Deck 10: Money, the Price Level and Inflation

Question 1

Which of the following items is included in the M1 money supply?

A) A credit card with a $5,000 limit.
B) Coins in a vending machine, waiting to be used as change.
C) $50 notes held at a Westpac branch.
D) $1,500 in a fixed-term savings account.
E) A $5,000 student loan granted to an Australian citizen.

Answer 1

Coins in a vending machine, waiting to be used as change.

Question 2

A common trait of money through history and across cultures is that money

A) was always issued by the local government.
B) was always based on gold or some other precious commodity.
C) was always fiat money.
D) was always generally accepted as a means of payment.
E) always had mystical properties.

Answer 2

was always generally accepted as a means of payment.

Question 3

Money is any commodity or token that is

A) backed by gold.
B) generally accepted as a means of measurement.
C) generally accepted as a means of payment.
D) a store of value.
E) issued by the government.

Answer 3

generally accepted as a means of payment.

Question 4

The unit of account is defined as

A) the medium of exchange.
B) the exchange of goods and services directly for other goods and services.
C) barter.
D) an object that is accepted in return for goods and services.
E) an agreed upon measure for stating prices of goods and services.

Question 5

The word "fiat" is

A) Latin for "backed by gold."
B) the term used to define the concept of barter.
C) used to describe money from when Kings ruled by decree or fiat.
D) another word to mean the "double coincidence of wants."
E) used to describe today's money because it is money set by law.

Question 6

In performing which of its primary functions does money solve the problem of the double coincidence of wants?

A) Money supply
B) Unit of account
C) Medium of exchange
D) Barter system
E) Store of value

Question 7

When we keep part of our wealth in a bank cheque account, we are using money as a

A) unit of currency.
B) medium of exchange.
C) barter token.
D) unit of account.
E) store of value.

Question 8

Which statement about money is most correct?

A) Money has been around for a long time and only includes cheque and savings accounts.
B) Money has been around for a long time and only includes dollar bills and coins.
C) Money is a new invention and only includes dollar bills and coins.
D) Money is a new invention and can include anything that is accepted as a means of payment.
E) Money has been around for a long time and can include anything that is accepted as a means of payment.

Question 9

Which of the following is an example of money?

A) A debit card.
B) Currency inside the banks.
C) Cheques written as payment for a good or service.
D) A credit card used as a payment for a good or service.
E) Currency in your wallet.

Question 10

The function of money that helps assess the opportunity cost of an activity is money's use as a

A) barter tool.
B) unit of account.
C) store of value.
D) medium of exchange.
E) store of debt.

Question 11

For an asset to be a "means of payment," the asset

A) requires a double coincidence of wants.
B) must be able to be used to settle a debt.
C) must be valuable and backed by the government.
D) must be used when bartering.
E) must be valuable and backed by gold.

Question 12

Money serves as a

A) means of payment, legal obligation and public tax.
B) means of settling debts, transaction lubricant and private commodity.
C) means to conduct barter transactions.
D) medium of exchange, unit of account and store of value.
E) means of worker exploitation and capitalist enrichment.

Question 13

Money is used as a ________ when you visit the local farmers' market and compare prices across different vendors.

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

Question 14

What is a problem with barter that makes it so difficult to use?

A) Barter omits the store of value role for money.
B) Barter requires the use of only fiat money.
C) Individuals have to produce something to trade with.
D) Barter is very efficient but illegal because it avoids taxation.
E) Barter requires a double coincidence of wants.

Question 15

M1 is composed of

A) traveller's cheques, credit cards and e-cash.
B) currency inside of banks, traveller's cheques and government-issued cheques.
C) currency held by individuals and businesses and current account deposits owned by individuals and businesses.
D) current account deposits owned by individuals and businesses, saving deposits, and certificates of deposit.
E) currency held by individuals and businesses, traveller's cheques, and the credit line on credit cards.

Question 16

Electronic cash (or e-cash), like Bitcoin,

A) is not money because it is not universally accepted as a means of payment.
B) is part of M1 but not M3.
C) is not a secure means of payment.
D) is not money because it is not officially issued by the government.
E) is part of the M3 money supply but not part of the M1 money supply.

