Deck 18: Money, Inflation, and Banking: A Deeper Look

Question 1

In Canadian history, use of a commodity-backed paper currency is associated with the

A) free banking era.
B) Second World War.
C) gold standard.
D) Bretton Woods agreement.
E) Great Depression.

Answer 1

C

Question 2

Fiat money

A) consists of pieces of paper that are essentially worthless.
B) consists of pieces of paper that are essentially worth more than the paper it is printed on.
C) is not accepted in the exchange for goods.
D) is not accepted in the foreign exchange market.
E) consists of coins issued by the Bank of Canada.

Answer 2

A

Question 3

The optimal trade-off between current leisure and current consumption goods is expressed as

A) MRS?,C =
B) MRS?,C = w.
C) MRS?,C =
D) MRS?,C =
E) MRS?,C =

Answer 3

C

Question 4

In the contemporary Canadian economy, the best example of fiat money would be

A) coins issued by the Bank of Canada.
B) deposits at all depository institutions.
C) deposits at chartered banks, but not deposits at other depository institutions.
D) the stock of notes issued by the Bank of Canada.
E) the stock of notes in the foreign exchange market.

Question 5

The Friedman rule for optimal money growth is that

A) inflation and aggregate output grow at the same rate.
B) the money supply and aggregate output grow at the same rate.
C) the real wage rate and aggregate output grow at the same rate.
D) money should grow at a rate that implies that the nominal interest rate is zero.
E) money should grow at a rate that implies that the real interest rate is zero.

Question 6

The double coincidence of wants problem is solved by

A) credit markets.
B) government intervention.
C) the use of money.
D) specialization.
E) the barter system.

Question 7

A system that uses commodity-backed paper currency is most like a system that

A) uses circulating private bank notes.
B) uses fiat money.
C) primarily relies on transaction deposits at banks.
D) uses commodity money.
E) primarily relied on financial intermediaries.

Question 8

The causal link between money growth and inflation is most closely associated with

A) Jevons.
B) Kiyotaki and Wright.
C) Friedman and Schwartz.
D) Diamond and Dybvig.
E) Kydland and Prescott.

Question 9

In the monetary intertemporal model, inflation is

A) equal to the money growth rate.
B) proportional to the money growth rate but not equal.
C) always less than the money growth rate.
D) zero.
E) always greater than the money growth rate.

Question 10

An increase in the inflation rate shifts the labour

A) supply curve to the right.
B) supply curve to the left.
C) demand curve to the right.
D) demand curve to the left.
E) supply curve to the left and the output supply curve to the right.

Question 11

Circulating private bank notes

A) have never been used in Canada.
B) were widely used in Canada prior to 1935.
C) were only widely used in Canada during the Great Depression.
D) are still currently in use in Canada.
E) were only widely used in Canada after World War II.

Question 12

Widespread use of deposit banking and the use of cheques in transactions in Canada

A) dates back to the 19?? century.
B) first occurred shortly after World War I.
C) first occurred in the early 20?? century.
D) has slowly developed, and the volume of transactions by cheques has surpassed the volume of transactions by cash only since the early 1980s.
E) first occurred shortly after World War II.

Question 13

The optimal trade-off between current consumption goods and future consumption goods is expressed as

A) MRSC,C' = 1 + R.
B) MRSC,C' = 1 + r.
C) MRSC,C' =
D) MRSC,C' = 1 + i.
E) MRS?,C'

Question 14

An increase in the inflation rate shifts

A) both the aggregate demand and supply curves left.
B) only aggregate demand right.
C) aggregate demand right and aggregate supply left.
D) only aggregate supply left.
E) aggregate demand left and aggregate supply right.

Question 15

A system that uses commodity-based paper currency was used in Canada

A) only during the Great Depression.
B) only during World War II.
C) before 1929.
D) only after World War II.
E) only during the 1960s and 1970s.

Question 16

The cheque-clearing system is

A) only found in the United States.
B) one mechanism by which consumers carry out exchanges.
C) one mechanism by which banks carry out exchanges with each other.
D) includes debit card transactions.
E) slowly being replaced by credit cards.

