deposits

Question 9

_____ are involved in brokering very large loans to companies.

A) Wholesale banks
B) Retail banks
C) Central banks
D) Savings banks

Question 10

A capital adequacy ratio measures:

A) the value of a bank's capital to its risk-weighted portfolio of assets.
B) the proportion of deposits that a bank should hold in the form of cash.
C) the percentage of deposits that a bank should hold in the form of gold.
D) the ratio of reserves that need to be held as near-liquid assets.

Question 11

The risk that the collapse of one bank will lead to the collapse of other banks is known as _____.

A) contagion
B) a thematic risk
C) a liquidity risk
D) an endemic risk

Question 12

Double coincidence of wants occurs when:

A) one person demands the goods offered for sale by another person.
B) people pay double the value for goods and services.
C) the value added is counted at each stage of production of goods.
D) the wants are double the amount of available resources.

Question 13

What is credit creation?

A) It refers to the government's ability to obtain loans to pay for its expenditure.
B) It refers to the conversion of existing bank deposits into loans to borrowers.
C) It is the process of reducing the scale of operations of a bank.
D) It refers to an expansion in the number of customer deposits with the banks.

Question 14

Bonds that are linked to other banks' stock of mortgages are called _____.

A) government bonds
B) collateralized debt obligations
C) treasury bills
D) mutual funds

Question 15

Which of the following is true of money?

A) It is more e?cient to barter than to use money in trade.
B) It is a unit of account.
C) It is indivisible.
D) It is non-transferable.

Question 16

The amount of notes and coins in circulation is known as _____.

A) reserve balances
B) the monetary base
C) the M4 measure of money
D) the M3 measure of money

Question 17

Which of the following is included in both the narrow and broad measures of money?

A) Reserve balances.
B) Retail deposits.
C) Notes and coins.
D) Wholesale deposits.

Question 18

Which of the following statements is true of the liquidity of banks?

A) The more cash banks loan to customers, the lower its pro?ts but the higher its liquidity.
B) Banks face liquidity problems because they borrow long and lend short.
C) The more cash a bank keeps in securities, the higher its liquidity and the lower its pro?ts.
D) In order to increase their liquidity, banks need to purchase government bonds from the

Question 19

Minimum reserve requirements stipulate:

A) the value of a bank's capital to its risk-weighted portfolio of assets.
B) the proportion of deposits to be held by a bank in the form of cash.
C) the percentage of deposits to be held by a bank in the form of gold.
D) the ratio of reserves to be held as near-liquid assets.

Question 20

_____ is the broadest measure of money in the UK.

A) M2
B) M0
C) M3
D) M4

Question 21

The following graph shows the marginal cost (MC) and marginal bene?t (MB) of holding real money balances. The market is initially in equilibrium at £100. Refer to the graph to answer the question. Suppose the interest rate on bonds increases. Other things remaining the same, which of the following is true?

A) The new equilibrium level of real money balances will be equal to £175.
B) The marginal cost line will move from MC1 to MC2.
C) The new equilibrium level of real money balances will be equal to £200.
D) The marginal bene?t line will move from MB1 to MB2.

Question 22

How does a central bank control the credit-creation process?

A) By increasing the equilibrium interest rate.
B) By changing the minimum reserve requirements for banks.
C) By undertaking open market operations.
D) By undertaking qualitative easing.

Question 23

If there was a decrease in national income then, other things constant, _____.

A) there would be a rise in the equilibrium interest rate
B) there would be a fall in the equilibrium interest rate
C) there would be an increase in real money balances
D) there would be a decrease in real money balances

Question 24

An individual demands money because he thinks that, compared to stocks and bonds, holding cash involves less risk. In other words, he demands money because of the _____.

A) asset motive
B) precautionary motive
C) transaction motive
D) pro?t motive

Question 25

The following graph shows the marginal cost (MC) and marginal bene?t (MB) of holding real money balances. The market is initially in equilibrium at £100. Refer to the graph to answer the question. Suppose marginal cost increases to MC2 but marginal bene?t remains unchanged. The new equilibrium level of real money balances will:

A) be equal to £75.
B) be equal to £175.
C) be equal to £200.
D) remain the same, at £100.

Question 26

The _____ for holding money explains why a ?rm holds extra cash just in case payments from customers are delayed.

A) asset motive
B) precautionary motive
C) transaction motive
D) pro?t motive

Question 27

Suppose the 'helicopter option' is implemented and freshly printed notes are distributed in the economy. This will lead to:

A) an increase in the money supply.
B) an increase in the equilibrium interest rate.
C) a decline in consumption and investment.
D) an increase in the elasticity of money demand.

Question 28

Which of the following is true of money supply?

A) As interest rates increase, the central bank reduces the supply of money.
B) The supply of money is highly responsive to changes in the demand for money.
C) The supply of money is perfectly interest inelastic.
D) As interest rates increase, central banks increase the supply of money.

Question 29

If the supply of money increased while demand for money remained constant, the equilibrium interest rate _____.

