Deck 28: Banking, Money and Interest Rates

Question 1

The direct exchange of goods and services for other goods and services is

A) barter.
B) a unit of account exchange.
C) a legal tender exchange.
D) a fiat exchange.

Answer 1

barter.

Question 2

Which of the following statements is not a weakness of a barter economy?

A) People are generally uninterested in exchanging goods with one another.
B) Both parties to an exchange must want what the other has.
C) Some stores of value are not easily divisible.
D) Some stores of value are difficult to transport.

Answer 2

People are generally uninterested in exchanging goods with one another.

Question 3

John received an income tax refund of £500 in May 2012. He put this money in a shoebox in his wardrobe so that he could spend it on his holiday to Ibiza in July 2012. This is an example of money serving as

A) a store of value.
B) an investment good.
C) a unit of account.
D) a medium of exchange.

Answer 3

a store of value.

Question 4

Floral Plus, a wholesale supplier of real and silk flowers, carries 200 different stock lines. In January 2013, Floral Plus estimated the value of flowers in its warehouses at £400,000. This is an example of using money as

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

Question 5

An item used as money that also has intrinsic value in some other use is

A) hard currency.
B) legal tender.
C) commodity money.
D) token money.

Question 6

On the island of Gulem, chocolate biscuits are used as money. This is an example of

A) legal money.
B) commodity money.
C) token money.
D) near money.

Question 7

A retail bank

A) specialises in providing hire- purchase finance for consumer durables.
B) specialises in granting loans for house purchases.
C) acts as brokers, arranging loans for companies from a number of different sources.
D) provides branch banking facilities, current accounts and overdraft facilities.

Question 8

Which of the following refers to a wholesale bank?

A) Large scale deposits made by firms at negotiated rates of interest
B) Deposits in savings accounts in high street banks
C) Loans made by high street banks at published rates of interest
D) Deposits in savings accounts in building societies

Question 9

Maturity transformation can be defined as

A) the process whereby banks can spread the risks of lending.
B) the transfer of money from one generation to another.
C) the transformation of deposits into loans of a shorter maturity.
D) the transformation of deposits into loans of a longer maturity.

Question 10

A time deposit in a bank is considered ____________of that bank.

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

Question 11

Which of the following defines a certificate of deposit?

A) An agreement between two financial institutions whereby one essentially borrows or lends to the other
B) Certificates issued by banks for fixed- term interest- bearing deposits
C) Deposits that can be withdrawn on demand, with no penalty
D) Deposits that require notice for withdrawal

Question 12

CDOs are

A) legal entities created by financial institutions for conducting specific financial functions, e.g. bundling assets together into fixed interest bonds and selling them.
B) where assets are sold before maturity to another institution or individual.
C) a type of security consisting of a bundle of fixed- income assets, e.g. corporate bonds, mortgage debt and credit card debt.
D) the proportion of a bank's total assets held in liquid form.

Question 13

Which of the following describes a repo?

A) Where a bank sells assets to person or institution A in return for buying assets from person or institution B
B) Where a bank sells some assets (e.g. bonds) and agrees to buy them back at a particular price after a set period of time
C) Where bank A lends to bank B provided that bank B is prepared to lend to bank A in the future
D) Where a bank agrees to buy certain assets from an institution for cash in return for being able to borrow from that institution in the future
E) All of the above

Question 14

Consider the following assets:
(i) Bills of Exchange
(ii) Cash and other operational balances
(iii) Money at call
(iv) Reverse repos
(v) Government bonds (1 to 5 years)
(vi) Advances
Which list shows the correct order of these assets in ascending order of liquidity (i.e. the least liquid asset first)?

A) (iv), (i), (ii), (v), (vi), (iii)
B) (vi), (v), (i), (iv), (iii), (ii)
C) (i), (vi), (iv), (v), (iii), (ii)
D) (v), (vi), (iii), (i), (iv), (ii)
E) (ii), (v), (i), (iv), (vi), (iii)

Question 15

The rate of discount on bills can be calculated by

A) the number of times greater the money multiplier is relative to the liquidity ratio.
B) the percentage change in the liquidity ratio on Treasury Bills.
C) the ratio of Tier 1 capital to risk- weighted assets.
D) the size of the discount relative to the redemption value.

Question 16

Commercial banks operate primarily to

A) help people.
B) help companies.
C) help the government.
D) make a profit.

Question 17

A loan made by a bank is considered______of that bank, whereas a time deposit in a bank is considered ____of that bank.

