Deck 11: Money and the Banking System

Question 1

What does the idea behind money as a measure of value illustrate about the use of money?

A)It allows persons to hold spending power for some period of time.
B)It allows receipt of income to be separated from spending.
C)It allows prices to be quoted in money terms.
D)It allows double-entry bookkeeping.

Answer 1

It allows prices to be quoted in money terms.

Question 2

What is money?

A)a highly illiquid asset
B)a widely used means of exchange in a barter economy
C)an object to be consumed
D)whatever is generally accepted in exchange for goods and services

Answer 2

whatever is generally accepted in exchange for goods and services

Question 3

Money almost always serves as the standard unit for quoting prices.What is another way of saying this?

A)Money serves as a medium of exchange.
B)Money serves as a store of value.
C)Money serves as a measure of value.
D)Money serves as a commodity itself.

Answer 3

Money serves as a measure of value.

Question 4

Which of the following is NOT a correct statement about money?

A)Money serves as a medium of exchange.
B)Money serves as a commodity.
C)Money serves as a store of value.
D)Money serves as a means of deferred payment.

Question 5

What is the primary feature of money?

A)It serves as a barter value.
B)It serves as a trade account.
C)It serves as inherent value.
D)It serves as a medium of exchange.

Question 6

Does rapid inflation make holding a large amount of money a wise decision?

A)No, because the opportunity cost of holding liquid assets is high.
B)Yes, because you will generally need more and more to buy the goods and services you want.
C)No, because someone might steal it or it might be destroyed.
D)Yes, because the opportunity cost of holding liquid assets is high.

Question 7

Which of the following is the best definition of money?

A)anything that is a liability of the federal government
B)coins and currency in the hands of the public
C)anything that is a liability of a chartered bank
D)anything generally accepted as a payment for goods or repayment of debt

Question 8

Why is barter inefficient when compared to using money for trading?

A)Potential buyers may not have appropriate items of value to sellers with which to barter.
B)The government cannot tax the barter system.
C)It cannot be done over long distances.
D)Buyers and sellers don't always agree on value.

Question 9

Which of the following transactions is an example of money serving as a medium of exchange?

A)Roland puts his coins into a piggy bank.
B)John buys a cup of coffee and a roll at the faculty dining room.
C)Steve puts a five-dollar bill in his money belt.
D)Scott deposits cash into a savings account.

Question 10

Why is using money as a store of value preferable to using wheat?

A)It is both safer and less expensive.
B)It is less expensive.
C)It is much more portable.
D)It is safer.

Question 11

If individuals will no longer take a currency as a method of payment,is it still considered to be money?

A)Yes, because the government identifies it as legal tender.
B)Yes, because one of the characteristics of money is that it can be also used as a measure of value.
C)No, because one of the main characteristics necessary for something to serve as money is that it must be generally acceptable.
D)No, because it becomes just a commodity.

Question 12

What is the principle role of money?

A)to serve as a standard for the Bank of Canada
B)to serve as a standard for credit transactions
C)to serve a medium of exchange
D)to serve as a standard for making bank loans

Question 13

When is currency a poor store of value?

A)when the unemployment rate is high
B)when the rate of inflation is very high
C)when banks are failing at an abnormally high rate
D)when gold can be purchased at bargain prices

Question 14

Money makes it easier to borrow and repay loans.What is this function of money referred to as?

A)a standard of value
B)a means of deferred payment
C)a unit of account
D)a store of value

Question 15

Why does gold work better than bananas as a form of money?

A)A value can be imprinted in gold, but not bananas.
B)Gold doesn't disintegrate over time, but bananas do.
C)Gold is a natural element and bananas can be grown.
D)Everyone can value pure gold, but not a banana.

Question 16

What is the primary benefit of monetary exchange as compared to barter exchange?

A)Increased efficiency in arranging transactions.
B)Increased time devoted to finding trade partners.
C)Increased time devoted to shopping for what we want.
D)The possibility of tracking trade for tax purposes.

Question 17

Which of the following would result without money to serve as a medium of exchange?

