Deck 29: The Monetary System

Question 1

Cigarettes were used as a currency not only in several prisoner-of-war camps during World War II, but also in some countries in Eastern Europe just before the collapse of communism.

Answer 1

True

Question 2

The growth in the level of electronic transactions has led to an increased ability for banks to predict the amount of cash they have on reserve.

Answer 2

False

Question 3

If you deposited $100 of your currency into a bank, and the reserve ratio were 5 per cent, then the banking system could create as much as $1900 in additional money.

Answer 3

False

Question 4

Money is:

A) equivalent to income
B) equivalent to wealth
C) an asset used as a medium of exchange
D) backed by gold

Question 5

In the absence of money, people would have to rely on credit cards in order to obtain the things they needed.

Question 6

EFTPOS is type of money.

Question 7

If the reserve ratio is 10 per cent and a bank holds $1000 in deposits, then the bank must hold $100 in reserve.

Question 8

All that is required for fiat money to circulate successfully in an economic system is for the government to declare that it is legal tender.

Question 9

The term wealth is used to refer to the total of all stores of value, including both money and non-monetary assets.

Question 10

The RBA currently requires banks to have a reserve ratio in order to control money supply to the economy

Question 11

A medium of exchange is an item that people use specifically to transfer purchasing power from the present to the future.

Question 12

Money should have intrinsic value to be accepted in exchange for goods and services.

Question 13

A decrease in reserve requirements lowers the reserve ratio, raises the money multiplier and increases the money supply.

Question 14

The money multiplier is the reciprocal of the reserve ratio.

Question 15

An independent RBA has minimised the level of political influence, and therefore enables better management of inflation.

Question 16

In fractional-reserve banking, a bank keeps only a fraction of its deposit in reserve.

Question 17

In spite of bank runs and inflation, money has proven to be a very useful social convention.

Question 18

The gold standard is used as the basis for a nation's money supply.

Question 19

Money with intrinsic value is called fiat money, and money without intrinsic value is called commodity money.

Question 20

Money is the set of assets in the economy that people regularly use to buy goods and services from other people.

Question 21

The value of money:

A) increases when prices rise
B) increases when the price of bonds falls
C) increases when prices fall
D) decreases when prices fall

Question 22

A decrease in reserve requirements will likely result in banks:

A) holding fewer reserves
B) making more loans
C) increasing the money supply
D) all of the above

Question 23

If you withdraw $100 from your bank, then:

A) the reserves of your bank will initially fall by $100
B) the money supply will initially increase by $100
C) the money supply will initially decrease by $100
D) the required reserves for your bank will fall by more than $100

Question 24

If the reserve ratio is 10 per cent, the money multiplier is:

A) 10
B) 10 per cent
C) 90 per cent
D) 90

Question 25

If the RBA sold government securities, then:

A) the money supply would increase
B) the money supply would not change
C) the money supply would decrease
D) none of the above

Question 26

If Trustus Bank has a reserve ratio of 25 per cent and keeps $100 in reserve, then Trustus's deposits are:

A) $400
B) $25
C) $2500
D) $5000

Question 27

If the RBA purchased government securities, then:

A) the money supply would decrease
B) the money supply would not change
C) the money supply would increase
D) none of the above

Question 28

If the reserve ratio is 20 per cent and a bank receives a new deposit of $100, then this bank:

A) must increase its required reserves by $20
B) will initially see its total reserves increase by $100
C) will be able to make a new loan of $80
D) all of the above

Question 29

Use the following balance sheet for the First Bank: If RBA announced a new reserve ratio of 10%, the First Bank would be in a position to make additional loans of:

A) $10 000
B) $15 000
C) $0
D) $5000

Question 30

Use the following balance sheet for the First Bank of Oz: If $1000 is deposited into the First Bank of Oz, then:

A) assets will increase by $1000
B) liabilities will decrease by $1000
C) total reserves will initially increase by $150
D) required reserves will increase by $850

Question 31

Which of the following is the most liquid asset?

A) a demand deposit
B) a savings account
C) a home
D) rare coins

Question 32

If the reserve requirement is increased to 25 per cent, then the First Bank of Oz:

A) can create money by making a new loan
B) can hold excess reserves
C) cannot make a new loan
D) both B and C

Question 33

The purpose of a central bank is to:

A) control the value of money
B) regulate the supply of money
C) oversee the banking system
D) all of the above

Question 34

Credit cards are:

A) equivalent to debit cards like the VISA debit
B) part of the M3 money supply
C) a method of deferring payment
D) used as a method of payment

Question 35

Under a fractional-reserve banking system, banks:

A) hold only a fraction of their deposits as reserves
B) generally lend out a majority of their deposits
C) can create money by lending out reserves
D) all of the above

Question 36

If the reserve ratio is 100 per cent, depositing $500 of paper money in a bank will increase the money supply by:

A) $500
B) $0
C) $5000
D) $500 000

Question 37

There is a _____:

A) short-run trade-off between prices and interest rates
B) long-run trade-off between inflation and unemployment
C) short-run trade-off between inflation and unemployment
D) short-run trade-off between inflation and the money supply

Question 38

If $500 is deposited into the First Bank of Oz, then:

A) the bank will be able to create money by $3333
B) excess reserves initially increase by $75
C) required reserves increase by $75
D) total reserves initially increase by $425

Question 39

If reserve requirements are increased:

A) the reserve ratio will increase, the money multiplier will increase and the money supply will increase
B) the reserve ratio will decrease, the money multiplier will decrease and the money supply will decrease
C) the reserve ratio will decrease, the money multiplier will increase and the money supply will increase
D) the reserve ratio will increase, the money multiplier will decrease and the money supply will decrease

Question 40

If a bank uses $80 of reserves to make a new loan when the reserve ratio is 25 per cent, then:

A) the money supply initially increases by $20
B) the money supply initially decreases by $80
C) the level of wealth in the economy will not have changed
D) the money supply will eventually increase by more than $20 but less than $80

Question 41

What is the difference between a medium of exchange and a store of value?

Question 42

If Banks 'R Us has a reserve ratio of 12.5% and keeps $100 in reserve, then Banks 'R Us's deposits are:

A) $1250
B) $12.50
C) $800
D) $80

Question 43

Bank runs:

A) occur when the discount rate rises
B) occur when large numbers of depositors all try to withdraw their deposits at the same time
C) are only a problem in a 100 per cent reserve banking system
D) none of the above

Question 44

Which of the following functions is not one of the functions of money?

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

Question 45

Store of value deteriorates when:

A) when only the cost of fruit and vegetables increases
B) when there are inflationary expectations
C) when there are deflationary expectations
D) none of the above

Question 46

Discuss the problems the RBA has controlling the money supply in a system of fractional-reserve banking.

Question 47

The RBA is required to ensure that:

A) prices of all products need to increase by a maximum of 3 per cent per annum
B) target inflation is at 2-3 per cent
C) there is adequate money available for the government's projects
D) all of the above

Question 48

Fiat money is:

A) money based on the value of a commodity, such as a car
B) money without intrinsic value
C) commodity money
D) paper or plastic money under gold standard

Question 49

Which of the following statements about credit cards is correct?

A) Credit cards are a method of payment
B) Credit cards are included in measures of the quantity of money
C) Credit cards are a method of deferring payment
D) Credit cards are considered a form of money

Question 50

Imagine a simple world in which currency is the only form of money. If there is only a depository bank and the total quantity of currency is $100, then the total supply of money will be:

A) $0
B) $10
C) $100
D) $1000

Question 51

If the cash rate is increased, the RBA is trying to:

A) address excessive inflation in the economy
B) reduce the demand for money in the economy
C) discourage credit-based spending
D) all of the above

Question 52

When money takes the form of a commodity with intrinsic value, it is called a:

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

Question 53

When the RBA is trying to control rising inflation, it:

A) decreases the interest rate that financial institutions can earn on overnight loans of their currency
B) targets inflation is at 2-3 percent
C) increases the interest rate that financial institutions can earn on overnight loans of their currency
D) all of the above

Question 54

Explain what will happen to the money supply under each of the following circumstances:
a. The public decides to increase the amount of currency it holds.
b. Banks decide to hold fewer excess reserves.

Question 55

Which of the following statements about the role of the Reserve Bank of Australia is correct?

A) The RBA ensures the overall stability of the financial system
B) The RBA has an obligation to protect the interests of bank depositors
C) The RBA supervises individual financial institutions and ensures their stability
D) The RBA acts as a lender of last resort

Question 56

As banks hold more excess reserves, the money multiplier:

A) increases and the money supply increases
B) decreases and the money supply decreases
C) increases and the money supply decreases
D) decreases and the money supply increases

Question 57

One of the functions of money comes from the use of money to transfer purchasing power to the future. This is called:

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

Question 58

Under what circumstances can banks not influence the supply of money?

Question 59

If $5000 of new reserves are deposited in the banking system, and the reserve ratio is 25%, what is the multiplier? What is the bank reserve, and how much is created?

Question 60

If banks choose to hold more excess reserves, then:

A) the total reserves in the banking system will decrease
B) the money supply will fall
C) the money multiplier will increase
D) the discount rate will decrease

Question 61

How has the growth in the level of electronic transactions led to a decreased ability for banks to predict the amount of cash they need to have on reserve.

Question 62

What was the purpose of the deposit guarantee scheme in Australian and NZ banks?

Question 63

Which of the following will lead to an increase in reserves in the banking system and which will lead to a decrease in the level of reserves?
a. The public deposits more notes and coins than they withdraw.
b. The Government runs a budget surplus.
c. The RBA buys government securities or other financial assets from the public or from financial institutions.
d. Public debt matures
e. The RBA buys government securities or other financial instruments.

Question 64

When the Governor of the RBA gives a press conference, his comments are often an indicator of RBA intention. This has been dubbed as 'Open Mouth Operations', enabling the RBA to change retail bank policy without making a cash rate decision. Explain how this can be an effective method of managing the monetary policy? Explain your reasoning.

Question 65

Reserve laws were circumvented in the United States, where banks did not highlight loans given 'off-balance-sheet'. This led to liquidity crises that have been called the credit crunch. Explain how crises can be exacerbated when laws demanding a fractional reserve level are flouted.

Question 66

What are the problems facing the RBA in its management of the money supply?