Question 17

Market exchange is typically an exchange of goods for money as opposed to goods for goods because use of money solves the problem of

A) the absence of a coincidence of wants.
B) the absence of a double coincidence of wants.
C) a coincidence of needs.
D) tax evasion.
E) the need for government intervention.

Question 18

The nominal interest rate affects the opportunity cost of leisure because

A) of the delay in when a consumer works and when they can spend the wage income.
B) the substitution effect dominates the income effect.
C) the income effect dominates the substitution effect.
D) there is no delay in when the consumer works and can spend the wage income.
E) additional leisure requires the consumer to borrow.

Question 19

Problems with the use of commodity money include all of the following except

A) it is expensive to produce.
B) there is an opportunity of fraud in the production of commodity money.
C) bits could be clipped off coins and melted down without detection.
D) it carries a high opportunity cost because the commodity could not be diverted from other uses.
E) there are several good substitutes.

Question 20

Credit cards should not be considered a form of money because

A) credit cards are not universally accepted.
B) a credit card can only be used by the cardholder.
C) money and credit are fundamentally different.
D) they are too susceptible to fraud.
E) they are not a good medium of exchange.

Question 21

For assessing whether and how much of an asset to hold, the important consideration is the asset's amount of

A) diversifiable risk.
B) nondiversifiable risk.
C) relative risk.
D) absolute risk.
E) rate of return risk.

Question 22

An alternative way to achieve some of the benefits if the Friedman rule would be to

A) suspend paying interest on the national debt.
B) pay interest on the component of outside money held by financial institutions as deposits at the Bank of Canada.
C) adopt a fixed exchange rate.
D) prohibit the central bank from conducting open-market operations.
E) reduce inflation rates to zero.

Question 23

Some of the most renowned examples of hyperinflation occurred in Austria, Hungary, Germany and Poland shortly after

A) the collapse of the Austro-Hungarian Empire.
B) World War I.
C) World War II.
D) the fall of the Berlin Wall.
E) the Great Depression.

Question 24

The Fisher relationship may be described by the following equation in which R is the nominal rate of interest, r is the real rate of interest, and i is the inflation rate.

A) i = r + R
B) 1 + i =
C) 1 + r =
D) 1 + r =
E) R = r + i

Question 25

If an increase in the growth rate of the money supply results in an equal increase in the rate of inflation with no effect on any real variables, we say that

A) the classical dichotomy fails.
B) money is neutral.
C) money is superneutral.
D) money is the most preferred store of value.
E) money is not neutral.

Question 26

To implement the Friedman rule for long-term monetary policy, the monetary authority would need to set the

A) inflation rate equal to zero.
B) nominal rate of interest equal to zero.
C) real rate of interest equal to zero.
D) money growth rate equal to zero.
E) output growth rate equal the inflation rate.

Question 27

A liquidity trap is where

A) real interest rates are greater than nominal interest rates.
B) nominal interest rates are greater than real interest rates.
C) real interest rates are zero.
D) nominal interest rates on government securities are zero.
E) capital influences are less than capital outflows.

Question 28

The most likely cause of a hyperinflation is

A) central bank incompetence.
B) the inability to finance government spending through taxation or borrowing.
C) an acute shortage of natural resources.
D) over-aggressive labour unions.
E) rising commodity prices.

Question 29

To implement the Friedman rule, the monetary authority needs to set the money growth rate so that

A) x = -r.
B) x > r.
C) x < -r.
D) x = r.
E) x = -r + i.

Question 30

An asset's liquidity depends upon

A) the absolute size of its value and how long it takes to sell the asset at market value.
B) how long it takes to sell the asset at market value and the costs of selling the asset.
C) the costs of selling the asset and the fraction of its value that can be obtained if it is sold immediately.
D) the fraction of its value that can be obtained if it is sold immediately and the absolute size of its value.
E) the value of the asset at time of sale and the costs of selling the asset.

Question 31

If the Friedman rule for long-term monetary policy were implemented, the result would be

A) inflation.
B) neither inflation nor deflation.
C) deflation.
D) hyperinflation.
E) constant inflation.