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

Question 18

Which of the following defines capital adequacy?

A) The total value of assets to liabilities
B) A bank's capital relative to its assets, where the assets are weighted according to the degree of risk
C) The difference in average maturity of loans and assets
D) The ratio of bank reserves to ordinary share capital

Question 19

Which of the following statements is correct?

A) The greater the average risk factor of a bank's assets, the lower will be the value of its risk- weighted assets and the higher will be its CAR.
B) The lower the average risk factor of a bank's assets, the lower will be the value of its risk- weighted assets and the higher will be its CAR.
C) The greater the average risk factor of a bank's assets, the greater will be the value of its risk- weighted assets and the lower will be its CAR.
D) The lower the average risk factor of a bank's assets, the greater will be the value of its risk- weighted assets and the lower will be its CAR.
E) The lower the average risk factor of a bank's assets, the higher will be the value of its risk- weighted assets and the higher will be its CAR.

Question 20

Why will large global financial institutions be required to have a CET1 ratio of up to 2.5% higher than other banks?

A) Because the failure of such an institution could trigger another financial crisis
B) Because the liquidity ratio of large global financial institutions tends to be lower, meaning they present a significantly higher risk to financial stability
C) Because other financial institutions have lower capital adequacy ratios
D) Because they are wholesale banks

Question 21

The ability of commercial banks to make profit is restricted by their need to maintain sufficient

A) liquidity.
B) elasticity.
C) diversity.
D) transparency.

Question 22

Pound Bank has £250 million in sight deposits and £250 million of other liabilities. It has liquid assets of £125 million. Pound Bank currently has a liquidity ratio of

A) 4%.
B) 1.25%.
C) 25%.
D) 50%.

Question 23

A bank has £100 million in liquid assets and a liquidity ratio of 20%. What are its total liabilities?

A) £200 million
B) £600 million
C) £120 million
D) £500 million

Question 24

The ratio of reserves to the total of deposits is the

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

Question 25

Which of the following defines secondary marketing?

A) Where assets are sold before maturity to another institution or individual
B) A specific type of loan for a long- term marketing campaign
C) The way in which banks market their various loan deals to big businesses
D) The proportion of a bank's total assets held in liquid form

Question 26

When was the Special Liquidity Scheme introduced?

A) April 2011
B) April 2012
C) April 2008
D) April 2010
E) April 2009

Question 27

Which of the following statements is true?

A) Securitisation occurs when a financial institution pools some of its assets and sells them to an intermediary.
B) The most common method for the sale of assets has been through securitisation.
C) Special Purpose Vehicles are legal entities created by the financial institution.
D) All of the above

Question 28

The central bank of the UK is known as

A) Lloyds of London.
B) the money market.
C) the Bank of England.
D) the Treasury.

Question 29

Which of the following activities is one of the responsibilities of the Bank of England?

A) Auditing central and local government accounts
B) Administration of the indirect taxation system
C) Ensuring there is sufficient liquidity in the financial system
D) Advising on income tax rates

Question 30

Which of the following activities is not one of the responsibilities of the Bank of England?

A) Administering the tax system
B) Regulating the banking system
C) Clearing interbank payments
D) Managing exchange rates

Question 31

The Central Bank is the ultimate guarantor of sufficient liquidity in the monetary system. It is called

A) final lending resort.
B) the lending guarantor.
C) the lender of last resort.
D) the liquidity guarantor.

Question 32

The Credit Guarantee Scheme had the intention of

A) guaranteeing loans on the interbank market, removing the risk of default and so encouraging banks to start lending to each other again.
B) guaranteeing mortgages to encourage banks to lend to home owners.
C) guaranteeing loans that are less than £100,000.
D) injecting sufficient funds into the liquidity system to ensure banks could lend to the wider public.

Question 33

Which of the following are parallel money markets?
(i) The market for certificates of deposit
(ii) The lender of last resort market
(iii) The inter- companies deposit market
(iv) The foreign currencies market
(v) The building society market
(vi) The commercial paper market

A) (ii), (iv) and (v)
B) (i), (ii), (iv) and (vi)
C) (i), (iii), (iv), (v) and (vi)
D) (i), (ii), (iii) and (vi)

Question 34

Which of the following banks have been bailed out by the government?

A) Lloyds
B) Northern Rock
C) RBS
D) All of them

Question 35

Which of the following institutions would not be considered a financial intermediary?

