Deck 11: Money, Banks and the Reserve Bank of Australia

Question 1

'Barter' takes place in an economy when:

A)goods and services are exchanged for money.
B)money is exchanged for goods and services.
C)goods and services are exchanged for other goods and services.
D)goods and services are exchanged for liabilities.

Answer 1

goods and services are exchanged for other goods and services.

Question 2

Many international trade contracts are denominated in American dollars (US$), regardless of the currencies of the countries that are trading with each other. This is an example of money serving as a:

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

Answer 2

unit of account.

Question 3

If you save $3 000 for a deposit on a new car, you are using money as a:

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

Answer 3

store of value.

Question 4

When a grocery store accepts your $10 note in exchange for bread and milk, this illustrates that the $10 note is serving as a:

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

Question 5

A disadvantage of using a commodity money as a store of value is that:

A)money is not portable.
B)it requires a double coincidence of wants.
C)currency is intrinsically worthless.
D)the value of money falls if the commodity is not durable.

Question 6

When a worker gets paid weekly but pays his bills at the end of the month, money functions as __________ during the month.

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

Question 7

Which of the following is the most liquid asset?

A)a Monet painting
B)a government bond
C)a house
D)a demand deposit account

Question 8

Which of the following is not a function of money?

A)medium of exchange
B)unit of account
C)store of value
D)standard of barter

Question 9

Which of the following is the most liquid asset?

A)gold
B)Australian government bonds
C)a demand deposit account
D)a credit card account

Question 10

'Liquidity' is defined as the ease with which a given asset can be converted to a:

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

Question 11

In World War II, cigarettes were used as money in some prisoner-of-war camps. Given this, we would expect to see:

A)no-one ever smoking cigarettes in the prisoner-of-war camps.
B)prices of other goods expressed in terms of cigarettes.
C)only government-issued cigarettes being accepted as money.
D)people bartering instead of using cigarettes as money.

Question 12

The problem with barter economies is that they require:

A)less time and trouble to trade as compared with a money economy.
B)that there be a double coincidence of wants.
C)a banking system for trade to occur.
D)that there be a single coincidence of wants.

Question 13

'Money' is:

A)an asset that people are generally willing to accept in exchange for goods and services.
B)a liability that people are willing to accept in exchange for goods and services.
C)the income a person earns over a period of time.
D)a person's assets net of liabilities at any point in time.

Question 14

A store of value is:

A)an asset that can be used to transport purchasing power from one period of time to another.
B)a standard unit that provides a consistent way of quoting prices.
C)what sellers generally accept and buyers generally use to pay for goods and services.
D)the ability to buy something today but to defer payment to the future.

Question 15

'Commodity money' is a good:

A)used as money that has no secondary use.
B)that is designated as money by law.
C)used as money that also has value independent of its use as money.
D)used as money that has no intrinsic value.

Question 16

The liquidity property of money is the property that makes money a good:

A)store of value and a good unit of account.
B)medium of exchange and a good store of value.
C)medium of exchange and a good unit of account.
D)store of value and a good standard of deferred payment.

Question 17

The statement 'a Dell laptop costs $1 600' illustrates which function of money?

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

Question 18

During World War II, prisoners of war used ________ as money.

A)bullets
B)cowrie shells
C)chocolate
D)cigarettes

Question 19

By making exchange ________, money allows for ________ and higher ________.

A)harder; specialisation; costs
B)easier; specialisation; productivity
C)harder; generalisation; productivity
D)easier; specialisation; costs

Question 20

A major source of inefficiency in barter economies is that they require:

A)a standard of deferred payment to make trade possible.
B)a double coincidence of wants in exchange.
C)more liquid stores of value than do monetary economies.
D)All of these options are correct.

Question 21

'Fiat money' is generally issued by:

A)private banks.
B)central banks.
C)brokerage firms.
D)major multinational corporations.

Question 22

What is 'money'? What are the main functions that money performs, and which function of money is its primary function?
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Question 23

An economy without money would have no exchanges of goods and services.

Question 24

A car dealer sells you a car today in exchange for money in the future. This illustrates which function of money?

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

Question 25

A 'good' is more likely to be adopted as money in an economy if:

A)the federal government declares the good be accepted in payment of debts.
B)the federal government declares that the good is legal tender.
C)the good is backed by gold.
D)all citizens accept the good as a means of payment for transactions and debts.

