Deck 24: Money, the Price Level, and Inflation

Question 1

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

A)a credit card.
B)a chequing deposit.
C)a savings deposit.
D)Bank of Canada notes.
E)coins.

Answer 1

A

Question 2

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

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

Answer 2

C

Question 3

Which of the following is a function of money?

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

Answer 3

A

Question 4

Which of the following best fits the definition of money?

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

Question 5

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

A)a unit of account.
B)a standard of deferred payment.
C)a store of value.
D)quasi-money.
E)a medium of exchange.

Question 6

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 B nor D are part of M1.

Question 7

Money is

A)equivalent to barter.
B)currency plus credit cards plus debit cards.
C)the same as gold.
D)a means of payment.
E)currency plus coins.

Question 8

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

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

Question 9

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

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

Question 10

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

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

Question 11

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

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

Question 12

Using a credit card can best be likened to

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

Question 13

The largest component of M1 is

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

Question 14

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

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

Question 15

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

A)credit cards
B)personal chequable deposits
C)fixed term deposits
D)non-personal chequable deposits
E)non-chequable deposits

Question 16

Without money to act as a medium of exchange,

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

Question 17

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

A)currency outside banks.
B)personal chequable deposits.
C)non-chequable deposits.
D)deposits at trust and mortgage loan companies.
E)cheques.

Question 18

Which of the following assets is the most liquid?

A)a Canada Savings Bond
B)a credit card
C)a house
D)cash
E)a line of credit

Question 19

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

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

Question 20

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

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

Question 21

Which one of the following is considered to be money?

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

Question 22

Which one of the following would not be considered a depository institution?

A)The Bank of Canada.
B)a credit union
C)a caisse populaire
D)a trust and mortgage loan company
E)The Bank of Montreal

Question 23

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

Question 24

Which one of the following is considered to be money?

A)a chequable deposit
B)a blank cheque
C)a credit card
D)a debit card
E)a Canada Savings Bond

Question 25

Anything can be money as long as it

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

Question 26

Fact 24.1.2
In July 2011, currency held by individuals and businesses was $57 billion; chequable deposits owned by individuals and businesses were $211 billion; non-chequable personal deposits were $163 billion; non-chequable business deposits were $29 billion; and fixed term deposits were $303 billion.
Consider Fact 24.1.2. M1 is

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

Question 27

Fact 24.1.1
The information describes a hypothetical banking system. Assume that all banks are holding their desired reserves.

Refer to Fact 24.1.1. The quantity of money as measured by M1 is equal to

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

Question 28

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)6
D)3/2
E)1/6

Question 29

Which one of the following is not money?

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

Question 30

Which one of the following is not a depository institution?

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

Question 31

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

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

Question 32

Which of the following items is money in Canada today?

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

Question 33

Barter can only take place if there is

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

Question 34

Fact 24.1.2
In July 2011, currency held by individuals and businesses was $57 billion; chequable deposits owned by individuals and businesses were $211 billion; non-chequable personal deposits were $163 billion; non-chequable business deposits were $29 billion; and fixed term deposits were $303 billion.
Consider Fact 24.1.2. M2 is

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

Question 35

Which of the following is a store of value?

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

Question 36

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

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

Question 37

Which one of the following is most liquid?

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

Question 38

A financial firm that takes deposits from households and firms is

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

Question 39

Liquidity is

A)the property of being easily convertible into a means of payment without loss in value.
B)the degree of certainty of the price of an asset.
C)a high-risk asset.
D)the net flow of gold into the Bank of Canada.
E)the same as currency.

Question 40

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

Question 41

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

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

Question 42

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

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

Question 43

The monetary base consists of 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 outside the Bank of Canada, the desired reserves of chartered banks, and coins held by banks.
C)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.
D)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.
E)Bank of Canada notes held outside the Bank of Canada, bank deposits at the Bank of Canada, and notes and coins held by banks.

Question 44

Whenever desired reserves exceed actual reserves, the bank

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

Question 45

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

Question 46

Pooling risk

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

Question 47

A bank can create money by

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

Question 48

Excess reserves are

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

Question 49

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

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

Question 50

Which of the following statements about depository institutions is false?

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

Question 51

The reserves of a bank include

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

Question 52

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

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

Question 53

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

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

Question 54

Choose the statement that is incorrect.

