Deck 12: Money and the Financial System

Question 1

How is trade facilitated in a barter system?  

A) Trade will occur only if there is a double coincidence of wants. 
B) An individual offers money to get a good or service. 
C) An individual offers a good or service to get money. 
D) Different kinds of money are exchanged.

Answer 1

 Trade will occur only if there is a double coincidence of wants. 

Question 2

Which of the following best characterizes a system of barter?  

A) No rates of exchange are defined. 
B) There are as many different rates of exchange as there are pairs of goods to trade. 
C) Rates of exchange are expressed in dollars per good. 
D) Rates of exchange are denominated in gold or silver.

Answer 2

 There are as many different rates of exchange as there are pairs of goods to trade. 

Question 3

When is exchange necessary in an economy?  

A) if output is to be produced 
B) if output is to be consumed 
C) if individuals are self-sufficient 
D) if labour is specialized

Answer 3

 if labour is specialized

Question 4

What did the earliest type of exchange involve?  

A) coins 
B) barter 
C) commodity money 
D) fiat money

Question 5

Which of the following is NOT a function of money?  

A) to act as a medium of exchange 
B) to act as a unit of account 
C) to facilitate trade 
D) to provide a double coincidence of wants

Question 6

How does a barter system work?  

A) An individual offers one good or service in order to obtain another good or service. 
B) An individual offers money in order to obtain a good or service. 
C) An individual offers a good or service in order to obtain money. 
D) Different kinds of money are exchanged for each other.

Question 7

Under what circumstances would it be less likely that a double coincidence of wants exists and the more likely that a monetary exchange will develop?  

A) the fewer the number of goods available in an economy 
B) the greater the number of goods available in an economy 
C) when are no goods are available in an economy 
D) when individuals are producing only the goods they want to consume

Question 8

Suppose the economy experiences a greater degree of specialization.Which of the following is likely to occur?  

A) It will be easier to discover a double coincidence of wants. 
B) The establishment of a barter system will be more feasible. 
C) The development of a monetary exchange will be less likely. 
D) It will be more difficult to negotiate an exchange rate between all pairs of goods.

Question 9

Which of the following best illustrates the double coincidence of wants?  

A) Tom and Jerry would like to purchase the same good. 
B) Tom has something he is willing to trade to Jerry, and Jerry has something he is willing to trade to Tom. 
C) Tom and Jerry have very similar tastes, thus Tom's wants coincide with Jerry's wants. 
D) Tom has something he is willing to trade to Jerry, who wants it, and Jerry has something he is willing to trade to Tom, who wants it.

Question 10

Which of the following is most critical for the maintenance of an efficient, productive economy?  

A) Money is backed by gold or silver. 
B) The supply of money is unlimited and unregulated. 
C) The monetary system functions properly. 
D) A well-organized barter system exists.

Question 11

Which of the following describes barter?  

A) Production requires a particular kind of labour. 
B) The overall skill level of labour is increasing. 
C) Individuals make goods that they are relatively capable of producing, and then trade them for goods produced by other individuals. 
D) Individuals achieve self-sufficiency in production.

Question 12

Why is barter more feasible in primitive societies than in modern societies?  

A) because inflation does NOT exist in primitive societies 
B) because many goods are available for trade in primitive societies, therefore people can always find the goods that they want 
C) because specialization is limited and thus few goods are available for trade in primitive societies 
D) because specialization is limited and thus many goods are available for trade in primitive societies

Question 13

When does barter work best?  

A) in the absence of a double coincidence of wants 
B) when many different products are available in the economy 
C) when money is readily available to establish relative prices 
D) when each trader has what the other wants and wants what the other has

Question 14

What does the term barter mean?  

A) the direct exchange of goods and services for any kind of money 
B) the direct exchange of goods and services for other goods and services 
C) the direct exchange of goods and services for either goods or money 
D) the direct exchange of goods and services for commodity money

Question 15

In which system is it difficult to keep track of the relative values of goods and services?  

A) in a barter system 
B) in a price system 
C) in a self-sufficient system 
D) in a monetary exchange system

Question 16

Suppose people are using quartz as a medium of exchange.Which term refers to this type of exchange?  

A) commodity money 
B) token money 
C) legal tender 
D) fiat money

Question 17

Which of following is NOT an important characteristic of money?  

A) its general acceptability 
B) its commodity value 
C) its divisibility 
D) its stable value

Question 18

As the number of goods and services increases, how is barter affected?  