Question 32

A consumer is said to be risk-averse when the consumer

A) purchases assets with a zero nominal interest rate.
B) prefers to hold assets with more non-diversified risk.
C) prefers to hold assets with less non-diversified risk.
D) prefers to not purchase a portfolio of assets.
E) purchases assets with maturities of less than one year.

Question 33

In the monetary intertemporal model, the long-run effects of an increase in the money supply growth rate include

A) an increase in output and an increase in the real wage.
B) an increase in output and a decrease in the real wage.
C) a decrease in output and an increase in the real wage.
D) a decrease in output and a decrease in the real wage.
E) an increase in output and a decrease in the real interest rate.

Question 34

The Fisher effect posits a long-run one-to-one relationship between the

A) inflation rate and the nominal interest rate.
B) nominal interest rate and the real interest rate.
C) real interest rate and the real exchange rate.
D) nominal exchange rate and the inflation rate.
E) inflation rate and the real interest rate.

Question 35

In the monetary intertemporal model, money is

A) neutral but not superneutral.
B) superneutral but not neutral.
C) superneutral.
D) unrelated to the inflation rate.
E) superneutral only if the Fisher effect is large.

Question 36

According to a study by Thomas Cooley and Gary Hansen, the cost in lost consumption of a 10% per annum rate of inflation is

A) negative.
B) approximately 0.001%.
C) approximately 0.5%.
D) approximately 5.0%.
E) approximately 0.14%.

Question 37

The maturity of a 30-year bond that makes coupon payments is

A) somewhat less than 30 years.
B) exactly 30 years.
C) somewhat more than 30 years.
D) uncertain.
E) up to the discretion of the issuer.

Question 38

The Friedman rule describes optimal monetary policy and is

A) always followed in practice by central banks.
B) too difficult to implement in practice.
C) never followed in practice by central banks.
D) a policy central banks would like to follow but do not know how to.
E) only followed by central banks during expansions.

Question 39

The Friedman rule is optimal because which of the following relationships holds in equilibrium?

A) MRS?,c = MRT?,c
B) MRS?,c =
C) MRT?,c = x
D) MRS?,c = MRT?,c (1 + R)
E) MRS?,c >

Question 40

According to Thomas Sargent, a key to stopping a hyperinflation is to

A) reduce the money supply.
B) increase the money supply.
C) dramatically increase nominal interest rates.
D) gain control over fiscal policy by reducing the government deficit.
E) slow the economy by reducing government spending and/or raising taxes.

Question 41

The Diamond-Dybvig model provides a rationale for the phenomenon of

A) undercapitalized banks.
B) banks making overly risky loans.
C) bank runs.
D) deflation.
E) banks carrying too many illiquid assets.

Question 42

The Diamond-Dybvig bank provides a useful social service because

A) it is forced to do so by the government.
B) it is immune from bank runs.
C) it holds liquid assets.
D) it is well-diversified.
E) it participates in interbank markets.

Question 43

Which asset is least liquid?

A) currency
B) a government bond
C) a chequing deposit
D) a factory
E) a savings deposit

Question 44

In the Diamond-Dybvig model, the bank's deposit contract has the following important features:

A) it allows a bank depositor to withdraw currency.
B) it insures depositors against the event that they consume early.
C) it implies that late consumers want to pose as early consumers.
D) it implies a bank run is prevented.
E) it gives more consumption to early consumers than later consumers.

Question 45

Bank Runs

A) were a persistent problem in Canada during the Great Depression.
B) were eliminated by the CDIC.
C) were never a problem in Canada.
D) were never a problem in the United States.
E) are a problem only in the Diamond-Dybvig model, not in any real economy.

Question 46

In the Diamond Dybvig model, a bank run occurs when

A) depositors think the bank managers have absconded with the bank's assets.
B) depositors see other depositors running on other banks.
C) depositors think that everyone else will request withdrawal.
D) depositors think the central bank cannot be trusted.
E) the banks suspends payments.

Question 47

The Diamond Dybvig model does not

A) provide an account of bank runs in the 19?? century United States.
B) provide an account of bank runs in Canada.
C) explain asset transformation.
D) explain why a financial intermediary is diversified.
E) show why a run can occur on an otherwise sound bank.

