Deck 29: The Monetary System

Question 1

The term wealth is used to refer to the total of all stores of value, including both money and non-monetary assets.

Answer 1

True

Question 2

If you deposited $100 of your currency into a bank, and the reserve ratio were five per cent, then the banking system could create as much as $1900 in additional money.

Answer 2

False

Question 3

Money has three main functions.It is a medium of exchange, a unit of account and is used as a store of value.

Answer 3

True

Question 4

In spite of bank runs and inflation, money has proven to be a very useful social convention.

Question 5

The money multiplier is the reciprocal of the reserve ratio.

Question 6

Monetary policy seeks to affect all interest rates in the economy, not just the overnight cash rate.

Question 7

Money is:

A)equivalent to income
B)equivalent to wealth
C)an asset used as a medium of exchange
D)backed by gold

Question 8

Cigarettes were used as a currency not only in several prisoner-of-war camps during World War II, but also in some countries in Eastern Europe just before the collapse of communism.

Question 9

Modern banking systems have reserve-deposit ratios of more than 100%, and are called fractional-reserve banking systems.

Question 10

The growth in the level of electronic transactions has led to an increased ability for banks to predict the amount of cash they have on reserve.

Question 11

The Reserve Bank can affect the money supply indirectly through its control of the supply of bank reserves.

Question 12

A relatively narrow measure of money is M3, which includes currency and cheque accounts.

Question 13

Banks attempt to hold as much reserves as possible.

Question 14

Money is the set of assets in the economy that people regularly use to buy goods and services from other people.

Question 15

A medium of exchange is an item that people use specifically to transfer purchasing power from the present to the future.

Question 16

If the reserve ratio is 10 per cent and a bank holds $1000 in deposits, then the bank must hold $100 in reserve.

Question 17

An independent RBA has minimised the level of political influence, and therefore enables better management of inflation.

Question 18

If the currency to deposit ratio falls, the money supplier rises.

Question 19

The gold standard is used as the basis for a nation's money supply.

Question 20

In the absence of money, people would have to rely on credit cards in order to obtain the things they needed.

Question 21

There is a _____:

A)short-run trade-off between prices and interest rates
B)long-run trade-off between inflation and unemployment
C)short-run trade-off between inflation and unemployment
D)short-run trade-off between inflation and the money supply

Question 22

The M1 measure of money consists of the sum of:

A)currency, cheque account deposits and travellers' cheques
B)currency and travellers' cheques
C)currency, cheque account deposits and savings account deposits
D)cheque account deposits and travellers' cheques

Question 23

If the reserve requirement is increased to 25 per cent, then the First Bank of Oz:

A)can create money by making a new loan
B)can hold excess reserves
C)cannot make a new loan
D)both B and C

Question 24

If the reserve ratio is 10 per cent, the money multiplier is:

A)10
B)10 per cent
C)90 per cent
D)90

Question 25

The value of money:

A)increases when prices rise
B)increases when the price of bonds falls
C)increases when prices fall
D)decreases when prices fall

Question 26

If the RBA purchased government securities, then:

A)the money supply would decrease
B)the money supply would not change
C)the money supply would increase
D)none of the above

Question 27

If the reserve ratio is 20 per cent and a bank receives a new deposit of $100, then this bank:

A)must increase its required reserves by $20
B)will initially see its total reserves increase by $100
C)will be able to make a new loan of $80
D)all of the above

Question 28

If reserve requirements are increased:

A)the reserve ratio will increase, the money multiplier will increase and the money supply will increase
B)the reserve ratio will decrease, the money multiplier will decrease and the money supply will decrease
C)the reserve ratio will decrease, the money multiplier will increase and the money supply will increase
D)the reserve ratio will increase, the money multiplier will decrease and the money supply will decrease

Question 29

The purpose of a central bank is to:

A)control the value of money
B)regulate the supply of money
C)oversee the banking system
D)all of the above

Question 30

A decrease in reserve requirements will likely result in banks:

A)holding fewer reserves
B)making more loans
C)increasing the money supply
D)all of the above

Question 31

The money supply in Econland is 1500, and currency held by the public equals bank reserves.The desired reserve-deposit ratio is 0.20.Bank reserves equal:

A)200
B)250
C)300
D)500

Question 32

Under a fractional-reserve banking system, banks:

A)hold only a fraction of their deposits as reserves
B)generally lend out a majority of their deposits
C)can create money by lending out reserves
D)all of the above

Question 33

If the RBA sold government securities, then:

A)the money supply would increase
B)the money supply would not change
C)the money supply would decrease
D)none of the above

Question 34

If a bank uses $80 of reserves to make a new loan when the reserve ratio is 25 per cent, then:

A)the money supply initially increases by $20
B)the money supply initially decreases by $80
C)the level of wealth in the economy will not have changed
D)the money supply will eventually increase by more than $20 but less than $80

Question 35

If you withdraw $100 from your bank, then:

A)the reserves of your bank will initially fall by $100
B)the money supply will initially increase by $100
C)the money supply will initially decrease by $100
D)the required reserves for your bank will fall by more than $100

Question 36

If the reserve ratio is 100 per cent, depositing $500 of paper money in a bank will increase the money supply by:

A)$500
B)$0
C)$5000
D)$500 000

Question 37

If Trustus Bank has a reserve ratio of 25 per cent and keeps $100 in reserve, then Trustus's deposits are:

