Deck 4: The Monetary System: What It Is and How It Works

Question 1

An important factor in the evolution of commodity money to fiat money is:

A)a desire to reduce transaction costs.
B)a desire to increase transaction costs.
C)the fact that gold is no longer highly valued.
D)a desire to use gold for jewelry.

Answer 1

a desire to reduce transaction costs.

Question 2

People use money as a unit of account when they:

A)hold money to transfer purchasing power into the future.
B)use money as a measure of economic transactions.
C)use money to buy goods and services.
D)hold money to gain power and esteem.

Answer 2

use money as a measure of economic transactions.

Question 3

Demand deposits are funds held in:

A)currency.
B)certificates of deposit.
C)chequing accounts.
D)money markets.

Answer 3

chequing accounts.

Question 4

A trade in a barter economy requires:

A)currency.
B)a cheque.
C)scrip.
D)a double coincidence of wants.

Question 5

People use money as a store of value when they:

A)hold money to transfer purchasing power into the future.
B)use money as a measure of economic transactions.
C)use money to buy goods and services.
D)hold money to gain power and esteem.

Question 6

All of the following are considered major functions of money except as a:

A)medium of exchange.
B)way to display wealth.
C)unit of account.
D)store of value.

Question 7

When a pizza maker lists the price of a pizza as $10, this is an example of using money as a:

A)store of value.
B)unit of account.
C)medium of exchange.
D)flow of value.

Question 8

In a country on a gold standard, the quantity of money is determined by the:

A)government.
B)central bank.
C)amount of gold.
D)buying and selling of government securities.

Question 9

To reduce the money supply, the Bank of Canada:

A)buys government bonds.
B)sells government bonds.
C)creates demand deposits.
D)destroys demand deposits.

Question 10

Money's liquidity refers to the ease with which:

A)coins can be melted down.
B)illegally obtained money can be laundered.
C)loans can be floated.
D)money can be converted into goods and services.

Question 11

To increase the money supply, the Bank of Canada:

A)buys government bonds.
B)sells government bonds.
C)buys corporate stocks.
D)sells corporate stocks.

Question 12

All of the following assets are included in M1 except:

A)currency.
B)demand deposits.
C)traveller's cheques.
D)money market deposit accounts.

Question 13

In Canada, monetary policy is conducted by:

A)the minister of finance.
B)parliament.
C)the Bank of Canada.
D)the National Bank of Canada.

Question 14

A country that is on a gold standard uses:

A)commodity money.
B)fiat money.
C)credit money.
D)the barter system.

Question 15

Currency equals:

A)M1.
B)the sum of funds in chequing accounts.
C)the sum of chequing accounts and paper money.
D)the sum of coins and paper money.

Question 16

Open-market operations are:

A)Department of Finance purchases and sales of gold.
B)Bank of Canada purchases and sales of government bonds.
C)Canadian Securities Administrators rules requiring open disclosure of market trades.
D)Bank of Canada purchases and sales of gold and stocks.

Question 17

The central bank in Canada is the:

A)Royal Bank of Canada.
B)Department of Finance.
C)National Bank of Canada.
D)Bank of Canada.

Question 18

People use money as a medium of exchange when they:

A)hold money to transfer purchasing power into the future.
B)use money as a measure of economic transactions.
C)use money to buy goods and services.
D)hold money to gain power and esteem.

Question 19

Economists use the term money to refer to:

A)income.
B)profits.
C)assets used for transactions.
D)earnings from labour.

Question 20

Macroeconomists call assets used to make transactions:

A)real income.
B)nominal income.
C)money.
D)consumption.

Question 21

In a system with 100-percent-reserve banking:

A)all banks must hold reserves equal to 100 percent of their loans.
B)no banks can make loans using deposits made at their institutions.
C)the banking system completely controls the size of the money supply.
D)no banks can accept deposits.

Question 22

The money supply consists of:

A)currency plus reserves.
B)currency plus the monetary base.
C)currency plus demand deposits.
D)the monetary base plus demand deposits.