A)We would all have to be self-sufficient.
B)The transactions cost of exchange would increase.
C)Gains from trade would be impossible.
D)Our cost of living would be higher.

Question 18

Which of the following is NOT a function of money?

A)money is a measure of value
B)money is a store of value
C)money is a means of differed payment
D)money is a facilitator of a barter system

Question 19

Why is the barter system less desirable than using money for exchange?

A)Gold and silver are risky and inconvenient to transport.
B)It is a more inefficient and a time-consuming process.
C)Gold and silver are relatively scarcer than other commodities.
D)It tends to promote inflation.

Question 20

What is one reason why gold and silver coins have historically served as money?

A)They can be produced for a low cost.
B)They can be made to last.
C)They can be easily melted down.
D)They can be controlled by the government.

Question 21

In defining the money supply as M2,on what grounds do economists include savings deposits?

A)on the grounds that savings deposits are liabilities of chartered banks, whereas chequable deposits are assets of the banks
B)on the grounds that savings deposits are a form of investment and thus a better store of value than currency
C)on the grounds that savings deposits can be used as a means of payment
D)on the grounds that the purchasing power of savings deposits is much more stable than that of demand deposits and currency

Question 22

Which of the following statements about paper money in Canada is most accurate?

A)It is fiat money.
B)It is more than half of M2.
C)It is convertible into specie (gold or silver) at the holder's request.
D)It is partially backed by gold and silver at the Bank of Canada.

Question 23

Which of the following assets is most liquid?

A)a television
B)funds in a savings account
C)ten hectares of land
D)a car

Question 24

What is the definition of liquidity?

A)the value of fiat money when used to buy a good or a service
B)the cash value of fiat money
C)the ease with which an asset can be converted into cash
D)the speed at which money is spent

Question 25

What effect would a decrease in currency in circulation combined with an equal increase in savings account deposits have?

A)It would increase M2 but have no effect on M2+.
B)It would decrease both M2 and M2+.
C)It would increase both M2 and M2+.
D)It would have no effect on either M2 or M2+.

Question 26

What point do virtually all economists agree on when defining money?

A)Money must be issued by the government.
B)Money must be generally accepted.
C)Money must be legal tender.
D)Money must be made of a precious metal.

Question 27

Which of the following is NOT money?

A)credit cards
B)savings deposits
C)coins
D)demand deposits

Question 28

Which of the following best describes M2?

A)It is a broader definition than M2+.
B)It is the narrowest definition of the money supply.
C)It focuses on money's use as a means of payment.
D)It consists of currency outside chartered banks and demand deposits at chartered banks.

Question 29

The money supply is significantly larger than the amount of currency in circulation.Approximately how much of M2 is made up of currency?

A)1 percent
B)6 percent
C)18 percent
D)27 percent

Question 30

Under what definition of the money supply are demand deposits at VanCity Credit Union included?

A)They are included in the M1 definition of the money supply.
B)They are included in the M2 definition of the money supply.
C)They are included in the M2+ definition of the money supply.
D)They are included in the M3 definition of the money supply.

Question 31

If you transfer the balance of your savings account at your credit union to your chequing account at your bank,how would this affect M2 and M2+?

A)M2+ would fall and M2 would rise.
B)M2+ would fall and M2 would stay the same.
C)Both M2 and M2+ would fall.
D)There would be no change in either M2 or M2+.

Question 32

What effect would a withdrawal of currency from your credit union savings account have?

A)It would increase M2 but have no effect on M2+.
B)It would decrease both M2 and M2+.
C)It would increase both M2 and M2+.
D)It would decrease M2+ but have no effect on M2.

Question 33

Which of the following is NOT a form of money?

A)government bonds
B)demand deposits
C)currency
D)coins

Question 34

What does the expression "money is liquid" mean?

A)Money overcomes the inherent problems faced in the barter system.
B)Money results in lower transaction costs.
C)Money can be easily converted into another asset or goods and services.
D)Money can be used as a store of value.

