Deck 12: Money, Banking, Prices, and Monetary Policy

Question 1

If R > q, then

A)the marginal benefit of using cash exceeds the marginal cost.
B)the nominal interest rate is not in equilibrium.
C)the real interest rate does not reach its equilibrium value.
D)the marginal cost of using the credit card exceeds the marginal benefit.
E)the marginal benefit of using the credit card exceeds the marginal cost.

Answer 1

E

Question 2

The real return on bonds is

A)the return someone receives from holding a real bond from the current to the future period.
B)the return someone receives from holding a nominal bond from the current to the future period.
C)always greater than the nominal return.
D)always equal to the nominal return.
E)R.

Answer 2

B

Question 3

To increase the nominal money supply, the government can

A)temporarily increase government spending, with an increase in either taxes or the quantity of government bonds.
B)engage in open market sales of interest-bearing debt.
C)reduce the quantity of government bonds, with an increase in government spending or taxes.
D)increase government spending and taxes by the same amount.
E)drop money out of helicopters.

Answer 3

E

Question 4

Money is useful in exchange when

A)credit transactions are difficult.
B)interest rates are high.
C)there is a single coincidence of wants.
D)there are several monetary aggregates.
E)inflation is rising.

Question 5

The excess demand for overnight funds is

A)perfectly elastic.
B)decreasing with the overnight interest rate.
C)perfectly inelastic.
D)zero.
E)increasing with the overnight interest rate.

Question 6

In a corridor system, if the excess demand for reserves is zero when the overnight interest rate is lower than the central bank's target

A)the central bank should borrow to achieve its target.
B)the corridor system is not working.
C)the central bank should impose a reserve requirement.
D)the central bank should increase its deposit rate.
E)the central bank should lend to achieve its target.

Question 7

Government printing of money to finance government spending is called

A)an open market sale.
B)an open-market purchase.
C)seigniorage.
D)sterilization.
E)irresponsible.

Question 8

Question 9

Fiat money is

A)currency found in Europe.
B)Canadian currency in Canada.
C)commodity-based paper money.
D)money in chartered banks.
E)commodity money.

Question 10

Use of money to save up for a future cash purchase would be an example of money's role as a

A)medium of exchange.
B)store of value.
C)unit of account.
D)store of wealth.
E)standard of deferred payment.

Question 11

The double coincidence of wants problem is solved by

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

Question 12

The inflation tax is

A)a tax on nominal goods.
B)the sales tax.
C)a tax introduced in the early 1980s to fight inflation.
D)the revenue from open market purchases.
E)the revenue from seigniorage.

Question 13

Quantitative easing occurs when the central bank

A)increases its interest rate target.
B)purchases long-term assets.
C)performs a helicopter drop.
D)purchases short-term assets.
E)engages in open market operations.

Question 14

An open market purchase

A)causes decrease in the money supply.
B)is a purchase by the government of goods and services.
C)is a purchase of money by the central bank.
D)is a sale of government bonds by the central bank.
E)is a purchase of government bonds by the central bank.

Question 15

Debit cards and online banking has

A)increased the riskiness of banks.
B)decreased the riskiness of banks.
C)increased the cost of banking transactions and reduced the demand for money.
D)lowered the cost of banking transactions and reduced the demand for money.
E)lowered the cost of banking transactions and increased the demand for money.

Question 16

Which one of the following is included in M3, but not in M2?

A)Canadian currency held by foreigners
B)personal term deposits
C)Bank of Canada term deposits
D)foreign currency deposits of residents of Canada
E)Eurodollars

Question 17

The zero lower bound is

A)conventional monetary policy.
B)the constraint that the nominal interest rate cannot fall below zero.
C)the constraint that consumption cannot fall below zero.
D)illegal.
E)the lower bound on money supply growth.

Question 18

Which of the following is included in M2, but NOT in M1?

A)currency (outside the Bank of Canada and the vaults of depository institutions)
B)nonpersonal notice deposits
C)demand deposits
D)travelers' cheques
E)personal savings deposits

Question 19

In a corridor system

A)reserves must be sufficiently large.
B)interest rates are determined by fiscal policy.
C)the Bank rate determines the overnight interest rate.
D)the central bank must intervene each day to peg the overnight interest rate.
E)the interest rate on deposits at the central bank determines the overnight interest rate.

Question 20

At the zero lower bound

A)open market purchases of government bonds by the central bank have no effects.
B)monetary policy has the usual effects.
C)consumption goes to zero.
D)conventional monetary policy is all that works.
E)government spending has no effects.

Question 21

The nominal interest rate cannot fall below zero because

A)inflation is generally too low.
B)financial markets do allow for arbitrage opportunities.
C)inflation is generally too high.
D)central banks are engaged in interest rate targeting.
E)financial markets cannot allow for arbitrage opportunities.

