Deck 14: Part B: Money, Banking, and Money Creation

Question 1

One of the three basic functions of money is to serve as legal tender.

Answer 1

False

Question 2

Currency and coins held by banks are part of the M1 definition of money supply.

Answer 2

False

Question 3

The supply of money increases when the public purchases government securities from chartered banks.

Answer 3

False

Question 4

The granting of a $10,000 loan and the purchase of a $10,000 government securities from a securities dealer by a chartered bank have the same effect on the money supply.

Question 5

Securitization is the process of slicing up and bundling groups of loans, mortgages, corporate bonds and other financial debts into distinct new securities.

Question 6

If a coin is token money, its face value is greater than its intrinsic value.

Question 7

Actual cash reserves equal desired reserves plus excess reserves.

Question 8

Chartered banks are the major source of money creating in the Canadian economy.

Question 9

The value of money varies inversely with the price level.

Question 10

The basic source of money in our economy is the Department of Finance.

Question 11

Chartered bank reserves are an asset to chartered banks but a liability to the Bank of Canada holding them.

Question 12

Excess reserves are the amount by which desired reserves exceed actual cash reserves.

Question 13

The primary purpose of the desired reserve is to provide the means by which the monetary authorities can influence the lending ability of chartered banks.

Question 14

Mortgage-backed securities are bonds backed by mortgage payments.

Question 15

Balance sheets always balance because assets must always equal liabilities plus net worth.

Question 16

Chartered banks increase the supply of money when they purchase either personal IOUs or government bonds from businesses and households.

Question 17

Money and banking in Canada are federal responsibilities.

Question 18

The currency owned by chartered banks is included in the money supply.

Question 19

Fiat money refers to "near-monies."

Question 20

Chartered banks create money in the form of chequable deposits when they make loans.

Question 21

Purchasing common stock by writing a cheque best exemplifies money serving as a:

A)store of value.
B)unit of account.
C)medium of exchange.
D)index of satisfaction.

Question 22

A cheque for $10,000 drawn on Bank A by a depositor and deposited in Bank B will increase the excess reserves in Bank B by $10,000.

Question 23

When a consumer wants to compare the price of one product with another, money is primarily functioning as a:

A)store of value.
B)unit of account.
C)chequable deposit.
D)medium of exchange.

Question 24

Stock market price quotations best exemplify money serving as a:

A)store of value.
B)unit of account.
C)medium of exchange.
D)index of satisfaction.

Question 25

Chartered banks monetize claims when they sell securities to the Bank of Canada.

Question 26

What function is money serving when you buy a ticket to a movie?

A)a store of value
B)a unit of account
C)a transaction demand
D)a medium of exchange

Question 27

Money functions as:

A)a store of value.
B)a unit of account.
C)a medium of exchange.
D)all of the above.

Question 28

Money eliminates the need for a coincidence of wants primarily through its use as a:

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

Question 29

When we say that money serves as a medium of exchange, we mean that it is:

A)a way to keep some of our wealth in a readily spendable form for future use.
B)a means of payment.
C)a monetary unit for measuring and comparing the relative values of goods.
D)declared as legal tender by the government.

Question 30

A $200 price tag on a cashmere sweater in a department store window is an example of money functioning as a:

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

Question 31

The higher desired reserve ratio, the lower is the monetary multiplier.

Question 32

The banking system can lend by a multiple of its excess reserves because lending does not result in a loss of reserves to the banking system as a whole.

Question 33

The functions of money are to serve as a:

A)resource allocator, method for accounting, and means of income distribution.
B)unit of account, store of value, and medium of exchange.
C)determinant of consumption, investment, and government spending.
D)factor of production, exchange, and aggregate supply.

Question 34

If you are estimating your total expenses for school next semester, you are using money as:

A)a medium of exchange.
B)a store of value.
C)a unit of account.
D)all of the above.

Question 35

When a borrower repays a loan of $4000, either in cash or by cheque, the supply of money is reduced by $4000.

Question 36

When chartered banks retire outstanding loans, the supply of money is increased.

Question 37

One major advantage of the medium of exchange function of money is that it allows society to:

A)transfer purchasing power from the present to the future.
B)measure the relative worth of products.
C)escape the complications of barter.
D)use credit cards instead of currency.

Question 38

If you write a cheque on a bank in Saskatoon to purchase a new Nissan Murano, you are employing money as:

A)a medium of exchange.
B)a store of value.
C)a unit of account.
D)all of the above.

Question 39

When we say that money serves as a unit of account, we mean that it is:

A)a way to keep some of our wealth in a readily spendable form for future use.
B)a means of payment.
C)a monetary unit for measuring and comparing the relative values of goods.
D)declared as legal tender by the government.