Question 35

Other things being equal,if you took money out of your demand deposit account and put it in a savings deposit account,what would be the effect on M2?

A)M2+ would decrease.
B)M2+ would increase.
C)M2 could increase.
D)M2+ would not change.

Question 36

Why does fiat money have value?

A)because it is has been decreed by the government
B)because it is divisible
C)because it is backed by gold
D)because it can be exchanged for the commodity backing it

Question 37

What is the term for the money supply that includes currency outside chartered banks plus demand deposits and savings deposits at chartered banks?

A)M1
B)M2
C)M2+
D)M3

Question 38

Other things being equal,if you took money out of your savings deposit account and put it in a demand deposit account,what would be the effect on M2?

A)M2+ would increase.
B)M2 would decrease
C)M2+ would decrease.
D)M2+ would not change.

Question 39

What effect would an increase in demand deposits combined with an equal decrease in currency in circulation have?

A)It would have no direct effect on M2 or M2+.
B)It would decrease M2 and increase M2+.
C)It would increase M2 and decrease M2+.
D)It would increase both M2 and M2+.

Question 40

What currency does M2 include?

A)currency outside chartered banks plus demand deposits at chartered banks
B)currency outside chartered banks plus notice deposits at chartered banks
C)currency outside chartered banks plus demand deposits and notice at chartered banks
D)currency outside chartered banks

Question 41

What does fractional reserve banking take its name from?

A)the fact that banks reserve only a fraction of their activity for lending
B)the fact that banks lend only a fraction of their total reserves to customers
C)the fact that banks hold only a fraction of their reserves at the bank itself
D)the fact that banks keep only a fraction of total deposits on reserve

Question 42

Which of the following statements about a gold standard is the most accurate?

A)It is a measurement of the importance of gold and it indicates high quality.
B)It is the basis for monetary exchange internationally.
C)It is an internationally recognized means for defining currency exchange rates.
D)It is a system where currency (e.g., the dollar) is defined as equivalent in value to a certain amount of gold.

Question 43

If the desired reserve ratio is 15 percent and a customer makes a new cash deposit of $50 000,how much new excess reserves are created?

A)$7500
B)roughly $33 000
C)$67 500
D)$42 500

Question 44

What are desired reserves of a bank a certain percentage of?

A)their deposits
B)their cash on hand
C)their loans
D)their total assets

Question 45

If a bank had demand deposits of $50 million and it desired a 25 percent reserve ratio,how much would it hold in reserve?

A)$12.5 million
B)$25 million
C)$37.5 million
D)$50 million

Question 46

If a bank had demand deposits of $50 million and it desired a 25 percent reserve ratio,what is the maximum amount of dollars' worth of loans it would be able to have?

A)$12.5 million
B)$25 million
C)$37.5 million
D)$50 million

Question 47

What is an important effect of fractional reserve banking?

A)Bankers always turn every dollar of excess reserves into loans.
B)A new bank deposit allows a bank to extend loans of the same amount to borrowers.
C)The commercial banking system has complete control over total reserves.
D)Bankers' choices about how much to lend can affect the money supply.

Question 48

Are Canadian treasury bills held by individuals an asset or a liability for the government and individuals?

A)They are government liabilities and an individual's assets.
B)They are government assets and an individual's liabilities.
C)They are government assets and an individual's assets.
D)They are government liabilities and an individual's liabilities.

Question 49

Can bankers create money?

A)No, they do not have this power.
B)Yes, through multiple deposit creation.
C)Yes, by printing cheques for customers.
D)No, unless they have a special charter which permits it.

Question 50

With the invention of banking,what is one important aspect of money with regards to the money supply?

A)Banks have full control over the money supply.
B)Banks have some discretion over the money supply.
C)Individuals have no discretion over the money supply.
D)Government lose all control over the money supply.

Question 51

How many large chartered banks are there in Canada?

A)1
B)3
C)6
D)20

Question 52

Other things being constant,if the public decides to hold more money in the form of currency rather than chequing deposits,what will be the effect on bank reserves and M2?