Question 17

When we use money to purchase goods and services, we are using money as a

A) store of value.
B) unit of account.
C) reserve of wealth.
D) medium of exchange.
E) bartering tool.

Question 18

When you use a credit card to pay your university fees,

A) you've used the credit card as money because you received something in return.
B) the credit card is not money but is an ID card for an instant loan.
C) the credit card is not money because it involves an electronic transaction.
D) you've used the credit card as money because it is a means of payment.
E) the credit card is not money because it is not officially issued by the government.

Question 19

Fiat money means

A) that the money can be converted into gold.
B) only currency counts as money.
C) the government has decreed that something is money.
D) Italian currency.
E) that money's value does not change.

Question 20

Credit cards are
i. a generally accepted form of payment and therefore part of M1.
ii. included in M1 because you write a cheque to pay your monthly bill.
iii. a means of borrowing money.

A) i only
B) ii only
C) iii only
D) i and iii
E) i and ii

Question 21

A bank's desired reserve ratio is

A) the ratio of currency to deposits.
B) the ratio of deposits to currency.
C) the ratio of deposits to reserves that a bank wants to hold to meet daily business requirements.
D) the ratio of reserves to deposits that a bank wants to hold to meet daily business requirements.
E) determined by actual reserves less desired reserves.

Question 22

A public authority that provides banking services to banks and regulates financial institutions and markets is called a

A) central bank.
B) commercial bank.
C) mint.
D) money market fund.
E) thrift institution.

Question 23

The monetary base consists of

A) gold and Reserve Bank notes.
B) Australian dollar securities and foreign exchange.
C) Australian dollar reserves and banks' reserve deposits.
D) Reserve Bank notes and banks' reserve deposits.
E) gold and foreign exchange.

Question 24

Which of the following are included in the M3 definition of money?

A) Currency outside of banks and credit lines on credit cards
B) Currency inside of banks and banks' reserves
C) Currency both inside and outside of banks
D) Currency outside of banks, current account deposits and other deposits
E) Government bonds

Question 25

A bank has $200 of reserves and $4,000 of deposits. It is just meeting its desired reserves and has no excess reserves. Thus the desired reserve ratio is

A) 10 per cent.
B) 5 per cent.
C) $200.
D) 25 per cent.
E) 20 per cent.

Question 26

Riley deposits $4,000 cash in her cheque account at Fershur Bank. If the desired reserve ratio is 5 per cent, Fershur Bank's

A) desired reserves increase by $200 and its excess reserves increase by $3,800.
B) assets and liabilities change in opposite directions.
C) desired reserves increase by $4,000.
D) liabilities do not change but its assets increase.
E) excess reserves increase by $4,000.

Question 27

The Board of the Reserve Bank of Australia consists of

A) six external members and the secretary to the Treasury.
B) the governor, the vice governor and six external members from business.
C) only the governor and the deputy governor.
D) the governor, the deputy governor, the secretary to the Treasury and six external members.
E) the governor, the deputy governor and six external members.

Question 28

Assume the First Bank of Townsville makes a loan of $2,500. This loan will

A) increase the First Bank of Townville's liabilities at the Reserve Bank.
B) increase the First Bank of Townville's reserves.
C) decrease the quantity of money initially by $2,500.
D) have no change on the quantity of money, just its composition.
E) increase the quantity of money initially by $2,500.

Question 29

Which of the following are examples of deposit-taking institutions?
i. Banks
ii. Western Union
iii. Building Societies

A) i, ii and ii
B) iii only
C) i and iii
D) i only
E) i and ii

Question 30

Banks earn a profit by

A) making loans at a higher interest rate than the rates they offer on their deposits.
B) keeping as many reserves on hand as possible.
C) making loans at a lower interest rate than the rate they offer on their deposits.
D) not paying interest on their reserves.
E) charging an interest rate on their depositors' accounts.

Question 31

Banks create money by

A) lending to the Reserve Bank.
B) asking the Reserve Bank to print more currency.
C) making loans.
D) buying government securities.
E) printing currency.