Question 48

In Canada, the Canada Deposit Insurance Corporation (CDIC)insures the value of chartered bank deposits up to

A) $50,000.
B) $100,000.
C) $500,000.
D) $1,000,000.
E) $2,000,000.

Question 49

The founding of the Canada Deposit Insurance Corporation (CDIC)was much later than deposit insurance arrangements in other countries because

A) Canada's banking system started so much later.
B) Canada did not experience the episodes of widespread bank failure and banking panics.
C) Canada had a weak reactive government.
D) Canadian banks are so much smaller.
E) Canadian banks are relatively large and well diversified geographically.

Question 50

Which asset is most liquid?

A) a house
B) currency
C) a government bond
D) a bank deposit
E) a stock

Question 51

The argument that deposit insurance can prevent the failure of an otherwise sound bank is based on the idea that

A) bank examinations by the Canada Deposit Insurance Corporation (CDIC) weed out badly managed banks.
B) the existence of deposit insurance may prevent self-fulfilling panics.
C) potential deposits need not be concerned about account overdrafts.
D) deposit insurance restores confidence in the stock market.
E) deposit insurance restores confidence in the bond market.

Question 52

A depository institution can make highly illiquid and long-maturity loans with funds obtained by issuing transaction deposits because

A) depository institutions tend to be owned by individuals with a high tolerance of risk.
B) most transaction depositors have very transaction patterns.
C) depositors, taken as a group, behave in a predictable manner.
D) depository institutions are skilled at evaluating credit risks.
E) depository institutions have a large pool of assets to draw from.

Question 53

In a bank run in the Diamond-Dybvig model, it is in any depositor's interest to request withdrawal of his or her deposit because

A) this avoids the possibility of consuming zero.
B) this avoids the possibility of having one unit of consumption.
C) government intervention assures that this is optimal behaviour.
D) there are plenty of liquid assets to go around.
E) the bank suspends withdrawal.

Question 54

The phenomenon in which an insured individual takes less care in preventing the event against which he or she is insured is an example of

A) foolish behaviour.
B) adverse selection.
C) moral hazard.
D) double coincidence of wants.
E) nondiversifiable risk.

Question 55

Banks in the Diamond-Dybvig model can offer depositors increased liquidity because

A) both individual depositors' liquidity needs and average depositor liquidity needs are predictable.
B) while individual depositors' liquidity needs are unpredictable, average depositor liquidity needs are predictable.
C) while individual depositors' liquidity needs are predictable, average depositor liquidity needs are unpredictable.
D) neither individual depositors' liquidity needs nor average depositor liquidity needs are predictable.
E) the bank only holds a small amount of illiquid assets.

Question 56

Moral hazard is a problem in providing deposit insurance because insured banks are

A) more likely to make bookkeeping errors.
B) overly cautious due to extra regulations adopted by the Canada Deposit Insurance Corporation.
C) more likely to provide bank managers with lavish perquisites.
D) encouraged to take on more risk.
E) more likely to offer interest rates on loans that are greater than market interest rates.

Question 57

One characteristic of a financial intermediary is that

A) it acts as a broker in the sale of stocks and bonds.
B) it intermediates between workers and firms.
C) it transforms assets.
D) it cannot processes information.
E) it is a lending institution only.

Question 58

The Diamond-Dybvig model provides an account of

A) bank runs.
B) the role for deposit insurance.
C) the role for a central bank.
D) the lender of last resort.
E) lack of diversification.

Question 59

Examples of financial intermediaries include

A) insurance companies.
B) credit markets.
C) financial markets.
D) stock exchanges.
E) mutual funds.

Question 60

In a bank run, the equilibrium deposit contract in the Diamond-Dybvig model

A) makes both early and late consumers better off.
B) makes early consumers no better off and makes late consumers worse off.
C) makes early consumers worse off and makes late consumers better off.
D) makes both early consumers and late consumers worse off.
E) provides an illiquidity transformation service to consumers.

Question 61

What are the costs of inflation?