A)$400
B)$25
C)$2500
D)$5000

Question 38

Use the following balance sheet for the First Bank of Oz:
$\begin{array}{cc|}\text { Assets }&&\text { Liabilities }\\\hline\text { Required reserves } & \$ 15.00 &\text { Deposits }&\$100.00\\\text { Loans } & \$ 85.00\end{array}$
If $1000 is deposited into the First Bank of Oz, then:

A)assets will increase by $1000
B)liabilities will decrease by $1000
C)total reserves will initially increase by $150
D)required reserves will increase by $850

Question 39

If the public switches from doing most of its shopping with currency to using cheques instead, and the Reserve Bank takes no action, the money supply will:

A)increase
B)decrease
C)not change
D)either increase or decrease

Question 40

When money is used as a means to hold wealth, it serves as a:

A)financial intermediary
B)double coincidence of wants
C)store of value
D)medium of exchange

Question 41

Bank runs:

A)occur when the discount rate rises
B)occur when large numbers of depositors all try to withdraw their deposits at the same time
C)are only a problem in a 100 per cent reserve banking system
D)none of the above

Question 42

In Econland, all $5 000 000 in currency is held by banks as reserves.The public does not hold any currency.If the banks' desired reserve-deposit ratio is 10 per cent, the money supply in Econland equals:

A)$4 545 545
B)$5 000 000
C)$5 500 000
D)50 000 000

Question 43

Under what circumstances can banks not influence the supply of money?

Question 44

If the actual reserve-deposit ratio equals eight per cent and the desired reserve-deposit ratio for this bank is 10 per cent, the bank should:

A)do nothing, because this is a profitable situation
B)stop making loans
C)send the extra reserves to the central bank
D)request that customers withdraw deposits from the bank

Question 45

Discuss the problems the RBA has controlling the money supply in a system of fractional-reserve banking.

Question 46

If banks choose to hold more excess reserves, then:

A)the total reserves in the banking system will decrease
B)the money supply will fall
C)the money multiplier will increase
D)the discount rate will decrease

Question 47

In a fractional-reserve banking system, the reserve-deposit ratio is:

A)equal to currency in bank vaults
B)equal to currency held by the public divided by deposits
C)100%
D)less than 100%

Question 48

Which of the following statements about credit cards is correct?

A)Credit cards are a method of payment
B)Credit cards are included in measures of the quantity of money
C)Credit cards are a method of deferring payment
D)Credit cards are considered a form of money

Question 49

The RBA is required to ensure that:

A)prices of all products need to increase by a maximum of 3 per cent per annum
B)target inflation is at 2-3 per cent
C)there is adequate money available for the government's projects
D)all of the above

Question 50

When the RBA is trying to control rising inflation, it:

A)decreases the interest rate that financial institutions can earn on overnight loans of their currency
B)targets inflation at two to three percent
C)increases the interest rate that financial institutions can earn on overnight loans of their currency
D)all of the above

Question 51

If the cash rate is increased, the RBA is trying to:

A)address excessive inflation in the economy
B)reduce the demand for money in the economy
C)discourage credit-based spending
D)all of the above

Question 52

Explain what will happen to the money supply under each of the following circumstances:
a.The public decides to increase the amount of currency it holds.
b.Banks decide to hold fewer excess reserves.

Question 53

If the actual reserve-deposit ratio equals 15 per cent and the desired reserve-deposit ratio for this bank is 10 per cent, the bank should:

A)do nothing, because this is a profitable situation
B)stop making loans
C)send the extra reserves to the central bank
D)make more loans in order to earn interest

Question 54

Imagine a simple world in which currency is the only form of money.If there is only a depository bank and the total quantity of currency is $100, then the total supply of money will be:

A)$0
B)$10
C)$100
D)$1000

Question 55

When money takes the form of a commodity with intrinsic value, it is called a:

A)barter money
B)legal tender
C)commodity money
D)debased money

Question 56

After the Reserve Bank increases reserves in the banking system through open-market purchases, banks create new deposits through multiple rounds of lending and accepting deposits, until the:

A)Reserve Bank requires them to stop
B)deposit insurance limit is reached
C)actual reserve-deposit ratio is greater than the desired reserve-deposit ratio
D)actual reserve-deposit ratio is equal to the desired reserve-deposit ratio

Question 57

Store of value deteriorates when:

A)when only the cost of fruit and vegetables increases
B)when there are inflationary expectations
C)when there are deflationary expectations
D)none of the above

Question 58

What determines the amount of money in the economy?

Question 59

Money has value to society because it performs three socially useful functions.What are those functions of money?

Question 60

One of the functions of money comes from the use of money to transfer purchasing power to the future.This is called:

A)medium of exchange
B)unit of account
C)store of value
D)measure of liquidity

Question 61

Reserve laws were circumvented in the United States, where banks did not highlight loans given 'off-balance-sheet'.This led to liquidity crises that have been called the credit crunch.Explain how crises can be exacerbated when laws demanding a fractional reserve level are flouted.

Question 62

How has the growth in the level of electronic transactions led to a decreased ability for banks to predict the amount of cash they need to have on reserve.

Question 63

What is the money multiplier?

Question 64

What was the purpose of the deposit guarantee scheme in Australian and NZ banks?

Question 65

When the Governor of the RBA gives a press conference, his comments are often an indicator of RBA intention.This has been dubbed as 'Open Mouth Operations', enabling the RBA to change retail bank policy without making a cash rate decision.Explain how this can be an effective method of managing the monetary policy? Explain your reasoning.

Question 66

What are the problems facing the RBA in its management of the money supply?