Deck 10: Money, Banks, and the Bank of Canada

Question 1

Fiat money has

A)little to no intrinsic value but is backed by the quantity of gold held by the central bank.
B)little to no intrinsic value and is authorized by the central bank or governmental body.
C)value, because it can be redeemed for gold by the central bank.
D)a great intrinsic value that is independent of its use as money.
E)is less useful than commodity money.

Answer 1

little to no intrinsic value and is authorized by the central bank or governmental body.

Question 2

If whole tomatoes were money, which of the following functions of money would be the hardest for tomatoes to satisfy?

A)unit of account
B)store of value
C)certificate of gold
D)medium of exchange
E)divisibility

Answer 2

store of value

Question 3

Which of the following functions of money would be violated if inflation were high?

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

Answer 3

store of value

Question 4

Dollar coins (loonies)in the modern economy serve as money because

A)they are backed by the gold stored in Ottawa.
B)they can be redeemed for gold by the Bank of Canada.
C)they have value as a commodity independent of their use as money.
D)people have confidence that others will accept them as money.
E)they are made of gold.

Question 5

The statement, "My iPhone is worth $300" represents money's function as

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

Question 6

People hold money as opposed to financial assets because money

A)earns interest.
B)is highly liquid.
C)earns no interest.
D)earns a higher return than other financial assets.
E)is easier to carry.

Question 7

In economics, money is defined as

A)the total value of one's assets in current prices.
B)the total value of one's assets minus the total value of one's debts, in current prices.
C)the total amount of salary, interest, and rental income earned during a year.
D)any asset people generally accept in exchange for goods and services.
E)the total of physical currency held by banks.

Question 8

Economies cannot function without money.

Question 9

Your roommate argues that he can think of no better situation than living in a deflationary economy because prices of goods and services would continuously fall.You disagree and argue that during a deflation, people can be made worse off because

A)the purchasing power of people's incomes would increase.
B)the purchasing power of the currency would decrease.
C)the value of the real interest rate will drop below the nominal interest rate.
D)borrowers will have to pay increasing amounts in real terms over time.
E)the value of taxes collected by government will fall.

Question 10

Canadian $5 bills all have "This note is legal tender" printed on them. What does this phrase actually mean?

A)All stores must accept $5 bills as payment for goods and services.
B)It is illegal to sign a contract using any means of payment other than Canadian currency in Canada.
C)Creditors must accept $5 bills as payments of debts when offered.
D)The amount of goods a $5 bill can purchase is set by law.
E)It is illegal for workers to refuse payment in $5 bills if offered.

Question 11

Economies where goods and services are traded directly for other goods and services are called ________ economies.

A)trade
B)barter
C)direct
D)seigniorage
E)market

Question 12

Which of the following assets is most liquid?

A)money
B)bond
C)savings account
D)stock
E)an IOU from a university professor

Question 13

In an economy with ________, there are more prices than in an economy with ________.

A)barter; money
B)money; barter
C)fiat money; commodity money
D)fiat money; barter
E)commodity money; fiat money

Question 14

The major shortcoming of a barter economy is

A)the requirement of a double coincidence of wants.
B)the requirement of specialization and exchange.
C)that goods and services are not traded.
D)that money loses value from inflation.
E)the difficulty in transporting goods for exchange.

Question 15

Silver is an example of a

A)commodity money.
B)barter money.
C)fiat money.
D)representative money.
E)perfect store of value.

Question 16

Commodity money

A)has value independent of its use as money.
B)has little to no value independent of its use as money.
C)is backed by a valuable commodity such as gold.
D)can be used to purchase commodities, but not services.
E)diminishes the long term value of money.

Question 17

Soldiers in a World War II prisoner-of-war camp

A)used gold as a fiat money.
B)used cowrie shells as money.
C)used cigarettes as money.
D)used U.S.dollars as a commodity money.
E)did not make use of money at all.

Question 18

Which of the following is one of the most important benefits of money in an economy?

A)Money allows for the exchange of goods and services.
B)Money allows for the accumulation of wealth.
C)Money makes exchange easier, leading to more specialization and higher productivity.
D)Money encourages people to produce all of their own goods (self-sufficiency)and therefore increases economic stability.
E)Money allows higher levels of government intervention in the economy.

Question 19

Which of the following statements regarding the use of gold as money is false?

A)It has standardized quality.
B)It is durable.
C)It has value other than money.
D)It is acceptable to traders.
E)It is easily divisible.

Question 20

Which of the following information about fiat money is false? Fiat money

A)is backed by gold.
B)serves as a medium of exchange.
C)has little to no value except as money.
D)is authorized by a central bank or governmental body.
E)is a generally accepted means of payment.

Question 21

Which of the following is the most liquid asset?

A)a Renoir painting
B)bonds
C)a car
D)money
E)inventories of crude oil

Question 22

Money will fail to serve as a medium of exchange if it ceases to be a store of value.

Question 23

A farm worker gets paid today in money, but plans to spend the money next week.This illustrates which function of money?