A) Pension funds
B) Commercial banks
C) Life insurance companies
D) Car insurance companies

Question 36

Banks can create money

A) by making loans that result in additional deposits.
B) by offering financial services, such as money market accounts.
C) only by illegally printing additional currency notes.
D) by paying interest to their depositors.

Question 37

Assume the banking system is 'closed' (i.e. all deposits are made in the banking system). The liquidity ratio is 25%. If a new deposit of £10,000 is made, total deposits can increase by

A) £50,000.
B) £25,000.
C) £40,000.
D) £10,000.

Question 38

The Home Loan Bank has £40 million in deposits and is fully loaned up. The bank's desired liquidity ratio is increased. The Home Loan Bank finds that

A) it must lower the interest rate that it charges on loans.
B) it has insufficient liquid assets on hand.
C) its capital decreases.
D) it now has excess liquid assets to lend.

Question 39

The number of times by which total money supply, whether in banks or outside the banking system, can increase for every additional pound of currency in circulation is the

A) change in M4.
B) deposits multiplier.
C) money multiplier.
D) liquidity ratio.

Question 40

The banking system has £200 million in total deposits. Banks are initially required by the central bank to operate a liquidity ratio of 20%. Assume now that the central bank wants to increase deposits in the banking system to £400 million. Assuming also that there are no leakages from the banking system, the central bank could achieve this by

A) increasing the liquidity ratio to 25%.
B) reducing the liquidity ratio to 5%.
C) increasing the liquidity ratio to 40%.
D) reducing the liquidity ratio to 10%.

Question 41

Assume that all commercial banks are lending as much as they can at the current liquidity ratio. If total cash deposits in the banking system are constant and the liquidity ratio is increased from 20% to 25%, the money supply will

A) decrease by 20%.
B) decrease by 5%.
C) increase by 20%.
D) decrease by 25%.
E) increase by 5%.
F) not change because there was no change in deposits.
G) increase by 25%.

Question 42

The monetary base consists of

A) private sterling sight deposits.
B) banks' till money + private sterling sight deposits.
C) cash in circulation outside the central bank
D) cash in circulation + private sterling sight deposits.

Question 43

Assume that banks become more conservative in their lending policies, and start holding a larger proportion of liquid assets. What will be the effect on the bank deposits multiplier?

A) The effect is impossible to predict as the bank deposits multiplier depends on the total amount of liquid assets in the banking system.
B) It will remain the same.
C) It will now be larger.
D) It will now be smaller.

Question 44

A bank deposits multiplier of 8 means that an increase in liquid assets of £1 could cause an increase in deposits of

A) £1.80
B) £80
C) £1.00
D) £8.00

Question 45

Assume that all commercial banks are making the maximum amount of loans possible given a desired liquidity ratio of 25%. Total deposits in the banking system are £200 million. Assume that banks reduce their chosen liquidity ratio to 20%. The money supply will

A) increase by £50 million.
B) not change because there was no change in deposits.
C) decrease by £50 million.
D) increase by £40 million.
E) decrease by £5 million.

Question 46

Which of the following will lead to a rise in interest rates?

A) An increase in the supply of money
B) A reduction in the reserve ratio which banks feel it is prudent to maintain
C) An increase in holdings of transactions balances
D) A decrease in holdings of precautionary balances
E) An increase in funds flowing in from abroad

Question 47

Which of these are effects following an increase in the supply of money?

A) Speculators will anticipate that the higher supply of the domestic currency will cause the exchange rate to depreciate.
B) Part of the excess money balances will be used to purchase foreign assets.
C) The excess supply of money in the domestic money market will push down the rate of interest. This will reduce the return on domestic assets below that on foreign assets.
D) All of the above

Question 48

As the liquidity ratio is decreased, the bank deposits multiplier

A) remains the same, as long as banks hold no excess liquid assets.
B) decreases.
C) could either increase or decrease.
D) increases.

Question 49

A money multiplier of 8 means that an increase in liquid assets of £1 could cause an increase in deposits of _____ if there were no leakage out of the system.

A) £8.00
B) £1.80
C) £80
D) £1.00

Question 50

Which of the following will cause no change in the UK money supply?

A) The government finances its PSNCR by selling bonds and bills to the general public and non- bank private sector.
B) There is a fixed exchange rate where the demand for sterling is greater than the supply.
C) The government decides to increase the proportion of the national debt financed by bonds rather than by bills.
D) The government imposes a statutory liquidity ratio on banks higher than their current ratio.