Question 26

What is 'commodity money'? Give an example.
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Question 27

What are the functions of money?
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Question 28

Paper currency:

A)is commodity money.
B)is fiat money.
C)is barter money.
D)includes bonds and securities.

Question 29

Which of the following is not one of the criteria for a commodity to be a suitable medium of exchange?

A)it should be durable
B)it should have a standardised quantity
C)it should be divisible
D)it should not have other uses

Question 30

Which of the following criteria would make gold a poor medium of exchange?

A)Its value depends on its purity and its purity is not easy to visibly identify.
B)Durability so that value is not lost by spoilage.
C)Value relative to its weight so that amounts large enough to be useful in trade can be easily transported.
D)Divisibility because different goods are valued differently.

Question 31

'Fiat money':

A)has no or very little value except as money.
B)is rarely used in modern economies.
C)functions well only if it can be redeemed for gold or other precious metals.
D)serves well as a medium of exchange, but not as a store of value.

Question 32

List the five criteria necessary in order for a good to be suitable as a medium of exchange, and explain whether Australian currency is suitable to use as a medium of exchange.
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Question 33

Among potential stores of value, money:

A)offers the highest rate of return.
B)increases in value during periods of inflation.
C)has the advantage of being the most liquid asset.
D)provides more services than other assets.

Question 34

Why must money serve as a store of value for it to also be a medium of exchange?
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Question 35

Governments in the world today issue fiat money that cannot be redeemed for gold.

Question 36

When employees receive their wages after they have completed two weeks' work, this is an example of money serving as a standard of 'deferred payment'.

Question 37

Gold is an example of:

A)commodity money.
B)fiat money.
C)barter money.
D)M3.

Question 38

Explain why Australia's currency is suitable to use as a medium of exchange.
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Question 39

Why is gold not a good medium of exchange?
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Question 40

In Australia, currency includes:

A)gold, silver and paper money.
B)cheque and savings accounts.
C)notes and coins.
D)money held in term deposits.

Question 41

M1 includes:

A)currency plus demand deposits in banks.
B)currency plus demand deposits in Australian-owned banks only.
C)currency plus all banks and non-bank financial institution deposits.
D)currency plus all deposits in Australian- and foreign-owned banks.

Question 42

'Broad money' is usually less than M3 in Australia.

Question 43

When Gina Rinehart is described as 'the richest woman in Australia and worth over $9 billion', this statement is referring to her:

A)income.
B)demand deposit accounts.
C)money.
D)wealth.

Question 44

In February 2016, the level of credit in Australia was approximately:

A)$2 667.6 billion.
B)$49.8 billion.
C)$141.8 billion.
D)$445.1 billion.

Question 45

A person's 'wealth':

A)is a measure of how much money the person has.
B)equals the value of the person's assets minus his or her liabilities.
C)is measured independently of his or her current and expected future income.
D)All of these options are correct.

Question 46

Which of the following is used by the Reserve Bank of Australia as the main measure of monetary movements in Australia?

A)M1
B)M3
C)broad money
D)credit

Question 47

Suppose that you decide that you no longer want to hold currency. You transfer all of your currency holdings to your cheque account. Carefully explain how this affects M1.
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Question 48

'Liabilities' are:

A)something owned by a firm.
B)something the firm owes to someone else.
C)the firm's net worth.
D)the firm's reserves.

Question 49

If you transfer all of your currency to your demand deposit account, then initially, M1 will ________ and M3 will ________.

A)increase; not change
B)not change; increase
C)not change; not change
D)decrease; increase

Question 50

The narrowest definition of the money supply in Australia is:

A)M1.
B)M2.
C)M3.
D)M4.

Question 51

Credit cards are considered:

A)part of M1.
B)part of M3.
C)broad money.
D)not part of the money supply.

Question 52

What are the main measures of money used in Australia? List them from the narrowest to the broadest measure.
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Question 53

If households in the economy decide to take money out of demand deposit accounts and put this money into long-term savings accounts, this will:

A)decrease M1 and increase M3.
B)decrease M1 and increase broad money.
C)decrease M1 and not change M3.
D)increase M1 and decrease M3.

Question 54

Explain whether credit cards are considered to be 'money'.
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Question 55

What a bank owes to someone else is considered part of the bank's ________.

A)liabilities
B)assets
C)net worth
D)excess reserves

Question 56

The statement, 'Bill Gates has $1 million in his demand deposit account' describes Mr Gates':

A)income.
B)credit.
C)money.
D)wealth.