A)Bank reserves will increase, and M2 will ultimately decline as well.
B)Bank reserves will decline, and M2 will ultimately increase as well.
C)Bank reserves will decline, and M2 will ultimately decline as well.
D)Bank reserves will increase, and M2 will ultimately increase as well.

Question 53

Under fractional reserve banking,what occurs when a bank lends to a customer?

A)Reserves drain away from the system.
B)Bank credit decreases.
C)Borrowers receive a newly created demand deposit.
D)The bank is protected from a run.

Question 54

Which of the following statements about a bank's capital is the most accurate?

A)It is the value of its physical plant, including buildings, computers, and automatic teller machines.
B)It is the value of all its assets, including loans.
C)It is the value of all its assets, excluding loans.
D)It is the difference between its assets and liabilities.

Question 55

If a bank had demand deposits of $80 million and it desired a 25 percent reserve ratio,how much would it hold in reserve?

A)$20 million
B)$40 million
C)$60 million
D)$80 million

Question 56

Which of the following backs our money supply?

A)faith in the government's ability to provide a medium of exchange
B)the words "This note is legal tender"
C)precious metals because their value is constant over time
D)the U.S. dollar

Question 57

Are loans an asset or a liability for banks and borrowers?

A)They are liabilities of banks and their borrowers.
B)They are assets of banks and their borrowers.
C)They are assets of banks and liabilities of borrowers.
D)They are liabilities of banks and assets of borrowers.

Question 58

Are demand deposits an asset or a liability for banks and depositors?

A)They are liabilities of banks and assets of depositors.
B)They are assets of banks and their depositors.
C)They are liabilities of banks and their depositors.
D)They are assets of banks and liabilities of depositors.

Question 59

Are Canadian treasury bills held by chartered banks an asset or a liability?

A)They are government liabilities and chartered bank assets.
B)They are government assets and chartered bank liabilities.
C)They are government liabilities and chartered bank liabilities.
D)They are government assets and chartered bank assets.

Question 60

Why might a bank choose to hold secondary reserves,such as Canadian Treasury bills?

A)They pay lower interest rates than deposits at the Bank of Canada and are hard to convert into cash assets.
B)They pay higher interest rates than deposits at the Bank of Canada, even though they are hard to convert into assets.
C)They pay lower interest rates than deposits at the Bank of Canada, but are more easily converted into cash assets.
D)They pay higher interest rates than deposits at the Bank of Canada and are easily converted into cash assets.

Question 61

If a bank has $1 million in demand deposits,$400 000 in reserves,and desires a 30 percent reserve ratio,how much money could a bank directly create by loaning out its excess reserves?

A)$100 000
B)$300 000
C)$400 000
D)$600 000

Question 62

If a bank had demand deposits of $80 million and it desired a 25 percent reserve ratio,what is the maximum amount of dollars' worth of loans it would be able to have?

A)$20 million
B)$40 million
C)$60 million
D)$80 million

Question 63

If a bank gets a $100 000 new deposit,chooses to lend out $75 000,and increases its excess reserves by $5000 at the same time,what is the desired reserve ratio?

A)5 percent
B)20 percent
C)25 percent
D)30 percent

Question 64

What impact will a decrease in the excess reserves banks want to hold,together with people taking currency out of their demand deposit accounts,have on the money supply?

A)It would leave the money supply unchanged.
B)It would decrease the money supply.
C)It would have an indeterminate effect on the money supply.
D)It would increase the money supply.

Question 65

If a bank had a desired reserve ratio of 10 percent and excess reserves of $2000,what is the largest loan it could extend?

A)$200
B)$1800
C)$2 000
D)$20 000

Question 66

Say the desired reserve ratio is 20 percent.What is the effect of paying back a bank loan of $10 000?

A)It eliminates $2000 in money.
B)It adds $2000 in money.
C)It adds $10 000 in money.
D)It eliminates $10 000 in money.

Question 67

If a bank receiving a new deposit of $200 000 would be able,as a result,to increase its lending by,at most,$120 000,what is the desired reserve ratio?