A) would increase
B) would fall
C) would remain the same
D) would be equal to zero

Question 30

Which of the following correctly describes the relationship between money supply and interest rates?

A) The supply of money is negatively related to the rate of interest.
B) As interest rates increase, the supply of money increases.
C) The supply of money is not affected by interest rates.
D) Interest rates affect money supply through the marginal propensity to consume.

Question 31

The following graph shows the marginal cost (MC) and marginal bene?t (MB) of holding real money balances. The market is initially in equilibrium at £100. Refer to the graph to answer the question. Suppose there is an increase in real incomes. Other things remaining the same, which of the following is true?

A) The new equilibrium level of real money balances will be equal to £175.
B) The marginal cost line will move from MC1 to MC2.
C) The marginal bene?t line will move from MB1 to MB2.
D) The new equilibrium level of real money balances will be equal to £75.

Question 32

If the central bank wants to reduce money supply through open market operations, it would _____.

A) increase the equilibrium interest rate
B) increase the minimum reserve requirements for banks
C) sell government bonds
D) increase margin requirements on loans

Question 33

Other things remaining the same, if there was a decrease in money supply, which of the following would occur?

A) The equilibrium interest rate will increase.
B) The equilibrium level of real money balances will increase.
C) The supply of money will become perfectly elastic.
D) Both real money balances and the interest rate will remain unchanged.

Question 34

If income increased but money supply remained the same, which of the following is likely to happen?

A) There will be an increase in the equilibrium interest rate.
B) The supply of money will become perfectly elastic.
C) The level of real money balances will increase.
D) Both real money balances and the interest rate will remain unchanged.

Question 35

Which of the following correctly describes the precautionary motive for holding money?

A) It re?ects the fact that money payments and money receipts are not perfectly synchronized.
B) It re?ects the need to hold money in order to diversify risk.
C) It re?ects the need to hold money to pay for daily transactions.
D) It re?ects the need to hold money due to uncertainty.

Question 36

Which of the following statements is true?

A) Cash in circulation is not included in the money supply.
B) Narrow measures of money include retail and wholesale banking deposits.
C) Reserve balances are not included in measures of money supply.
D) The level of minimum reserve requirements is decided by commercial banks.

Question 37

In order to increase the money supply, a central bank would:

A) reduce the minimum reserve requirements for banks.
B) sell government bonds.
C) sell assets like corporate debt bonds, mortgaged-backed securities and equities.
D) increase the interest rates on government bonds.

Question 38

Which of the following correctly describes the relationship between the demand for money and interest rates?

A) Interest rates and money demand are negatively related.
B) Interest rates and money demand are positively related.
C) Money demand is independent of interest rates.
D) Interest rates affect money demand through the marginal propensity to import.

Question 39

The _____ for holding money explains the demand for money by an individual who wants to pay for groceries every day of the week although he is paid only once a week.

A) precautionary motive
B) transaction motive
C) asset motive
D) pro?t motive

Question 40

The demand for real money balances:

A) is not adjusted for the effect of the price level.
B) will reduce when in?ation increases.
C) will fall as the interest rates on other assets increase.
D) is high as money is a low-risk asset.

Question 41

According to the permanent income hypothesis, why did consumption and borrowings grow substantially in the late 1990s and 2000s?

A) The late 1990s and 2000s was a period of sustained and historically low interest rates.
B) The government enacted income tax cuts for a year beginning in 1990.
C) The prices of assets like property were continually falling in the late 1990s and 2000s.
D) In the late 1990s and 2000s, the level of consumer con?dence was low as employment

Question 42

What does qualitative easing mean?

A) The central bank swaps high quality assets for poor quality assets.
B) The central bank assesses the quality of the assets held by the banks.
C) The central bank buys high quality corporate debts.
D) The central bank buys high quality bonds to increase money supply.

Question 43

The channel through which monetary policy impacts economic output and prices is called _____.

A) monetary neutrality
B) the permanent income hypothesis
C) revenue equivalence
D) the transmission mechanism

Question 44

What is meant by net present value?

A) It is the discounted value of a future cash ?ow.
B) It is the amount of money supply in an economy.
C) It is the amount that money supply changes after a change in the equilibrium interest rate.
D) It is the level of planned investment by a ?rm.

Question 45

When the central bank undertakes quantitative easing:

A) the demand for ?nancial assets will fall.
B) commercial borrowing will fall.
C) the prices of ?nancial assets will increase.
D) the yields on ?nancial assets will increase.

Question 46

In response to the credit crisis of 2008-09, a number of central banks operated a policy of quantitative easing. Which of the following is likely to have occurred as a result of this quantitative easing?

A) The rate of return on ?nancial assets decreased.
B) The rate of in?ation reduced sharply.
C) The rate of growth of GDP declined.
D) The cost of ?nancing through the issuance of shares and bonds increased.

Question 47

Which of the following will increase a household's lifetime wealth?

A) A sustained increase in asset prices.
B) A temporary tax cut.
C) An increase in the interest rate.
D) An increase in the income tax rates.

Question 48

Other things remaining the same, which of the following increases the level of consumption in the economy?