Question 57

Suppose that you want to buy a new car and so you transfer $10 000 of your funds from a fixed term bank account into your demand deposit account. Carefully explain how this affects M1 and M3.
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Question 58

As credit is now the main measure of monetary movements used by the Reserve Bank of Australia, credit is now defined as 'money'.

Question 59

A firm's assets are:

A)something that is owned by a firm that be used to produce or sold.
B)something the firm owes to someone else.
C)the same as the firm's net worth.
D)the firm's balance sheet.

Question 60

In February 2016, which of the following comprised the largest individual component of credit in Australia?

A)credit cards
B)business loans
C)housing loans
D)personal loans

Question 61

If you open a savings account at a bank, the bank will record the transaction by increasing its ________ account and increasing its ________ account.

A)deposit; reserve
B)deposit; liability
C)reserve; loan
D)loan; deposit

Question 62

The reserves of a bank:

A)are usually a small proportion of the bank's deposits.
B)include funds held at the Reserve Bank of Australia.
C)comprise vault cash.
D)All of these are correct.

Question 63

Which of the following are not part of a bank's assets?

A)deposits at the Reserve Bank of Australia
B)customer deposits
C)loans
D)corporate securities

Question 64

The simple deposit multiplier is the ratio of the amount of:

A)new reserves created by the banks to the amount of deposits.
B)new reserves created by the banks to the amount of loans.
C)deposits created by the banks to the amount of new reserves.
D)deposits created by the banks.

Question 65

The portion of ________ that a bank does not loan out or spend on securities is known as ________.

A)loans; reserves
B)deposits; reserves
C)deposits; securities
D)loans; securities

Question 66

If Thrifty Bank receives a $10 000 deposit and keeps 10% of its deposits in reserve, how much will the bank loan out?

A)$10 000
B)$1 000
C)$9 000
D)$11 000

Question 67

The nature of a balance sheet is such that any entry that ________ one side of the balance sheet will ________ the other side of the balance sheet.

A)increases; increase
B)increases; decrease
C)decreases; increase
D)decreases; not change

Question 68

Usually, a bank's largest liability is its:

A)short-term borrowing.
B)long-term debt.
C)deposits.
D)securities.

Question 69

Banks can increase the money supply by:

A)offering financial services, such as money market accounts.
B)printing additional currency notes.
C)paying interest to their depositors.
D)making loans that result in additional deposits.

Question 70

For most banks, their largest asset is their:

A)reserves.
B)securities.
C)deposits.
D)loans.

Question 71

Those things that are owed to a bank are considered part of the bank's ___________.

A)liabilities
B)assets
C)net worth
D)excess reserves

Question 72

Which of the following is a 'liability' of a bank?

A)deposits
B)reserves
C)securities
D)loans

Question 73

If the reserve ratio is 0.05, then the simple deposit multiplier is:

A)10.
B)5)
C)2)
D)20.

Question 74

Which of the following are part of a bank's reserves?

A)money in the bank's vaults
B)government bonds
C)loans
D)buildings and equipment

Question 75

A bank holds its reserves as ________ and ________.

A)securities; loans
B)securities; deposits at the Reserve Bank of Australia
C)vault cash; deposits at the Reserve Bank of Australia
D)vault cash; loans

Question 76

The ________ the amount of excess reserves a bank holds, the ________ the size of the deposit multiplier.

A)greater; larger
B)greater; smaller
C)smaller; smaller
D)smaller; greater likelihood there is no change in

Question 77

A person's 'wealth' is:

A)something owned by them.
B)something they owe to someone else.
C)the difference between their assets and liabilities.
D)the same as all their income earned.

Question 78

Robba Bank has $500 million in deposits, is meeting its usual reserve ratio, and has no excess liquidity. It has $125 million in liquid assets. Robba Bank therefore has a reserve ratio of:

A)4%.
B)1)25%.
C)25%.
D)20%.

Question 79

Suppose you deposit $2 000 into a bank that has a reserve ratio of 0.1. How does this initially affect the bank's balance sheet?

A)Deposits rise by $2 000.
B)Required reserves rise by $200.
C)Excess reserves rise by $1 800.
D)All of the above.

Question 80

Which of the following is an 'asset' of a bank?

A)deposits
B)short-term borrowing
C)long-term debt
D)loans