Question 23

The minimum amount of owners' equity in a bank mandated by regulators is called a _____ requirement.

A)reserve
B)margin
C)liquidity
D)capital

Question 24

The value of a bank's owners' equity is called bank:

A)deposits.
B)reserves.
C)capital.
D)liquidity.

Question 25

Banks create money in:

A)a 100-percent-reserve banking system but not in a fractional-reserve banking system.
B)a fractional-reserve banking system but not in a 100-percent-reserve banking system.
C)both a 100-percent-reserve banking system and a fractional-reserve banking system.
D)neither a 100-percent-reserve banking system nor a fractional-reserve banking system.

Question 26

Financial intermediation is the process of:

A)settling disputes between borrowers and lenders.
B)advising corporations how to invest.
C)transferring funds from savers to borrowers.
D)converting from a barter economy to a money economy.

Question 27

Money market mutual fund shares are included in:

A)M1 only.
B)M2 only.
C)both M1 and M2.
D)neither M1 nor M2.

Question 28

Chequing account balances that are linked to debit cards are included in:

A)M1.
B)M2 only.
C)both M1 and M2.
D)neither M1 nor M2.

Question 29

In a system with fractional-reserve banking:

A)all banks hold reserves equal to a fraction of their loans.
B)no banks can make loans.
C)the banking system completely controls the size of the money supply.
D)all banks hold reserves equal to a fraction of their deposits.

Question 30

In a 100-percent-reserve banking system, banks:

A)can increase the money supply.
B)can decrease the money supply.
C)can either increase or decrease the money supply.
D)cannot affect the money supply.

Question 31

In Canada, bank reserves consist of:

A)currency and demand deposits.
B)vault cash and deposits at the Bank of Canada.
C)gold deposits at the Bank of Canada.
D)the money supply.

Question 32

Payment is deferred by using _____, but immediate access to funds occurs when using _____.

A)currency; demand deposits
B)credit cards; debit cards
C)demand deposits; savings deposits
D)debit cards; credit cards

Question 33

Liabilities of banks include:

A)reserves.
B)currency in the hands of the public.
C)loans to customers.
D)demand deposits.

Question 34

Credit card balances are included in:

A)M1 only.
B)M2 only.
C)both M1 and M2.
D)neither M1 nor M2.

Question 35

In a 100-percent-reserve banking system, if a customer deposits $100 of currency into a bank, then the money supply:

A)increases by $100.
B)decreases by $100.
C)increases by more than $100.
D)remains the same.

Question 36

In Canada, the money supply is determined:

A)only by the Bank of Canada.
B)only by the behaviour of individuals who hold money and of banks in which money is held.
C)jointly by the Bank of Canada and by the behaviour of individuals who hold money and of banks in which money is held.
D)according to a constant-growth-rate rule.

Question 37

Assets of banks include:

A)money market mutual funds.
B)currency in the hands of the public.
C)loans to customers.
D)demand deposits.

Question 38

In a fractional-reserve banking system, banks create money because:

A)each dollar of reserves generates many dollars of demand deposits.
B)banks have the legal authority to issue new currency.
C)funds are transferred from households wishing to save to firms wishing to borrow.
D)the wealth of the economy expands when borrowers undertake new debt obligations.

Question 39

In a fractional-reserve banking system, banks create money when they:

A)accept deposits.
B)make loans.
C)hold reserves.
D)exchange currency for deposits.

Question 40

Bank reserves equal:

A)gold kept in bank vaults.
B)gold kept at the central bank.
C)currency plus demand deposits.
D)deposits that banks have received but have not lent out.

Question 41

The size of the monetary base is determined by:

A)the Bank of Canada.
B)chartered banks.
C)preferences of households about the form of money they wish to hold.
D)business policies of banks and the laws regulating banks.

Question 42

If the reserve-deposit ratio is less than one, and the monetary base increases by $1 million, then the money supply will:

A)increase by $1 million.
B)decrease by $1 million.
C)increase by more than $1 million.
D)decrease by more than $1 million.