Question 40

The main goal of a chartered bank is liquidity.

Question 41

In Canada the money supply (M1) is comprised of:

A)coins, paper currency, and demand deposits.
B)currency, notice deposits, and bonds.
C)coins, paper currency, demand deposits, and credit balances with brokers.
D)paper currency, coin, gold certificates, and time deposits.

Question 42

The paper money used in Canada is:

A)National Bank notes.
B)Treasury notes of 1890.
C)Canada notes.
D)Bank of Canada notes.

Question 43

1.Foreign currency deposits of residents booked in Canada 2.Personal savings deposits at the chartered banks
3)Currency (coins and paper money)
4)Demand deposits
5)Government securities
6)Non-personal notice deposits at the chartered banks
Refer to the above information.The M2 definition of money includes:

A)items 1, 2, 3, and 6.
B)items 3, 4, 5, and 6.
C)items 2, 3, 4, and 6.
D)items 1, 2, 3, and 4.

Question 44

Coins held in chartered banks are:

A)included in M1, but not in M2.
B)included both in M1 and in M2.
C)included in M2, but not in M1.
D)not part of the nation's money supply.

Question 45

One reason that "near-monies" are important is because:

A)they simplify the definition of money and therefore the formulation of monetary policy.
B)they can be easily converted into money or vice versa, and thereby can influence the stability of the economy.
C)they do not reflect the level of consumer spending but they have a critical impact on saving and investment in the economy.
D)credit cards synchronize one's expenditures and income, thereby reducing the cash and chequeable deposits one must hold.

Question 46

The difference between M1 and M2 is that:

A)the former includes notice deposits.
B)the latter includes personal saving deposits and non-personal notice deposits.
C)the latter includes government bonds.
D)the latter includes cash held by chartered banks.

Question 47

What function is money serving when you deposit money in a savings account?

A)a store of value
B)a unit of account
C)a chequable deposit
D)a medium of exchange

Question 48

Currency (paper money plus coins) constitute about:

A)80 percent of our M1 money supply.
B)55 percent of our M1 money supply.
C)24% percent of our M1 money supply.
D)68 percent of our M1 money supply.

Question 49

Demand deposits are:

A)included in M1 but not in M2.
B)considered to be a near-money.
C)included in M1 and in M2.
D)also called notice deposits.

Question 50

Refer to the information below.The M1 definition of money comprises item(s): 1.Foreign currency deposits of residents booked in Canada
2)Personal savings deposits
3)Currency (coins and paper money)
4)Demand deposits
5)Government securities
6)Nonpersonal notice deposits

A)3 only.
B)2, 3, and 6.
C)3 and 4.
D)3, 4, and 6.

Question 51

Demand deposits are:

A)included in M1.
B)not included in either M1 or M2.
C)considered to be a near money.
D)also called notice deposits.

Question 52

Demand deposits are classified as money because:

A)they can be readily used in the making of purchases and payment of debts.
B)banks hold currency equal to the value of their outstanding deposits.
C)they are ultimately the obligations of the government.
D)they earn interest income for the depositor.

Question 53

Near-monies are important:

A)because they are likely to affect the level of consumer spending.
B)because they can be converted into chequable deposits and thereby affect macroeconomic stability.
C)because they complicate defining money and therefore complicate the formulation of monetary policy.
D)for all of the above reasons.

Question 54

The smallest component of the money supply (M1) is:

A)currency.
B)chequable deposits.
C)small time deposits.
D)large time deposits.

Question 55

In 2017, the value of M2++ in Canada was about:

A)$182 billion.
B)5,092 billion.
C)$2,330 billion.
D)$3,043 billion.

Question 56

When we say that money serves as a store of value, we mean that it is:

A)a way to keep some of our wealth in a readily spendable form for future use.
B)a means of payment.
C)a monetary unit for measuring and comparing the relative values of goods.
D)declared as legal tender by the government.

Question 57

The amount of money reported as M2:

A)is smaller than the amount reported as M1.
B)is larger than the amount reported as M1.
C)excludes coins and currency.
D)includes nonpersonal fixed-term deposits of residents booked in Canada.

Question 58

1.Foreign currency deposits of residents booked in Canada 2.Personal savings deposits at the chartered banks
3)Currency (coins and paper money)
4)Demand deposits
5)Government securities
6)Non-personal notice deposits at the chartered banks
Refer to the above information.Which of the following is not included in any of the official definitions of money?