A) A fall in the interest rate.
B) A fall in the economy's GDP level.
C) An increase in the income tax rates.
D) An increase in the level of in?ation.

Question 49

What is meant by central bank independence?

A) Central banks can independently decide the tax rates in the economy.
B) Commercial banks in the country are independent of the central bank.
C) Monetary policy in an economy is independent from political motives.
D) Fiscal policy in an economy is independent of the election cycle.

Question 50

Which of the following would reduce the political incentive to change interest rates in the economy?

A) Allowing central banks to make ?scal policy decisions.
B) Providing central banks with an in?ation target.
C) Increasing the time lag involved in monetary policy.
D) Allowing the government to appoint the key policy makers in the central bank.

Question 51

The discount that a buyer requires in order to buy poor quality assets is called a _____.

A) haircut
B) discount window
C) subsidy
D) concession

Question 52

The Bank of England's monetary policy committee assumes that interest rates take _____ to affect economic output.

A) 1 year
B) more than 5 years
C) a total of 3 years
D) 10 to 15 years

Question 53

The Keynesian view of consumption differs from the permanent income hypothesis because the Keynesian view assumes that:

A) consumption varies with changes in current income.
B) temporary tax cuts will have no effect on consumption.
C) consumption depends on lifetime earnings.
D) the marginal propensity to consume is equal to 1.

Question 54

Which of the following correctly explains how interest rates are linked to investment?

A) As interest rates increase, ?rms' cost of borrowing decreases.
B) Higher rates of interest reduce investment by ?rms.
C) Lower interest rates provide a bigger discount to future cash ?ows.
D) As interest rates fall, investment and aggregate demand fall.

Question 55

Which of the following is an effect of repeated rounds of deregulation in the banking industry?

A) Deregulation has enabled technical innovations in ?nancial instruments.
B) Deregulation has restricted the scope of banking to lending and accepting deposits.
C) Deregulation reduced the level of risk-taking in the banking sector.
D) Deregulation has limited the growth of the banking sector.

Question 56

Which of the following will increase the net present value of the cash ?ows from an asset purchased by a ?rm?

A) A fall in the interest rate used to discount the cash ?ows from the asset.
B) An increase in the period of time over which the asset's cash ?ows are discounted.
C) An increase in the initial amount invested in the asset.
D) A fall in the resale value of the asset.

Question 57

Which of the following is an effect of persistently high wage and price in?ation in the economy?

A) Firms will substitute workers for capital equipment.
B) Consumers will increase consumption and borrowing.
C) The cost of production for ?rms will increase.
D) The level of business con?dence in the economy will increase.

Question 58

With increased deregulation in the banking sector:

A) the level of risk in the ?nancial services industry has fallen.
B) the scope of banking has reduced to savings and loans.
C) the rate of return on ?nancial instruments has fallen.
D) both risk and rates of return on ?nancial assets have increased.

Question 59

The tools of monetary policy are used to _____.

A) control aggregate demand in the economy
B) change the level of taxation in the economy
C) ensure an equal distribution of income
D) reduce government expenditure and the budget de?cit

Question 60

According to the permanent income hypothesis:

A) consumption will be determined by interest rates.
B) consumption will be determined by short-term changes in tax rates.
C) consumption is determined by lifetime earnings.
D) consumption is determined by current income.

Question 61

The transaction motive for holding money arises because money payments and money receipts are not perfectly synchronized.

Question 62

Other things being equal, a decrease in the money supply would increase the equilibrium interest rate.

Question 63

The money multiplier is the ratio of the money supply to the monetary base.

Question 64

The asset motive for holding money reflects the unpredictability of transactions and the need to hold liquid funds in order to meet these payments.

Question 65

Unlike capital adequacy ratios, minimum reserve requirements emphasize bank safety over liquidity.

Question 66

A decrease in the minimum reserve requirements for banks in an economy would decrease the money supply.

Question 67

Moral hazard occurs when someone changes their behaviour because they are insulated from risk.

Question 68

Risk pooling allows banks to take on greater lending risks than individual savers.

Question 69

Since there is no cost involved in holding cash, most individuals prefer holding their wealth in the form of cash.

Question 70

There is a positive relationship between money demand and interest rates.

Question 71

An economy that does not use money in exchange is known as a barter economy.

Question 72

The more capital backing a bank, the bigger the loss its shareholders can suffer, before losses spread to deposit holders and providers of debt.

Question 73

Fiat money refers to notes and coins that are fully backed by gold deposits.

Question 74

Other things being equal, an increase in national income would decrease the equilibrium interest rate.

Question 75

A double coincidence of wants is more likely to occur when money is used than in a barter trade.

Question 76

Time deposits provide customers with instant access to cash.

Question 77

A wholesale bank lends to non-banks, including households and non-bank firms.

Question 78

The more risky the project undertaken by a firm, the lower the interest rate on the loan offered to finance the project.

Question 79

The monetary base in an economy is the same as the stock of high-powered money.

Question 80

M0 is the broadest measure of money supply.