Deck 27: The Monetary System

Question 1

Money and wealth are the same thing.

Answer 1

False

Question 2

When you are willing to go to sleep tonight with €100 in your wallet and you have complete confidence that you can spend it tomorrow and receive the same amount of goods as you would have received had you spent it today, money has demonstrated its function as a medium of exchange.

Answer 2

False

Question 3

You use euros to pay the owner of a restaurant for a delicious meal. The euro currency

A) has no intrinsic value. The exchange is an example of barter.
B) has no intrinsic value. The exchange is not an example of barter.
C) has intrinsic value. The exchange is not an example of barter.
D) has intrinsic value. The exchange is an example of barter.

Answer 3

C

Question 4

If the central bank wishes to contract the money supply, it could do any of the following: sell government bonds, raise the reserve requirement, and raise the refinancing rate.

Question 5

The Bank of England is the central bank of the United Kingdom and its Monetary Policy Committee comprises members appointed by the Bank and by the Chancellor of the Exchequer (the UK finance minister).

Question 6

Which of the following is not a function of money?

A) hedge against inflation
B) medium of exchange
C) unit of account
D) store of value

Question 7

An example of fiat money is

A) paper euros.
B) gold.
C) silver coins.
D) cigarettes.

Question 8

In order for something to function well as a medium of exchange, it must be

A) issued by a central government.
B) readily and widely accepted in trade.
C) backed by a valuable commodity.
D) All of the above are correct.

Question 9

Barter exchange tends to be inefficient because

A) gold is difficult to transport.
B) it limits the time and effort required for trade.
C) it can be time consuming to find a double coincidence of wants.
D) a standardized unit of value can be difficult to find in a primitive economy.

Question 10

If a society chooses to use fiat money, it

A) must guarantee the convertibility of its currency into gold.
B) give its central bank independence.
C) cannot make use of a banking system.
D) must have a mechanism for regulating the quantity of money in the economy.

Question 11

Commodity money has value independent of its use as money.

Question 12

Which of the following is an example of barter?

A) A parent gives a teenager a €10 note in exchange for her babysitting services.
B) A homeowner gives an exterminator a cheque for €50 in exchange for extermination services.
C) A barber gives a plumber a haircut in exchange for the plumber fixing the barber's leaky tap.
D) All of the above are examples of barter.

Question 13

Commodity money

A) has no intrinsic value.
B) has intrinsic value.
C) is used exclusively in the economies of western Europe and North America.
D) is used as reserves to back fiat money.

Question 14

Roberta won a lottery prize of €1 million. She put the money in the bank to save it for her daughter's university education. For Roberta, money was functioning primarily as a

A) unit of account.
B) store of value.
C) means of payment.
D) type of short-term loan.

Question 15

Money has three functions: It acts as a medium of exchange, a unit of account, and a hedge against inflation.

Question 16

The money market refers to the market in which the commercial banks lend money to one another on a short-term basis.

Question 17

If there is 100 per cent reserve banking, the money supply is unaffected by the proportion of its money that the public chooses to hold as currency rather than as bank deposits.

Question 18

A double coincidence of wants

A) is required when there is no item in an economy that is widely accepted in exchange for goods and services.
B) is required in an economy that relies on barter.
C) is a hindrance to the allocation of resources when it is required for trade.
D) All of the above are correct.

Question 19

When the central bank in an economy raises the refinancing rate it encourages commercial banks to reduce their lending, thereby tending to reduce the money supply.

Question 20

A repurchase agreement is an agreement between the central bank and a commercial bank whereby a bond or other non-monetary asset is sold by one to the other with an agreement to reverse the transaction a short time later.

Question 21

The quantity of money circulating in the economy is called the __________.

A) fiat reserves
B) money stock
C) gold reserve
D) silver reserve

Question 22

Which of the following statements about money is not true?

A) A debit card is not really money because it is only a means of transferring money between accounts.
B) All the wealth that people hold, in whatever form, should be considered as money.
C) Wealth held in the current account you hold with your bank is almost as convenient for buying things as wealth held in your wallet, so the wealth in current accounts should be included in measures of money.
D) In a complex economy it is not easy to draw a clear dividing line between assets that should be considered as money and those that should not.

Question 23

What is the difference between the average interest banks earn on assets and the average interest rate paid on liabilities?

A) spread
B) loss
C) gain
D) change

Question 24

In addition to the European Central Bank, the national central banks of each of the countries comprising the European Monetary Union represent the

A) eurosystem.
B) central committee.
C) budget committee
D) governing council

Question 25

When an economy uses gold as money or uses paper money that is convertible into gold on demand, it is said to be operating under a _____________.

A) gold standard.
B) silver standard.
C) credit account.
D) bank account.

Question 26

Which one of the following is not included in the M1 money stock?

A) Deposits with maturity up to two years.
B) Overnight deposits.
C) Currency in circulation.
D) None of the above - they are all included in M1.

Question 27

Wealth held in ______________ is almost as convenient for buying things as wealth held as cash.

A) savings accounts
B) stock options
C) trading accounts
D) current bank accounts

Question 28

Which of the following statements is NOT true?

A) The purchase of government bonds from the public increases the money supply.
B) Monetary policy in the euro area is set by the Governing Council of the European Central Bank.
C) When the central bank sells government bonds to the public, the money supply decreases.
D) Monetary policy in the UK is set by the Chancellor of the Exchequer in consultation with the Bank of England.

Question 29

A central bank is designed to regulate the quantity of money made available in the economy. This is called the

A) money supply.
B) gold standard.
C) stock assets.
D) bonds.

Question 30

A(n) _________ card is used as a means of transferring money between accounts.