A)A chartered bank is a private firm, chartered under the Bank Act of 1992 to receive deposits and make loans.
B)A credit union is a cooperative organization that operates under the Co-operative Credit Association Act of 1992.
C)A caisse populaire is similar to a credit union.
D)Trust and mortgage loan companies receive deposits, make loans, and act as trustee for pension funds and for estates.
E)Trust and mortgage loan companies have the bulk of the deposits in M1 and M2.

Question 55

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

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

Question 56

Which one of the following is not a service of depository institutions?

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

Question 57

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

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

Question 58

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

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

Question 59

Whenever actual reserves exceed desired reserves, the bank

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

Question 60

Choose the statement that is incorrect.

A)Fractional-reserve banking is a system in which banks keep a fraction of their depositors' funds as a cash reserve and lend the rest.
B)Fractional-reserve banking was invented by gold prospectors in the Canadian Yukon during the gold rush.
C)100 percent reserve banking is a system in which banks keep the full amount of their depositors' funds as a cash reserve.
D)The requirement to hold 100 percent reserves lowers bank profits.
E)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.

Question 61

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

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

Question 62

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

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

Question 63

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

Question 64

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)bank deposits increase.
E)banks lend reserves.

Question 65

Fact 24.4.1
The Bank of Speedy Creek has chosen the following initial balance sheet:

Refer to Fact 24.4.1. 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 stayed the same, with currency decreasing and deposits increasing.
C)has fallen, with currency decreasing and deposits staying the same.
D)has risen, with currency unchanged and deposits increasing.
E)has fallen, with currency decreasing and deposits unchanged.

Question 66

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

A)bank managers' decisions.
B)the monetary base, desired reserves, and desired currency holdings.
C)the number of consumers who apply for loans.
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 67

The ratio of currency to deposits is the

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

Question 68

Fact 24.4.2
The Bank of Hobbiton has chosen the following initial balance sheet:

Refer to Fact 24.4.2. 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 stayed the same, with its components unchanged.
B)has stayed the same, with currency decreasing and deposits increasing.
C)has fallen, with currency decreasing and deposits staying the same.
D)has risen, with currency unchanged and deposits increasing.
E)has fallen, with currency decreasing and deposits unchanged.

Question 69

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

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

Question 70

Choose the correct statement.

A)The quantity of money measured in constant dollars is nominal money.
B)The quantity of money measured in dollars is nominal money.
C)The quantity of nominal money demanded is inversely related to the price level.
D)As real GDP increases, the quantity of nominal money demanded decreases.
E)As the interest rate rises, the quantity of real money demanded increases.

Question 71

Fact 24.4.2
The Bank of Hobbiton has chosen the following initial balance sheet:

Refer to Fact 24.4.2. Based on the Bank of Hobbiton's initial balance sheet, what is its desired reserve ratio?

A)10 percent
B)100 percent
C)20 percent
D)5 percent
E)not calculable with the available information

Question 72

Fact 24.4.1
The Bank of Speedy Creek has chosen the following initial balance sheet:

Refer to Fact 24.4.1. Based on the Bank of Speedy Creek's initial balance sheet, what is its desired reserve ratio?

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

Question 73

Suppose that the interest rate is greater than the equilibrium interest rate. Which of the following statements is true?
I. There is an excess quantity of money.
II. The quantity of money automatically increases.
III. The interest rate falls.

A)I only
B)II only
C)III only
D)I and III only
E)None of the above statements are true.

Question 74

In Canada

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

Question 75

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

Question 76

Quantitative easing

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

Question 77

The opportunity cost of holding money increases when the

A)purchasing power of money increases.
B)nominal interest rate rises.
C)price of goods and services decrease.
D)income of consumers increases.
E)income of consumers decreases.

Question 78

If people decide to transfer their currency into their bank deposits then, all else constant, their decisions will

A)cause the quantity of money to decrease.
B)cause lower inflation.
C)cause higher real interest rates.
D)cause the quantity of money to increase immediately.
E)increase the actual reserves of banks.

Question 79

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 monetary base divided by the change in monetary holdings of households.
D)change in the quantity of money divided by the change in the monetary base.
E)change in monetary base divided by the change in quantity of money.

Question 80

If the price level doubles, all else constant, the quantity of

A)real money demanded will double.
B)nominal money demanded will double.
C)real money demanded will half.
D)nominal money demanded will half.
E)nominal money demanded will remain constant.