Question 32

When goldsmiths issued receipts to gold owners, and those gold receipts circulated while gold stayed in the goldsmiths' safes,

A) the gold receipts were considered money because they were used as a means of payment.
B) an infant banking system developed in sixteenth century Europe.
C) fiat money was created.
D) money was invented.
E) Both A and B are correct.

Question 33

A building society is

A) a government bank.
B) a cooperative that receives deposits and makes loans to provide mortgage finance.
C) an institution that accepts only deposits made in money.
D) a non-profit firm that receives deposits from its members and makes loans to them.
E) a private firm that receives deposit and makes loans.

Question 34

What are the two liabilities of the Reserve Bank?

A) Gold and Reserve Bank notes
B) Australian dollar securities and foreign exchange
C) Australian dollar reserves and banks' reserve deposits.
D) Gold and foreign exchange
E) Reserve Bank notes and banks' reserve deposits

Question 35

The part of a bank's reserves that are larger than desired are called

A) required reserves.
B) non-required reserves.
C) excess reserves.
D) additional reserves.
E) unnecessary reserves.

Question 36

Because the Reserve Bank of Australia is a central bank, it provides banking services to

A) the government only.
B) consumers and business.
C) banks.
D) businesses only.
E) no one.

Question 37

Which of the following are assets of banks?
i. Reserves
ii. Loans
iii. Deposits

A) i only
B) ii only
C) i and ii
D) ii and iii
E) i, ii and iii

Question 38

The largest category of banks' assets is

A) loans.
B) currency.
C) cheque account deposits.
D) investment securities.
E) reserves and liquid assets.

Question 39

Which of the following is NOT held as an asset by banks?

A) Reserves
B) Loans
C) Currency in the banks' vaults
D) Investment securities
E) Deposits

Question 40

Which of the following is NOT a function of money?
i. Unit of account
ii. Store of value
iii. Unit of debt

A) i only
B) ii only
C) iii only
D) i and ii
E) ii and iii

Question 41

When the Reserve Bank buys government securities, the immediate effect of the purchase is that banks'

A) reserves increase.
B) assets increase.
C) deposits increase.
D) reserves decrease.
E) loans decrease.

Question 42

The currency drain reduces the amount of

A) currency available for banks to borrow from the Reserve Bank.
B) open market operations the Reserve Bank can make.
C) reserves available to banks to make loans.
D) currency the Reserve Bank has outstanding in the economy.
E) the monetary base.

Question 43

If a bank has $25,000 in excess reserves and the desired reserve ratio is 20 per cent, what is the maximum this bank can loan?

A) $25,000
B) $20,000
C) $5,000
D) $125,000
E) $30,000

Question 44

When the Reserve Bank purchases government securities,

A) required reserves in the banking system increase, leading to more loans being made.
B) the monetary base does not change.
C) required reserves in the banking system decrease, leading to fewer loans being made.
D) excess reserves in the banking system increase, leading to more loans being made.
E) excess reserves in the banking system decrease, leading to fewer loans being made.

Question 45

An open market purchase of securities by the Reserve Bank leads to all of the following EXCEPT

A) an increase in bank lending.
B) an increase in the monetary base.
C) a decrease in the quantity of money.
D) an increase in banks' reserves.
E) an initial increase in excess reserves.

Question 46

Open market operations are the

A) borrowing of reserves by the Reserve Bank from the banking system.
B) purchase or sale of government securities by the Reserve Bank.
C) minimum percentage of loans that banks must retain as reserves in the open market.
D) lending of reserves to the banking system by the Reserve Bank.
E) purchase or sale of gold by the Reserve Bank.

Question 47

The number by which a change in the monetary base is multiplied to find the resulting change in the quantity of money is called the

A) currency multiplier.
B) money multiplier.
C) currency drain.
D) desired reserve ratio.
E) open market operation.

Question 48

When the Reserve Bank ________ securities in an open market operation, banks' reserves ________, and therefore lending ________.

A) buys; decrease; decreases
B) buys; increase; increases
C) sells; increase; increases
D) buys; do not change; does not change
E) sells; decrease; increases

Question 49

When the Reserve Bank engages in open market operations, it is buying or selling

A) securities newly issued by private companies.
B) loans made to banks to meet the legal reserve requirement ratio.
C) capital equipment.
D) government securities.
E) gold.