Question 51

Endogenous money supply is determined by______, whereas exogeneous money supply is determined by______.

A) the market demand; the exchange rate
B) the central bank or government; a customs union
C) the central bank or government; the market demand
D) the market demand; the central bank or government

Question 52

A £20,000 bond that pays £1,000 a year in interest has an interest rate of

A) 1%.
B) 5%.
C) 10%.
D) 2%.

Question 53

Which of the following is not a demand for money?

A) Transactions motive
B) Goods motive
C) Speculative motive
D) Precautionary motive

Question 54

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

A) an increase in the demand for money.
B) a decrease in the supply of money.
C) an increase in the supply of money.
D) a decrease in the demand for money.

Question 55

If the amount of money demanded by households and firms is less than the amount in circulation as determined by the Bank of England

A) the interest rate will decrease.
B) the money supply will increase.
C) the interest rate will increase.
D) the money supply will decrease.

Question 56

An increase in aggregate output causes the demand for money to______and the interest rate to______

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

Question 57

Which of the following reasons for holding money is based on the speculative motive?

A) To be able to purchase goods and services if your wages are not paid on time
B) To purchase household items
C) To purchase shares at some future date
D) To pay rent

Question 58

If the amount of money demanded by households and firms is greater than the amount in circulation as determined by the Bank of England

A) the interest rate will decrease.
B) the money supply will increase.
C) the interest rate will increase.
D) the money supply will decrease.

Question 59

A decrease in aggregate output causes the demand for money to______and the interest rate to
______ .

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

Question 60

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

A) the frequency with which people are paid.
B) speculation about future asset prices.
C) nominal national income.
D) interest rate.
E) all of the above

Question 61

Which of the following would shift the demand for money curve to the right?

A) A fall in national income
B) A rise in national income
C) Financial innovation
D) A fall in the interest rate

Question 62

The interest rate is determined in the

A) money and labour markets.
B) goods and labour markets.
C) goods market.
D) money market.

Question 63

Which of the following statements is false? (Assume ceteris paribus.)

A) A fall in the rate of interest will lead to a rise in investment.
B) A rise in money supply will lead to a fall in the rate of interest.
C) A rise in investment + a rise in exports + a fall in imports will reduce aggregate demand.
D) A change in aggregate demand will result in a change in national income.

Question 64

Which of the following refers to the interest- rate transmission mechanism?

A) A rise in aggregate demand causes a rise in the money supply and hence a fall in the rate of interest.
B) A rise in the money supply causes a rise in aggregate demand and hence a rise in the demand for money and a rise in interest rates.
C) A rise in the money supply causes a fall in interest rates and hence a rise in aggregate demand.
D) A rise in interest rates causes a fall in money supply and hence a fall in inflation.

Question 65

Which of the following best describes the exchange rate monetary transmission mechanism?

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

Question 66

The effect of a change in money supply on real national income will be greater

A) the smaller the change in exchange rates that result from the change in money supply.
B) the more positive is the output gap.
C) the more elastic the demand for money.
D) the more elastic is the demand for investment with respect to change in interest rates.

Question 67

The interest rate in the UK (on guilt repos) is set by the government.

Question 68

Broad money is cash in circulation minus retail and whole sale bank and building society deposits.

Question 69

The Westland Bank has £100,000 in actual liquid assets and its required liquid assets are £80,000. Westland Bank, therefore, has excess reserves of £20,000.

Question 70

Banks' liabilities include advances to customers.

Question 71

Usually there is a trade- off between an asset's liquidity and its profitability.

Question 72

Future cash flows (e.g. from interest rate or mortgage payments), which are turned into marketable securities such as bonds, are referred to as secondary marketing.

Question 73

Risk- weighted assets are the total value of assets, where each type of asset is multiplied by a risk factor.

Question 74

The Bank of England chooses the inflation target.

Question 75

The intention of the bank levy is to discourage excessive short- term borrowing by the banks in their use of wholesale funding.

Question 76

The Bank of England operates monetary and exchange rate policy.

Question 77

'Prudential control' is the term used to describe the Bank of England's role in insisting that banks keep enough liquid assets.

Question 78

Securitisation helps to close the gap between liquidity and profitability.

Question 79

One danger of secondary marketing is that it may lead to an expansion of credit during a period of boom.

Question 80

The process of purchasing bills from the banks and discount houses by the Bank of England is known as rediscounting.