Question 22

Question 23

Monetary aggregates are

A)the various roles of money.
B)currency in the hands of the public and demand deposits.
C)different definitions of money.
D)high-powered money.
E)the money at the Bank of Canada.

Question 24

The monetary intertemporal model contains the fact that

A)the foreign sector does not matter.
B)the Bank of Canada supplies money.
C)interest rates are determined by the federal government.
D)interest rates are determined by the chartered banks.
E)transactions require money and transactions services supplied by banks.

Question 25

The monetary base includes

A)M0 and M1.
B)inside money.
C)all money available outside of the financial system.
D)money drawn from credit cards.
E)currency outside banks only.

Question 26

In the monetary intertemporal model, changing M

A)has real consequences.
B)affects output directly.
C)has no impact on prices or inflation.
D)affects the price level.
E)is used to create economic growth in the short run.

Question 27

The quantity of money in circulation is governed by

A)individual consumers.
B)the central bank.
C)provincial governments.
D)chartered banks.
E)the federal government.

Question 28

The real interest rate is approximately equal to

A)the nominal interest rate minus the inflation rate.
B)one divided by the nominal interest rate minus the inflation rate.
C)the growth in real GDP.
D)the nominal interest rate.
E)the nominal interest rate plus the inflation rate.

Question 29

A classical dichotomy refers to the fact that

A)classical theory predicts negative effects of high inflation.
B)the real variables in the model are determined independently of the money market.
C)the real variables are jointly determined depending on what happens in the money market.
D)the real interest rate differs from the nominal interest rate.
E)real and nominal variables are often different.

Question 30

In the monetary intertemporal model, the supply of money is determined by

A)the sale of bonds by the chartered banks.
B)the Bank of Canada.
C)foreign capital flows.
D)private sector transactions.
E)the government merged with the Bank of Canada.

Question 31

An open-market operation refers to

A)changing the money supply by changing government spending.
B)an exchange of domestic money for foreign money by the monetary authority.
C)an exchange of money for interest-bearing debt by the monetary authority.
D)changing the money supply by changing taxes.
E)seigniorage.

Question 32

Unconventional monetary policy includes

A)money growth targeting.
B)negative nominal interest rates and quantitative easing.
C)abolishing the central bank.
D)tax incentives and interest rate increases.
E)money growth targeting and tariffs.

Question 33

Buying an item with cash would be an example of money's role as a

A)medium of exchange.
B)store of value.
C)unit of account.
D)store of wealth.
E)standard of deferred payment.

Question 34

The demand for money is determined by

A)the behaviour of the private sector.
B)the behaviour of the consumer and the firm.
C)the behaviour of the government.
D)the behaviour of the chartered banks.
E)the behaviour of the Bank of Canada.

Question 35

Nominal bonds can be issued by

A)chartered banks.
B)government, consumers, or business firms.
C)business firms.
D)government and consumers.
E)the Bank of Canada.

Question 36

To increase the nominal money supply, the Bank of Canada can engage in

A)seigniorage.
B)reducing inflation.
C)open market purchases.
D)increasing taxes.
E)open market sales.

Question 37

Which of the following is an example of the role of banks?

A)help control the amount of currency in circulation
B)financial intermediaries
C)manage stock portfolios
D)manage the money supply
E)create money

Question 38

The nominal money supply is

A)horizontal at P*.
B)horizontal at M.
C)determined by the market for goods.
D)determined by equilibrium in the market for credit card balances.
E)exogenous.

Question 39

The two most common types of money in circulation in Canada today consist of

A)transaction deposits at banks and commodity money.
B)fiat money and transaction deposits at banks.
C)commodity-backed paper currency and fiat money.
D)private bank notes and commodity money.
E)private bank notes and commodity-backed paper currency.

Question 40

Price tags attached to goods for purchase at a store would be an example of money's role as a

A)medium of exchange.
B)store of value.
C)unit of account.
D)store of wealth.
E)standard of deferred payment.

Question 41

Real money demand is a function of

A)increasing real income and decreasing nominal interest rates.
B)increasing real income and increasing inflation rates.
C)increasing real income and decreasing inflation rates.
D)the level of transactions in the economy.
E)increasing real income.

Question 42

The most distinguishing economic feature of money is its

A)store of value role.
B)medium of exchange role.
C)unit of account role.
D)standard of deferred payment role.
E)store of wealth role.

Question 43

Double coincidence of wants means

A)two economic agents want different sets of goods.
B)households want more of leisure and consumption.
C)two economic agents want to exchange the goods they have.
D)households prefer to double the quantity of their goods.
E)households prefer a diverse set of goods.

Question 44

Monetary aggregates are useful indirect measures of

A)the monetary base.
B)aggregate economic activity.
C)inflation.
D)interest rates.
E)the role of money.

Question 45

In a floor system

A)the central bank's deposit rate determines the overnight interest rate.
B)interest rates are highly variable.
C)the central bank must intervene each day to achieve its interest rate target.
D)the central bank's lending rate determines the overnight interest rate.
E)reserves are essentially zero.