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

Question 24

Although gold is highly valued by most people, it is difficult to use as a medium of exchange.Explain.

Question 25

Liquidity is defined as

A)the ease with which a given asset can be converted to a store of value.
B)the ease with which a given asset can be converted to a unit of account.
C)the ease with which a given asset can be converted to a medium of exchange.
D)the ease with which a given asset can be converted to a standard of deferred payment.
E)the ease with which a given asset can be transferred from one owner to another.

Question 26

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.
E)used only in market economies.

Question 27

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

A)bullets
B)cowrie shells
C)chocolate
D)cigarettes
E)nothing

Question 28

Would the invention of money, as opposed to barter, increase the growth rate of real GDP in a country over time? Why or why not?

Question 29

Which of the following is a function that money serves?

A)medium of exchange
B)unit of account
C)store of value
D)standard of deferred payment
E)All of the above are correct.

Question 30

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)sufficient supplies of money to finance all transactions.
E)All of the above are correct.

Question 31

The statement "this Harry Rosen tie costs $120" illustrates which function of money?

A)medium of exchange
B)unit of account
C)store of value
D)standard of deferred payment
E)incentive for specialization

Question 32

When a grocery store accepts your $5 bill in exchange for bread and milk, the $5 bill serves as a

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

Question 33

If banks closed and ATMs limited withdrawals to 3 a week and no more than $100 per withdrawal, what would be the most likely result?

A)A rapid growth in the economy as people began to trade more directly with each other.
B)Governments would start to refuse payment of taxes in cash.
C)Consumers would lose all incentive to hold cash.
D)Businesses would start to demand payment in cash.
E)Importers would make expanded use of credit.

Question 34

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
E)liquidity

Question 35

What are the four functions of money? Can something be considered money if it does not fulfill all four functions?

Question 36

If gold is used as money in an economy, the money supply is easy to control.

Question 37

A barter economy is an economy where

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.
E)all exchanges are decreed by a central authority.

Question 38

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 the other assets.
E)provides the greatest security.

Question 39

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

A)harder; specialization; costs
B)easier; specialization; productivity
C)harder; generalization; productivity
D)easier; specialization; costs
E)harder; specialization; government oversight

Question 40

Money is

A)an asset that people are 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 one earns over a period of time.
D)one's assets net of one's liabilities at any point in time.
E)the bills and coins held by households.

Question 41

Money cannot serve as a medium of exchange unless it also serves as a store of value.Is this statement true or false? Explain.

Question 42

Which is not one of the criteria necessary for a commodity to make a suitable medium of exchange?

A)It should be durable.
B)It should be of standardized quality.
C)It should be valuable relative to its weight.
D)It should have intrinsic value.
E)It should be generally accepted in exchange.

Question 43

In an economy with money, as opposed to barter, people are more likely to specialize in the production of goods and services.

Question 44

The largest proportion of M1+ is made up of

A)currency.
B)chequing account deposits.
C)traveller's cheques.
D)savings account deposits.
E)time deposits.

Question 45

The most liquid measure of money supply is

A)M0.
B)M1+.
C)M2+.
D)M3.
E)M1++.

Question 46

A good can serve as money only if

A)government mandates that the good must be accepted in payment of debts.
B)it is declared by authorities to be legal tender.
C)it has intrinsic value or if it is backed by precious metals.
D)citizens accept the good as a means of payment for transactions and debts.
E)the good is actually consumed by everyone.

Question 47

Because Canadian dollars (paper currency)are legal tender,

A)Canadian workers must accept them as payment for labour services.
B)Canadian creditors must accept them in payment of debts.
C)Canadian firms must accept them as payment for goods and services.
D)All Canadian enforced contracts must be signed in Canadian dollars.
E)All of the above are correct.

Question 48

Which of the following is a reason why Bitcoin is not included in the Bank of Canada's measures of the money supply?

A)Bitcoin is not accepted as payment anywhere in Canada.
B)Bitcoins are not appropriately divisible.
C)Only a very small portion of transactions are in Bitcoin.
D)Recent collapses of Bitcoin exchanges have reduced the Banks confidence in Bitcoin.
E)The limited number of Bitcoins mean inflation will not undermine its value.

Question 49

Fiat money

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

Question 50

The Bank of Canada's narrowest definition of the money supply is

A)M0.
B)M1+.
C)M2+.
D)M3.
E)M2++.

Question 51

Which of the following is not counted in M1+?

A)chequing account balances
B)credit card balances
C)coins in circulation
D)currency in circulation
E)non-chequable deposits

Question 52

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

Question 53

Gold is an example of

A)commodity money.
B)fiat money.
C)barter money.
D)M1.
E)M2+.

Question 54

Paper currency is

A)commodity money.
B)fiat money.
C)barter money.
D)a bond.
E)a chequing account.

Question 55

Which of the following qualities 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)It is durable, so its value is not lost by spoilage.
C)Its value is relative to its weight, and amounts large enough to be useful in trade can be easily transported.
D)It is divisible, so can be used to pay for goods of different values.
E)It's supply is easily controlled.