Question 43

If the monetary base equals $400 billion and the money multiplier equals 2, then the money supply equals:

A)$200 billion.
B)$400 billion.
C)$800 billion.
D)$1,000 billion.

Question 44

If the ratio of reserves to deposits (rr) increases, while the ratio of currency to deposits (cr) is constant and the monetary base (B) is constant, then:

A)it cannot be determined whether the money supply increases or decreases.
B)the money supply increases.
C)the money supply decreases.
D)the money supply does not change.

Question 45

If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the money supply equals:

A)$100 billion.
B)$150 billion.
C)$600 billion.
D)$650 billion.

Question 46

The use of borrowed funds to supplement existing funds for purposes of investment is called:

A)arbitrage.
B)leverage.
C)convergence.
D)intermediation.

Question 47

The money supply will increase if the:

A)currency-deposit ratio increases.
B)reserve-deposit ratio increases.
C)monetary base increases.
D)discount rate increases.

Question 48

The amount of capital that banks are required to hold depends on the:

A)amount of deposits held at a bank.
B)riskiness of the bank's assets.
C)reserve requirements for deposits set by the Bank of Canada.
D)level of deposit insurance coverage.

Question 49

Table: Bank Balance Sheet Based on the table, what is the leverage ratio at the bank?

A)3
B)4.67
C)5
D)10

Question 50

The money supply will decrease if the:

A)monetary base increases.
B)currency-deposit ratio increases.
C)discount rate decreases.
D)reserve-deposit ratio decreases.

Question 51

The reserve-deposit ratio is determined by:

A)the Bank of Canada.
B)business policies of banks and opportunities for banks to lend.
C)preferences of households about the form of money they wish to hold.
D)the Canada Deposit Insurance Corporation (CDIC).

Question 52

If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the monetary base equals:

A)$50 billion.
B)$100 billion.
C)$150 billion.
D)$600 billion.

Question 53

Table: Bank Balance Sheet Based on the table, what is the reserve-deposit ratio at the bank?

A)3 percent
B)5 percent
C)10 percent
D)15 percent

Question 54

The ratio of the money supply to the monetary base is called:

A)the currency-deposit ratio.
B)the reserve-deposit ratio.
C)high-powered money.
D)the money multiplier.

Question 55

If the currency-deposit ratio equals 0.5 and the reserve-deposit ratio equals 0.1, then the money multiplier equals:

A)0.6.
B)1.67.
C)2.0.
D)2.5.

Question 56

The currency-deposit ratio is determined by:

A)the Bank of Canada.
B)business policies of banks and opportunities for banks to lend.
C)preferences of households about the form of money they wish to hold.
D)the Canada Deposit Insurance Corporation (CDIC).

Question 57

The preferences of households determine the:

A)reserve-deposit ratio.
B)currency-deposit ratio.
C)size of the monetary base.
D)loan-deposit ratio.

Question 58

Table: Bank Balance Sheet Based on the table, owners' equity will fall to zero if loan defaults reduce the value of total assets by _____ percent.

A)10
B)20
C)30
D)40

Question 59

If the monetary base is denoted by B, rr is the ratio of reserves to deposits, and cr is the ratio of currency to deposits, then the money supply is equal to _____ multiplied by B.

A)(rr + 1)/ (rr + cr)
B)(cr + 1)/ (cr + rr)
C)(rr + cr)/ (rr + 1)
D)(rr + cr)/ (cr + 1)

Question 60

High-powered money is another name for:

A)currency.
B)demand deposits.
C)the monetary base.
D)M2.

Question 61

The quantitative easing operations conducted by the Federal Reserve between 2007 and 2011 resulted in _____ increases in the monetary base and _____ increases in money supply.

A)no; no
B)large; larger
C)large; smaller
D)small; smaller

Question 62

Compared to typical open-market operations, when engaging in quantitative easing operations conducted by the Federal Reserve between 2007 and 2011, Federal Reserve purchases tended to be _____ securities.