Question 46

Negative nominal interest rates

A)cannot happen because of the zero lower bound.
B)can be implemented because the effective lower bound is negative.
C)are not unconventional monetary policy.
D)will reduce investment.
E)are part of conventional monetary policy.

Question 47

An increase in the perceived instability of banks

A)leads to bank failure.
B)decreases the demand for money.
C)increases people's dependence on banks for transactions.
D)led to the elimination of reserve requirements in 1992.
E)increases the demand for money.

Question 48

The most narrowly defined monetary aggregate is

A)M2++.
B)M2.
C)currency outside banks.
D)L.
E)M1.

Question 49

If an increase in the level of the money supply results in a proportionate increase in prices with no effect on any real variables, we say that

A)the Fisher relationship holds.
B)money demand is neutral.
C)money is superneutral.
D)money is neutral.
E)money is the most preferred store of value.

Question 50

Real money demand depends

A)negatively on the inflation rate.
B)negatively on the nominal interest rate.
C)positively on the inflation rate.
D)positively on the nominal interest rate.
E)positively on the consumer's savings rate.

Question 51

Question 52

A liquidity trap occurs when

A)the central bank does not print enough currency.
B)consumers are too reliant on credit cards for purchases.
C)the real interest rate is zero.
D)the real interest rate is very high.
E)too many arbitrage opportunities exist.

Question 53

Equilibrium in the credit card market

A)results in a larger volume of real transactions.
B)determines the demand for money.
C)occurs if the marginal benefit exceeds the marginal cost of credit card balances.
D)raises the real interest rate.
E)is equal to nominal income earned during the day.

Question 54

The Fisher effect is

A)the effect of money supply growth on inflation.
B)the effect of inflation on the nominal interest rate.
C)the effect of the money supply on the price level.
D)the effect of government spending on output.
E)the effect of inflation on the real interest rate.

Question 55

The most significant problem in trying to empirically measure the real rate of interest is that

A)interest rates fluctuate so much from day to day.
B)there are so many different nominal interest rates.
C)expected inflation is unobservable.
D)banks infrequently change the prime rate of interest.
E)there are so many different types of bonds.

Question 56

The marginal cost of financial transactions rises with the volume of financial transactions due to

A)congestion.
B)power failure.
C)bank failure.
D)reserve requirements.
E)perceived instability of banks.

Question 57

Barter, the exchange of goods for goods, relates to

A)a single coincidence of wants.
B)a double coincidence of wants.
C)the role of money as a medium of exchange.
D)the role of the monetary base.
E)money as a store of value.

Question 58

Quantitative easing may work because

A)interest rate increases are not an option.
B)on net, this increases the effective quantity of liquid assets in the economy.
C)the central bank says they will.
D)open market operations always work at the zero lower bound.
E)it eases the strain on the government surplus.

Question 59

If the nominal interest rate rises

A)consumers and firms are less inclined to use credit cards.
B)there is substantial inflation in the economy.
C)inflation is declining.
D)real interest rates are declining.
E)the opportunity cost of holding cash rises.

Question 60

Neutrality of money refers to

A)a one-time change in the money supply has a one-time change in economic activity.
B)a one-time change in the money supply has no real consequence for the economy.
C)a one-time change in the money supply affects consumption and investment decisions only.
D)money being a medium of exchange for everyone.
E)a certain percentage change in the money supply has the same percentage change in economic activity.

Question 61

If R < q, then

A)the marginal benefit of using the credit card exceeds the marginal cost.
B)the nominal interest rate is not in equilibrium.
C)the marginal benefit of using cash exceeds the marginal cost.
D)the real interest rate does not reach its equilibrium value.
E)the marginal cost of using the credit card exceeds the marginal benefit.

Question 62

The monetary intertemporal model assumes that

A)after leaving the credit market, consumers do not go to work.
B)the real interest rate equals the nominal interest rate.
C)all credit card balances are paid off at the end of the day.
D)the federal government makes all the decisions about interest rates.
E)all transactions in the credit market are carried out using credit cards.

Question 63

Central banks in the world are increasingly experimenting with unconventional monetary policies. Describe
two types of unconventional monetary policies, and discuss why these policies may or may not work.

Question 64

Money supply targeting

A)is superior to nominal interest rate targeting in maintaining price stability.
B)performs poorly.
C)is very successful in maintaining price stability.
D)is used by most monetary authorities today.
E)will result in a high rate of inflation.

Question 65

Lower inflation over the long run tends to be associated with

A)higher real interest rates.
B)higher government spending.
C)lower nominal interest rates.
D)more international trade.
E)lower taxation.

Question 66

Unpredictable shocks to the financial system

A)increase the demand for money.
B)affect small depositors more so than large depositors.
C)reduce the demand for money.
D)result in money neutrality.
E)cause consumers and firms to switch to credit cards.