Question 50

Suppose the Reserve Bank buys $50 million worth of securities from ANZ. As a result, the monetary base ________, and the quantity of money will ________ $50 million due to the ________.

A) increases; decrease by; currency drain
B) decreases; decrease by less than; expenditure multiplier
C) increases; increase by more than; money multiplier
D) decreases; decrease by more than; money multiplier
E) increases; increase by more than; expenditure multiplier

Question 51

C/D is the currency drain ratio and R/D is the desired reserve ratio. The money multiplier equals

A)
B)
C)
D)
E)

Question 52

Suppose the Reserve Bank buys $200 million of securities in the open market from Bank West. After the transaction which of the following occurs?
i. Bank West has $200 million less in securities.
ii. The Reserve Bank has $200 million more in securities.
iii. The Reserve Bank decreases Bank West's reserve deposit account at the Reserve Bank.

A) i only
B) ii only
C) iii only
D) i and ii
E) i and iii

Question 53

If required reserves are 20 per cent and the Reserve Bank buys $10,000 worth of government securities, what is the change in the banks' total reserves?

A) $8,000
B) $100,000
C) $20,000
D) $10,000
E) $2,000

Question 54

If the money multiplier is 3.0, a $1,000 increase in the monetary base

A) increases the quantity of money by $3,000.
B) decreases the quantity of money by $3,000.
C) increases the money multiplier by 3 per cent.
D) decreases the quantity of money by 3 per cent.
E) increases the monetary base by $300.

Question 55

When the Reserve Bank sells government securities to banks, the sale

A) decreases banks' reserves.
B) increases banks' reserves.
C) creates more excess reserves.
D) increases the quantity of money.
E) increases the monetary base.

Question 56

The two policy tools the Reserve Bank uses to influence the interest rate and regulate the amount of money circulating in the economy are

A) setting the cash rate and the market interest rate.
B) credit easing and setting the required reserve ratio.
C) open market operations and setting the cash rate.
D) open market operations and setting tax rates.
E) open market operations and setting the excess reserve ratio.

Question 57

When the Reserve Bank engages in open market operations to buy securities

A) the monetary base decreases by the amount of the open market purchase.
B) the monetary base increases by more than the amount of the open market purchase.
C) the monetary base increases by the amount of the open market purchase.
D) the monetary base increases by less than the amount of the open market purchase.
E) None of the above.

Question 58

The greater the currency drain ratio,

A) the smaller is the quantity of deposits and money that the banking system can create.
B) the larger the ratio of excess reserves to currency.
C) the smaller is the quantity of currency the public hold outside the bank.
D) the larger is the quantity of deposits and money that the banking system can create.
E) None of the above.

Question 59

A currency drain occurs when the

A) non-bank public increases its holdings of currency outside the banking system.
B) Reserve Bank sells government securities.
C) Reserve Bank increases the required reserve ratio.
D) banks reduce the number of loans they create with their excess reserves.
E) None of the above.

Question 60

If Reserve Bank notes are $65 billion and banks' deposits at the Reserve Bank are $22 billion, the stock of gold and foreign exchange is $74 billion, and the Reserve Bank owns $13 billion of government securities, what does the monetary base equal?

A) $76 billion
B) $87 billion
C) $65 billion
D) $88 billion
E) $74 billion

Question 61

The Reserve Bank conducts an open market purchase of securities of $5,000. If the currency drain ratio is 0 per cent and the desired reserve ratio is 10 per cent, then the total increase in the quantity of money is

A) $4,000.
B) $20,000.
C) $10,000.
D) $50,000.
E) $5,000.

Question 62

If the currency drain ratio is 0.2 and the desired reserve ratio is 0.03, the money multiplier is

A) 3.23.
B) 0.76.
C) 5.22.
D) 6.67.
E) 4.46.

Question 63

When the opportunity cost of holding money increases, then

A) people want to hold more money.
B) people want to hold less money.
C) the nominal interest rate falls.
D) the real interest rate falls.
E) the quantity of money supplied increases.