A) Barter becomes easier because the chance of there being a double coincidence of wants increases. 
B) Barter becomes harder because the chance of there being a double coincidence of wants increases. 
C) Barter becomes easier because the chance of there being a double coincidence of wants decreases. 
D) Barter becomes harder because the chance of there being a double coincidence of wants decreases.

Question 19

Which of the following describes specialization of labour?  

A) Production requires a particular kind of labour. 
B) The overall skill level of labour is increasing. 
C) Individuals produce goods other than those they want to consume. 
D) Individuals achieve self-sufficiency in production.

Question 20

Under what circumstances is it less likely that a double coincidence of wants will exist and more likely that a monetary exchange will develop?  

A) when labour is more specialized 
B) when labour is less specialized 
C) when labour is NOT specialized 
D) when labour is self-sufficient

Question 21

Which of the following best describes the unit of account function of money?  

A) Money makes price information more accessible. 
B) Money is made of something valuable. 
C) Money can be used to save up purchasing power. 
D) Money is more easily counted than goods.

Question 22

Which of the following serve as money in many federal prisons in the United States?  

A) postage stamps 
B) power bars 
C) cans of mackerel 
D) cans of tuna

Question 23

The Miwok Indians of Yosemite Valley used seashells as money.Which of the following would have been a disadvantage of using seashells as money?  

A) The shells were easily identifiable. 
B) The shells were easy to carry. 
C) The shells provided a money supply that was easily divisible. 
D) The shells were intrinsically valuable as commodities.

Question 24

Which of the following best describes the unit of account function of money?  

A) Money makes the relative values of goods and services more easily known. 
B) Money must be made of something valuable. 
C) Money can be used to save up purchasing power. 
D) Money is more easily counted than goods.

Question 25

What is token money?  

A) coinage for which production costs exceed the face value 
B) coinage for which the face value exceeds production costs 
C) coinage that CANNOT be used for exchange 
D) legal tender

Question 26

What does Gresham's law state?  

A) People sell goods for money but prefer to buy goods with other goods. 
B) People buy and sell goods with money. 
C) People spend lower-quality money and hoard higher-quality money. 
D) People spend higher-quality money and hoard lower-quality money.

Question 27

Why were coins minted with serrated edges?  

A) to make it obvious that they were made of cheap alloys 
B) so that cheaper metals did NOT have to be used 
C) to allow words to be printed on the border 
D) to prevent the coins from being clipped

Question 28

Suppose different forms of commodity money, such as $1 coins in both gold and silver, are circulating simultaneously.What does Gresham's law state will happen?  

A) The form with the more intrinsic value will disappear from circulation. 
B) The form with the lesser intrinsic value will disappear from circulation. 
C) The government will eventually have to withdraw both forms from circulation. 
D) The resultant disruption in the money markets will cause inflation.

Question 29

What does the term commodity money refer to?  

A) a type of money that has no intrinsic value 
B) a type of money that has intrinsic value 
C) a type of money that is based on a valuable metal 
D) a type of money whose value never changes

Question 30

Which of the following would NOT perform well as money?  

A) coins 
B) sea shells 
C) cigarettes 
D) diamonds

Question 31

Which function of money facilitates commitments to make or receive future payments?  

A) money as a unit of account 
B) money as a store of value 
C) money as a medium of exchange 
D) money as a form of barter

Question 32

How does money function as a unit of account?  

A) Money has intrinsic worth as a commodity. 
B) The prices of all goods and services are measured in terms of money. 
C) Some commodities can function as money because people know a standard of value ultimately backs the money. 
D) Money can be saved in bank accounts.

Question 33

Who is famous for his observation that bad money drives out good money?  

A) Adam Smith 
B) François Quesnay 
C) Thomas Gresham 
D) John Maynard Keynes

Question 34

Which type of money has the lowest opportunity cost?  

A) gold coins 
B) commodity money 
C) token coins 
D) fiat money

Question 35

What does the term seigniorage refer to?  

A) the conversion of paper money to a valuable commodity 
B) clipping 
C) the revenue earned from the power to coin money 
D) fiat money

Question 36

Which of the following was the earliest type of money?  

A) coins 
B) commodity money 
C) token money 
D) fiat money

Question 37

In order for a commodity to be considered as money, what criterion must it meet?  

A) It must be issued by banks. 
B) It must be declared to be currency. 
C) It must be widely acceptable. 
D) It must be made of something valuable.