Question 56

Fiat money is generally issued by

A)private banks.
B)central banks.
C)brokerage firms.
D)major multinational corporations.
E)local/municipal governments.

Question 57

The M1+ measure of the money supply equals

A)paper money plus coins in circulation.
B)currency plus savings account balances.
C)currency plus chequing account balances.
D)currency plus chequing account balances plus savings account balances.
E)currency plus personal, non-personal demand and notice deposits at chartered banks.

Question 58

The M2 measure of money equals

A)currency, personal non-personal demand and notice deposits, and fixed-term deposits.
B)currency plus chequable deposits.
C)currency.
D)currency plus personal deposits plus non-personal deposits plus stocks and bonds.
E)currency plus personal chequable deposits plus non-personal term deposits at chartered banks.

Question 59

Using the five criteria in the text, explain how Canadian currency is suitable to use as a medium of exchange.

Question 60

The supply of money is easier to control with commodity money than it is with fiat money.

Question 61

The amount of national income in an economy equals the money supply in an economy.

Question 62

You earn $500 a month, currently have $200 in currency, $100 in your chequing account, $2,000 in your savings accounts, $3,000 worth of illiquid assets and $1,000 of debt.You have

A)money = $2,300, annual income = $6,000, and wealth = $5,000.
B)money = $300, annual income = $6,000, and wealth = $4,300.
C)money = $200, annual income = $500, and wealth = $4,300.
D)money = $300, annual income = $6,000, and wealth = $5,000.
E)money = $3500, annual income = $6,000, and wealth = $5,300.

Question 63

The Canadian government makes a profit from issuing fiat money.

Question 64

If a person cashes in a $500 Canada Savings Bond and puts it in his/her chequing account, then M1+ will ________ and M2++ will ________.

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

Question 65

The narrowest official definition of the money supply is

A)M1+.
B)M1++.
C)M2+.
D)M2++.
E)M3.

Question 66

In Canada, currency includes

A)gold, silver, and paper money.
B)chequing and savings account deposits.
C)paper money and coins in circulation.
D)traveller's cheques.
E)deposits at the Bank of Canada.

Question 67

Scenario 10.1 Consider the information above for a simple economy.Assume there are no travellers' cheques.
Refer to Scenario 10.1.M2+ in this simple economy equals

A)$3,000.
B)$8,000.
C)$11,000.
D)$14,000.
E)$21,000.

Question 68

M1++ includes

A)currency outside banks; and all chequable and non-chequable deposits at chartered banks, trust and mortgage loan companies, credit unions, and caisses populaires.
B)currency outside banks; everything in M1 and M1+; and all chequable deposits at chartered banks, trust and mortgage loan companies, credit unions and caisses populaires.
C)currency outside banks; savings account balances; chequing account deposits in banks; and holdings of traveller's cheques.
D)coins, paper currency, savings account balances, and traveller's cheques.
E)currency outside banks; chequable deposits at chartered banks; and outstanding credit card balances.

Question 69

If households and firms decide to hold less of their money in chequing account deposits and more in currency, then the money supply

A)will not change.
B)will increase.
C)will decrease.
D)may increase or decrease.
E)become more sensitive to the interest rate.

Question 70

Suppose you withdraw $1,000 from your savings account and put it in your chequing account.Briefly explain how this will affect M1+ and M2+.

Question 71

If credit card balances rise in the economy, then M1+ will ________ and M2+ will ________.

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

Question 72

If a person takes $100 from his/her piggy bank at home and buys Canada Savings Bonds, then M1+ will ________ and M2++ will ________.

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

Question 73

Money's most narrow definition is based on its function as a

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

Question 74

Most payments in Canada for goods and services are made using

A)currency.
B)chequing account deposits.
C)traveller's cheques.
D)gold.
E)Bitcoin.

Question 75

Suppose you withdraw $1,000 from your savings account and put it under your mattress.Briefly explain how this will affect M1+ and M2+.

Question 76

One potential advantage of Bitcoin over conventional currency is

A)limited supply means less inflation.
B)digit currency is less likely to be stolen.
C)digit currency is easier for government to tax.
D)more sellers accept it than conventional currency.
E)bitcoin charges a higher transaction fee than credit cards.

Question 77

If a person withdraws $500 from his/her chequing account and holds it as currency, then M1+ will ________ and M1++ will ________.

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

Question 78

Liquidity increases as we move from the M1+ to the M2+ definition of the money supply.

Question 79

The Bank of Canada currently treats virtual currencies as

A)credit or debit cards.
B)chequing accounts at chartered banks.
C)chequing deposits at trust and mortgage and loan companies.
D)Canada savings bonds.
E)Foreign currency deposits resident at chartered banks.

Question 80

Scenario 10.1 Consider the information above for a simple economy.Assume there are no travellers' cheques.
Refer to Scenario 10.1.M1+ in this simple economy equals

A)$1,000.
B)$2,000.
C)$3,000.
D)$8,000.
E)$14,000.