Question 64

If the desired reserve ratio is 10 per cent and there is no currency drain, then a $100 increase in the monetary base leads the banking system to increase the quantity of money by

A) $1,000.
B) $110.
C) $1,100.
D) $400.
E) $900.

Question 65

The nominal interest rate is 12 per cent and the inflation rate is 4 per cent. The opportunity cost of holding a dollar for a year is

A) 16 cents.
B) 12 cents.
C) 48 cents.
D) 8 cents.
E) 88 cents.

Question 66

The lower the nominal interest rate, the

A) greater the quantity of money supplied.
B) greater the quantity of money demanded.
C) greater the demand for money.
D) smaller the quantity of money demanded.
E) smaller the demand for goods and services.

Question 67

If the Reserve Bank buys $10 million of government securities when the desired reserve ratio is 20 per cent and the currency drain ratio is 5 per cent, the quantity of money

A) increases by $50 million.
B) decreases by $50 million.
C) increases by $7.5 million.
D) decreases by $42 million.
E) increases by $42 million.

Question 68

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

A) decreases and the demand for money curve shifts rightward.
B) increases and there is a movement upward along the demand for money curve.
C) decreases and the demand for money curve shifts leftward.
D) increases and the demand for money curve shifts rightward.
E) decreases and there is a movement downward along the demand for money curve.

Question 69

The difference between the nominal interest rate and the real interest rate is the

A) price level.
B) GDP growth rate.
C) unemployment rate.
D) money growth rate minus the growth rate of real GDP.
E) inflation rate.

Question 70

The opportunity cost of holding money instead of an interest-earning asset is the

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

Question 71

In Australia for the M3 definition of money, the currency drain ratio was 3.6 per cent and the banks' reserve ratio was 1.6 per cent. So the money multiplier was about

A) 20.
B) 1.
C) 5.
D) 10.
E) 23.

Question 72

If the currency drain ratio is 30 per cent and the desired reserve ratio is 10 per cent, the money multiplier is

A) 3.25.
B) 0.80.
C) 1.25.
D) 5.00.
E) 10.0.

Question 73

The demand for money curve shows the relationship between the quantity of money demanded and

A) the inflation rate.
B) the nominal interest rate.
C) real GDP.
D) the real interest rate.
E) the price level.

Question 74

Suppose you can earn 5 per cent on your savings account if you deposit $500 in it. The inflation rate is 3 per cent. The opportunity cost of holding the $500 as money is

A) $100.
B) $25.
C) $80.
D) $30.
E) $525.

Question 75

The quantity of money demanded

A) is equal to real GDP.
B) is the money people choose to hold.
C) is the total currency in circulation.
D) changes only when real GDP changes.
E) is the same as the money supply.

Question 76

As real GDP increases, which of the following occurs?

A) The demand for money curve shifts leftward.
B) The nominal interest rate falls as the demand for money curve shifts leftward.
C) The demand for money curve shifts rightward.
D) The demand for money decreases and there is a movement upward along the demand for money curve.
E) The demand for money increases and there is a movement downward along the demand for money curve.

Question 77

An increase in the nominal interest rate leads to

A) a leftward shift in the demand for money curve.
B) a rightward shift in the demand for money curve.
C) a movement downward along the demand for money curve.
D) a movement upward along the demand for money curve.
E) neither a shift in nor a movement along the demand for money curve.

Question 78

As the nominal interest rate increases, the opportunity cost of holding money ________ and the quantity of money demanded ________.

A) increases; increases
B) decreases; decreases
C) increases; decreases
D) increases; does not change because people need money
E) decreases; increases

Question 79

The Reserve Bank buys $50,000 of government securities. The desired reserve ratio is 10 per cent and the currency drain ratio is zero. What will be the change in the quantity of money?

A) $0
B) $5,000,000
C) $50,000
D) $500,000
E) $5,000

Question 80

Which of the following reduces the money multiplier?

A) Banks loan all their excess reserves.
B) Bank customers hold some of the loan proceeds as currency outside the banking system.
C) The Reserve Bank sells government securities.
D) Banks impose a currency drain on bank customers.
E) Banks reduce the desired reserves ratio.