A)4 percent
B)25 percent
C)40 percent
D)50 percent

Question 68

If a bank receiving a new deposit of $200 000 would be able,as a result,to increase its lending by,at most,$150 000,what is the desired reserve ratio?

A)4 percent
B)25 percent
C)40 percent
D)50 percent

Question 69

If a banking transaction created new excess reserves in the banking system,what would the impact be on the amount of loans made by banks and the money supply?

A)an increase in the amount of loans made by banks and a decrease in the supply of money
B)an increase in the amount of loans made by banks and an increase in the supply of money
C)a decrease in the amount of loans made by banks and a decrease in the supply of money
D)a decrease in the amount of loans made by banks and an increase in the supply of money

Question 70

If the National Bank of Uptown desires to hold 10 percent reserves and has excess reserves of $20 000,what is the maximum amount of additional loans that the bank can extend?

A)$2000
B)$18 000
C)$20 000
D)$200 000

Question 71

Assume the desired reserve ratio is 10 percent.First National Bank has vault cash and deposits with the Bank of Canada of $40 million,loans and securities of $360 million,and demand deposits of $400 million.Which of the following statements about First National is the most accurate?

A)It is not in a position to extend additional loans.
B)It could extend a maximum of $10 million of additional loans.
C)It could extend a maximum of $20 million of additional loans.
D)It could extend a maximum of $40 million of additional loans.

Question 72

Suppose all banks desire a uniform reserve requirement of 20 percent and the Firsttown Bank has zero excess reserves.If a new customer deposits $10 000,how much in new loans can the bank now extend?

A)up to a maximum of $2000
B)up to a maximum of $8 000
C)up to a maximum of $10 000
D)up to a maximum of $50 000

Question 73

If a bank has $1 million in demand deposits,$350 000 in reserves,and desires a 30 percent reserve ratio,how much money could a bank directly create by loaning out its excess reserves?

A)$50 000
B)$300 000
C)$350 000
D)$700 000

Question 74

If a bank had a desired reserve ratio of 10 percent and excess reserves of $2000,what is the largest loan it could legally extend?

A)$200
B)$1800
C)$2000
D)$20 000

Question 75

If the desired reserve ratio were increased,what impact would this have on the money supply and bank loans?

A)The money supply would tend to increase, but the outstanding loans of banks would tend to decrease.
B)Both the money supply and the outstanding loans of banks would tend to decrease.
C)Both the money supply and the outstanding loans of banks would tend to increase.
D)The money supply would tend to decrease, but the outstanding loans of banks would tend to increase.

Question 76

A chartered bank has $1 000 000 of outstanding demand deposits and actual reserves of $300 000.If the desired reserve ratio is 20 percent,what is the maximum loan the bank can extend?

A)$100 000
B)$150 000
C)$300 000
D)$500 000

Question 77

A chartered bank has $1 000 000 of outstanding demand deposits and actual reserves of $300 000.If the desired reserve ratio is 20 percent,what is the maximum loan the bank can extend?

A)$0
B)$100 000
C)$300 000
D)$700 000

Question 78

Assume that the desired reserve ratio is 20 percent.First National Bank has vault cash and deposits with the Bank of Canada of $80 million,loans and securities of $320 million,and demand deposits of $400 million.Which of the following statements about First National is the most accurate?

A)It could extend a maximum of $40 million of additional loans.
B)It could extend a maximum of $20 million of additional loans.
C)It could extend a maximum of $10 million of additional loans.
D)It is not in a position to extend additional loans.

Question 79

Say the desired reserve ratio is 10 percent.What is the effect of paying back a bank loan of $20 000?

A)It eliminates $20 000 in money.
B)It adds $2000 in money.
C)It adds $20 000 in money.
D)It eliminates $2000 in money.

Question 80

First Safety,a chartered bank,has $6 000 000 of outstanding demand deposits and actual reserves of $1 700 000.If the desired reserve ratio is 25 percent,what is the maximum loan the bank can extend?

A)$100 000
B)$425 000
C)$200 000
D)$1 500 000