Question 38

What is seigniorage?  

A) the revenue earned from coining money 
B) a fine paid by counterfeiters 
C) the profits made by illegally "clipping" or "shaving" bits of precious metal from coins 
D) the oldest known form of commodity money

Question 39

When does government receive seigniorage?  

A) whenever it sells gold to people for money 
B) whenever it sells goods and services it produces for money 
C) whenever it uses money to buy goods and services 
D) whenever it mints coins whose face value is greater than the value of the resources used in producing the money

Question 40

Suppose an ocean liner sinks and the passengers become stranded on a lush tropical island.Which of the following is most likely to be most useful as money in the economy that develops among the survivors?  

A) the life jackets they put on when leaving the ship 
B) beads from the necklaces that were the party favours the night the ship sank 
C) the coconuts growing on the island 
D) the fish swimming around the island

Question 41

When silver and gold were used as money, the quantity and quality of the money were open to question.What was the solution?  

A) seashells 
B) seigniorage 
C) token money 
D) coinage

Question 42

Under a narrow definition of money, which one of the following is NOT money in the Canadian economy?  

A) a chequing account at a bank in Canada 
B) a 25-cent Bank of Canada coin 
C) a $20 Bank of Canada note 
D) a $100 Government of Canada bond

Question 43

In the world of banking, what are cheques?  

A) written instructions from a depositor to the bank 
B) a form of commodity money 
C) token money 
D) fiat money

Question 44

Mary-Ellen deposits $100 per month into her bank account.Her daughter Carolyn keeps all her pennies in a piggy bank.What money function is illustrated by both of these examples?  

A) a store of value 
B) commodity money 
C) a medium of exchange 
D) a unit of account

Question 45

Which of the following is legal tender in Canada?  

A) cheques 
B) Bank of Canada notes 
C) bank notes issued by private banks 
D) credit cards

Question 46

How is the value of money fundamentally determined?  

A) by the reputation of the bank that holds it 
B) by the reputation of the person who holds it 
C) by the amount of gold or silver for which it can be redeemed 
D) by the value of the commodities for which it can be traded

Question 47

What is the term for money that the government requires to be accepted in payment for debt?  

A) legal tender 
B) commodity money 
C) a good store of wealth 
D) token money

Question 48

Why are goldsmiths considered the forerunners of modern banks?  

A) because they had safes to keep gold secure 
B) because they issued gold coins 
C) because they created money by lending out gold reserves 
D) because they created legal tender

Question 49

When is money considered to be legal tender?  

A) if it is backed by gold or silver 
B) if it is commodity money 
C) if the government says it is 
D) if it is in a bank account

Question 50

What is fiat money backed by?  

A) gold or silver 
B) fractional reserves 
C) the promise of a bank to redeem it upon presentation 
D) nothing

Question 51

When does fractional reserve banking occur?  

A) when a bank has reserves that exceed its deposits 
B) when a bank has reserves that are equal to its deposits 
C) when a bank has reserves that are less than its deposits 
D) when some depositors lose their deposits through poor bank management

Question 52

What was the first step in the evolution of money?  

A) physical commodities 
B) barter 
C) pieces of paper representing claims on physical commodities 
D) pieces of paper with no intrinsic value

Question 53

Who were most likely the first bankers?  

A) carpenters 
B) stockbrokers 
C) goldsmiths 
D) sea captains

Question 54

What happens to the purchasing power when prices rise?  

A) The purchasing power of money increases. 
B) The purchasing power of money decreases. 
C) The purchasing power of money remains unchanged. 
D) The purchasing power of money either increases or decreases, depending upon the size of the national debt.

Question 55

Which of the following is an important function of chartered banks?  

A) to print new currency 
B) to issue fiat money 
C) to mint coins 
D) to make loans

Question 56

Who were the original bankers?  

A) seigniors 
B) governments 
C) savings and loan institutions 
D) goldsmiths

Question 57

How is the value of money determined?  

A) by people's belief that it is worth something 
B) by the amount of precious metal that the government holds to back the money 
C) by the money's market value as a commodity 
D) by the rate of interest, which is the price paid to borrow money

Question 58

Why does fiat money have value?  

A) because people accept it 
B) because it has intrinsic worth 
C) because it is backed by commodity reserves 
D) because of its metallic content

Question 59

What kind of reserve system do modern banks use?  