A)item 1
B)items 1 and 4
C)no item
D)item 5

Question 59

Near money means:

A)Money substitutes such as credit cards
B)Chequing accounts
C)They are not backed by gold
D)They do not function as a medium of exchange but they serve as a store of value

Question 60

The major component of the money supply (M1) is:

A)gold certificates.
B)demand deposits.
C)paper money in circulation.
D)coins.

Question 61

The money supply is "backed":

A)by the government's ability to control the supply of money and therefore to keep its value relatively stable.
B)by government bonds.
C)dollar-for-dollar with gold and silver.
D)dollar-for-dollar with gold bullion.

Question 62

A basic argument for using the M1 concept of money is that:

A)it includes all of the important financial assets that have any degree of liquidity.
B)the government collects data for the components of M1, but does not do so for M2 and M2+.
C)its components are superior to other financial assets as a store of value.
D)its components are directly and immediately spendable.

Question 63

If we let P equal the price level expressed as an index number and D equal the value of the dollar, then we can say that:

A)P = D - 1.
B)D = 1/P.
C)1 = D/P.
D)D = P - 1.

Question 64

Fiat money is valuable because:

A)it is backed by gold.
B)it is fractionally backed by gold.
C)it is generally acceptable.
D)it is convertible to gold.

Question 65

If the price index rises from 100 to 120, the value of the dollar:

A)may either rise or fall.
B)will rise by 16.67 percent.
C)will fall by 16.67 percent.
D)will rise by 20 percent.

Question 66

In terms of volume or dollar amount, most of the money in our economy is created by:

A)the receipt of gold bullion through international trade and finance.
B)chartered banks and the Bank of Canada.
C)the Royal Canadian mint.
D)the Department of Finance.

Question 67

Coins and paper money are:

A)debts of Chartered banks and savings institutions.
B)debts of the Bank of Canada.
C)credits of the Bank of Canada.
D)credits of chartered banks and savings institutions.

Question 68

Token money is:

A)minted by the Bank of Canada.
B)minted by the Royal Canadian mint.
C)minted by the Treasury of Canada.
D)not considered to be part of the money supply.

Question 69

If the value of the dollar is falling, then it follows that:

A)the price index is falling.
B)the price index is rising.
C)real incomes are falling.
D)interest rates are rising.

Question 70

Which of the following statements best describes the relationship between the real value or purchasing power of the monetary unit and the price level? The purchasing power of money:

A)and the price level varies inversely.
B)and the price level vary directly during recessions, but inversely during inflations.
C)and the price level vary directly, but not proportionately.
D)and the price level vary directly and proportionately.

Question 71

The M2+ definition of the money supply includes:

A)M1 plus the M2.
B)M2 plus the coins and paper money held by the chartered banks.
C)M2 plus the deposits at trust and mortgage companies, credit unions, caisses populaires, and government savings institutions, plus money market mutual funds and life insurance annuities.
D)M2 plus the government securities held by the chartered banks.

Question 72

Currency and coins held within chartered banks are:

A)part of the M2+ definition of the money supply.
B)part of the M2 definition of the money supply.
C)part of the M1 definition of the money supply.
D)not part of the definitions of the money supply.

Question 73

Demand deposits are:

A)debts of chartered banks and other financial institutions.
B)debts of the Bank of Canada.
C)credits of the Bank of Canada.
D)credits of chartered banks and other financial institutions.

Question 74

If the price index rises from 100 to 130, the value of the dollar will fall by about:

A)15 percent.
B)19 percent.
C)30 percent.
D)23 percent.

Question 75

A $20 bill is an example of:

A)legal tender.
B)fiat money.
C)a store of value.
D)all of the above.

Question 76

A 15 percent increase in the price

A)increases the value of a dollar by 15 percent.
B)decreases the value of a dollar by about 13 percent.
C)decreases the value of a dollar by 15 percent.
D)decreases the value of a dollar by about 8 percent.

Question 77

The purchasing power of the dollar:

A)has been increasing in recent years because of economic growth.
B)varies directly with the cost-of-living index.
C)is inversely related to the level of aggregate demand.
D)is the reciprocal of the price level.

Question 78

Refer to the above information.The value of the dollar in year 2 is:

A)$1.25.
B)$1.33.
C)$.80.
D)$1.00.

Question 79

Currency and demand deposits are money because:

A)they are backed by a precious metal.
B)the government asserts that they are.
C)they are "resting" in a chartered bank vault.
D)they can be redeemed for an intrinsically valuable commodity such as gold.

Question 80

The value of money varies:

A)inversely with the price level.
B)directly with the volume of employment.
C)directly with the price level.
D)directly with the interest rate.