A)safer and shorter-term
B)tax-favoured and foreign
C)smaller-denomination and higher-grade
D)riskier and longer-term

Question 63

When the Bank of Canada increases the interest rate paid on reserves, it:

A)increases the reserve-deposit ratio (rr).
B)decreases the reserve-deposit ratio (rr).
C)increases the monetary base (B).
D)decreases the monetary base (B).

Question 64

If the Bank of Canada conducts a Sale and Repurchase Agreement (SRA), the money supply will:

A)explode.
B)stay the same.
C)decrease.
D)increase.

Question 65

The Bank of Canada can influence the money supply using:

A)open-market operations and deposit switching.
B)open-market operations and excess reserve swaps.
C)changes in the reserve-deposit ratio and the currency-deposit ratio.
D)changes in the amount of corporate bonds.

Question 66

When the Bank of Canada conducts an open-market purchase, it buys bonds from the:

A)public.
B)U.S. government.
C)Canada Revenue Agency.
D)International Monetary Fund.

Question 67

If the Bank of Canada decides to switch some of the Government of Canada's deposits held at the Bank to chartered banks, the money supply will:

A)decrease.
B)stay the same.
C)collapse.
D)increase.

Question 68

If you hear in the news that the Bank of Canada conducted open-market purchases, then you should expect _____ to increase.

A)reserve requirements
B)the discount rate
C)the money supply
D)the reserve-deposit ratio

Question 69

When the Bank of Canada decreases the interest rate paid on reserves, it:

A)increases the reserve-deposit ratio (rr).
B)decreases the reserve-deposit ratio (rr).
C)increases the monetary base (B).
D)decreases the monetary base (B).

Question 70

Minimum reserve requirements:

A)are set at 10 percent in Canada.
B)are set at 7.5 percent in Canada.
C)depend on the Government of Canada.
D)do not exist in Canada.

Question 71

The most frequently used tool of monetary policy in Canada to influence the money supply is:

A)deposit switching.
B)open-market operations.
C)changes in reserve requirements.
D)changes in interest rate paid on reserves.

Question 72

To increase the money supply, the Bank of Canada can:

A)decrease the monetary base.
B)increase the overnight rate.
C)raise the interest rate paid on reserves.
D)switch government deposits it holds to chartered banks.

Question 73

When the Bank of Canada makes an open-market sale, it:

A)increases the money multiplier (m).
B)increases the currency-deposit ratio (cr).
C)increases the monetary base (B).
D)decreases the monetary base (B).

Question 74

The quantitative easing policy conducted by the Federal Reserve between 2007 and 2011 resulted in a large increase in the monetary base that was partially offset by:

A)a significant increase in the reserve-deposit ratio.
B)a significant decrease in the reserve-deposit ratio.
C)open-market purchases.
D)open-market sales.

Question 75

An increase in the bank rate will result in _____.

A)an increase in the money supply.
B)an increase in the monetary base.
C)a decrease in the monetary base.
D)no change in the monetary base.

Question 76

When the Bank of Canada increases the overnight rate, it:

A)increases the reserve to deposit ratio (rr).
B)decreases the reserve to deposit ratio (rr).
C)is likely to increase the monetary base (B).
D)is likely to decrease the monetary base (B).

Question 77

If the Bank of Canada wishes to increase the money supply, it should:

A)decrease the overnight rate.
B)increase interest paid on reserves.
C)sell government bonds.
D)decrease the monetary base.

Question 78

If the Bank of Canada increases the interest rate paid on reserves, banks will tend to hold _____ excess reserves, which will _____ the money multiplier.

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

Question 79

If the Bank of Canada conducts a Special Purchase and Resale Agreement (SPRA), the money supply will:

A)decrease.
B)increase.
C)stay the same.
D)collapse.

Question 80

To increase the monetary base, the Bank of Canada can:

A)conduct open-market purchases.
B)conduct open-market sales.
C)raise the interest rate paid on reserves.
D)lower the required reserve ratio.