A) a 100-percent reserve system 
B) a fractional reserve system 
C) a gold standard system 
D) a partial reserve system

Question 60

What is meant by a fractional reserve banking system?  

A) Only a fraction of the banks in the system are allowed to create money. 
B) Only a fraction of the banks in the system have reserves. 
C) The claims outstanding against the bank are only a fraction of the bank's total reserves. 
D) Bank reserves represent only a fraction of bank deposits.

Question 61

Which of the following is NOT a goal of the Bank of Canada?  

A) a high level of employment 
B) stability in interest rates 
C) high prices to encourage production 
D) stability in prices

Question 62

Some financial institutions are known as financial intermediaries because they serve as go-betweens.Which parties are linked together by financial intermediaries?  

A) savers and borrowers 
B) employers and employees 
C) firms and the government 
D) firms and consumers

Question 63

Which of the following is a depository institution?  

A) an insurance company 
B) a credit union 
C) a stock market 
D) a pension fund

Question 64

Which of the following is NOT a power of the Bank of Canada?  

A) buying and selling government securities 
B) issuing Bank of Canada notes 
C) extending loans to chartered banks 
D) making loans to the general public

Question 65

Which of the following is NOT a function of the Bank of Canada?  

A) holding member banks' reserves on deposit 
B) holding deposits of households and firms 
C) issuing bank notes 
D) serving as bankers to the federal government

Question 66

Which of the following is NOT a depository institution?  

A) a chartered bank 
B) a trust and mortgage loan company 
C) an insurance company 
D) a credit union

Question 67

Which of the following is NOT a function of a financial intermediary?  

A) to link savers and borrowers 
B) to earn profits by loaning money 
C) to print money 
D) to accept deposits

Question 68

Which of the following does the Bank of Canada have the power to do?  

A) raise or lower federal income tax rates 
B) increase or decrease federal government spending 
C) compete with chartered banks in making loans to business firms 
D) buy and sell federal government securities

Question 69

What will happen if a nation's official money fails to serve as a medium of exchange?  

A) Economic efficiency will increase. 
B) Resources must be diverted from production to exchange. 
C) Transactions costs of exchange will decrease. 
D) Fewer barter exchanges will be completed.

Question 70

What is the main source of profit for financial institutions?  

A) their ownership of stocks in commercial corporations 
B) their ownership of real assets received in foreclosures on loans to households 
C) the fees charged for holding and servicing chequing accounts 
D) the difference between interest paid on deposits and interest received on loans

Question 71

Which of the following is a duty of the Bank of Canada?  

A) regulating banks' reserve ratios 
B) extending loans to households 
C) offering deposit insurance 
D) engaging in open-market-operations

Question 72

Which of the following is one problem with fiat money, as compared to commodity money?  

A) More resources are used to create fiat money than to create commodity money. 
B) Frequently too little fiat money is available relative to commodity money. 
C) The potential for inflation is greater with fiat money than with commodity money. 
D) Fiat money is less divisible than commodity money.

Question 73

What are Bank of Canada notes?  

A) token money 
B) commodity money 
C) money backed by gold 
D) fiat money

Question 74

What is the distinction between depository institutions and other financial institutions?  

A) Only depository institutions seek to maximize profit. 
B) Depository institutions do NOT make loans. 
C) Only depository institutions make loans. 
D) Only depository institutions receive funds through customer deposits.

Question 75

Which of the following is NOT a power of the Bank of Canada?  

A) setting the prime interest rate 
B) engaging in open market operations 
C) buying and selling Canadian government securities 
D) extending loans to chartered banks

Question 76

When did the Bank of Canada begin operations?  

A) in 1694 
B) in 1875 
C) in 1913 
D) in 1935

Question 77

Which of the following is associated with the problem of hyperinflation?  

A) Money is in short supply. 
B) The value of money rises dramatically. 
C) People look for alternatives to using money. 
D) People start to hold onto money for long periods of time.

Question 78

Which of the following is NOT a depository institution?  

A) a chartered bank 
B) a caisses populaire 
C) a pension fund 
D) a trust and mortgage loan company

Question 79

Which law established the Bank of Canada?  

A) the Free Banking Act 
B) the National Banking Act 
C) the Banking Act 
D) the Bank of Canada Act

Question 80

Which of the following is NOT a depository institution?  

A) a chartered bank 
B) a caisses populaire 
C) a stockbroker 
D) a credit union