A) asset.
B) debit.
C) loan.
D) bond.

Question 31

What are the paper notes and metal coins that are held in the hands of the public called?

A) currency
B) accounts
C) bonds
D) stock

Question 32

Money

A) is a perfect store of value.
B) is the most liquid asset.
C) has intrinsic value, regardless of which form it takes.
D) All of the above are correct.

Question 33

A central bank's open market operations represent the purchase and sale of ______________ to and from the banking sector.

A) the money supply
B) non-monetary assets
C) cash holdings
D) savings.

Question 34

The primary objective of the _______________ is to promote price stability throughout the euro area and to design and implement monetary policy that is consistent with this objective.

A) European Parliament.
B) European Commission.
C) European Central Bank.
D) European Council.

Question 35

The set of actions taken by the central bank in order to affect the money supply is known as

A) banking functions.
B) procedures.
C) negotiated policies.
D) monetary policy.

Question 36

Credit cards are

A) included in M2 but not in M1.
B) not considered to be money.
C) included in M3 but not in M2 or M1.
D) considered as money only when they are in the hands of the public.

Question 37

The refinancing rate is the interest rate

A) at which commercial banks lend to and borrow from each other.
B) the European Central Bank pays on reserves.
C) the public pays when borrowing from banks.
D) the European Central Bank charges on loans to banks.
E) banks pay on the public's deposits.

Question 38

Which of the following would NOT be used by a central bank to influence interest rates in the economy?

A) Selling government bonds
B) Buying shares
C) Setting reserve requirements
D) Changing the refinancing rate

Question 39

In 1997, the UK government granted the Bank of England independence in the setting of

A) share prices
B) the exchange rate
C) the money supply
D) interest rates

Question 40

Which of the following policy actions by a central bank is likely to increase the money supply?

A) Increasing the refinancing rate.
B) All of these will increase the money supply.
C) Buying government bonds in open market operations.
D) Increasing reserve requirements.

Question 41

What are open market operations and in which circumstances are they performed?

Question 42

What is the difference between money and wealth?

Question 43

Discuss the role of the European Central Bank.

Question 44

Discuss the constraints on bank lending.

Question 45

A ________________ risk can occur when a bank cannot fund demand for withdrawals.

A) savings.
B) liquidity.
C) depositor.
D) systemic.

Question 46

Are credit cards and debit cards money? What is the difference between credit cards and debit cards?

Question 47

The three main tools of monetary policy are

A) fiat, commodity, and deposit money.
B) open-market operations, reserve requirements, and the refinancing rate.
C) the money supply, government purchases, and taxation.
D) government expenditures, taxation, and reserve requirements.
E) coin, currency, and demand deposits.

Question 48

If an economy's inflation rate is above target, the central bank would be most likely to

A) encourage banks to provide loans by lowering the refinancing rate.
B) encourage banks to provide loans by raising the refinancing rate.
C) restrict bank lending by lowering the refinancing rate.
D) restrict bank lending by raising the refinancing rate.

Question 49

What is the name of the policy designed to limit the risks across the financial sector by focusing on improving 'prudential' standards of operation that enhance stability and reduce risk?

A) governance
B) compliance
C) systemic policy
D) macroprudential policy

Question 50

A credit risk is the risk a bank faces in defaults on

A) savings accounts
B) loans
C) client loss
D) trade deficits

Question 51

Which one of the following statements is NOT correct?

A) A repurchase agreement is the sale of a non-monetary asset together with an agreement to repurchase it at a specified future date.
B) The difference between the price at which a commercial bank sells an asset to the central bank and the price at which it agrees to buy it back can be expressed as an annualized percentage of the selling price, and this is called the refinancing rate.
C) In the UK the refinancing rate is known as the repo rate.
D) If the central bank raises its refinancing rate then the commercial banks will try to increase their lending.

Question 52

Economists argue that the move from barter to money increased trade and production. How is this possible?

Question 53

What is the refinancing rate?

Question 54

Which one of the following is NOT true?

A) The difference between the price at which a commercial bank sells an asset to the central bank and the price it agrees to buy it back can be expressed as an annualized percentage of the selling price, and this is called the refinancing rate.
B) Commercial banks may borrow from and lend to each other and the interest rate at which they do this is called the refinancing rate.
C) In the UK the refinancing rate is known as the repo rate and in the USA it is referred to as the discount rate.
D) If the central bank has bought some assets from a commercial bank with an agreement that the commercial bank will buy them back at a later date, then this would be called a repo.

Question 55

If there is a general shortage of liquidity in the money market then

A) the long-term interest rate in the economy will rise and the central bank will raise its interest rate in response.
B) the economy's banking system will lend more money to households and firms.
C) the short-term interest rate at which the economy's commercial banks lend to and borrow from each other will fall and the central bank may be expected to reduce the supply of liquidity to the banks.
D) the short-term interest rate at which the economy's commercial banks lend to and borrow from each other will rise and the central bank may be expected to increase the supply of liquidity to the banks.

Question 56

After the 2007-09 global financial crisis, many central banks adopted macroprudential policies. Why?

Question 57

What are the two main functions of central banks?

Question 58

A bank run is said to have occurred when

A) depositors realise that a particular bank is paying higher interest than its competitors and a substantial number of them rush to deposit their money in it.
B) a substantial number of depositors suspect that a bank may go bankrupt and withdraw their deposits.
C) a bank experiences a series of defaults on its loans.
D) a bank converts its loans into deposits.

Question 59

A bank's balance sheet consists of its

A) assets and liabilities
B) cash and deposits
C) savings
D) liquidity

Question 60

What is the difference between commodity money and fiat money? Why do people accept fiat money in trade for goods and services?