Deck 10: The Monetary System

Question 1

Which of the following best defines barter?

A)It is an exchange of goods for money.
B)It is an exchange of money for foreign currency.
C)It is a generally accepted legal tender.
D)It is a transaction that requires a double coincidence of wants.

Answer 1

D

Question 2

Which of the following has intrinsic value?

A)a golden coin
B)a twenty-dollar bill
C)a bank account
D)a personal cheque

Answer 2

A

Question 3

Which of the following is current Canadian currency?

A)fiat money with intrinsic value
B)fiat money with no intrinsic value
C)commodity money with intrinsic value
D)commodity money with no intrinsic value

Answer 3

B

Question 4

When Arnold uses dollars to record his income and expenses, how is he using money?

A)as a unit of account
B)as a means of payment
C)as a store of value
D)as a medium of exchange

Question 5

Which of the following characterizes commodity money?

A)It is money that is backed by gold.
B)It is the principal type of money in use today.
C)It is money with intrinsic value.
D)It is comprised of receipts created in international trade that are used as a medium of exchange.

Question 6

Which of the following is a generally accepted medium of exchange?

A)a plane ticket
B)federal government bonds
C)fine art
D)currency

Question 7

What does the legal tender requirement imply?

A)People are more likely to accept the dollar as a medium of exchange.
B)The government must hold enough gold to redeem all currency.
C)People may not make trades with anything else.
D)It is illegal to hold foreign currencies.

Question 8

Which of the following is a characteristic of paper money?

A)It has a high intrinsic value.
B)It is used in a barter economy.
C)It is valuable because it is generally accepted in trade.
D)It is valuable only because of the legal tender requirement.

Question 9

Which of the following characterizes currency?

A)It has intrinsic value.
B)It has no intrinsic value.
C)It may be used as a medium of exchange but is not legal tender.
D)It performs all the functions of money except providing a unit of account.

Question 10

Mia puts money into a piggy bank so she can spend it later. Which of the following functions of money does this illustrate?

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

Question 11

Which of the following is included in M2 but not in M1?

A)currency
B)demand deposits
C)savings deposits
D)gold

Question 12

Which of the following lists ranks assets from most to least liquid?

A)currency, fine art, stocks
B)currency, stocks, fine art
C)fine art, currency, stocks
D)fine art, stocks, currency

Question 13

Which of the following is the role of money in an economy?

A)Money serves as a person's wealth.
B)Money allows people to save
C)Money is an investment asset.
D)Money allows greater specialization.

Question 14

Which of the following is included in M1?

A)government bonds
B)demand deposits
C)savings deposits
D)travellers' cheques

Question 15

Which of the following characterizes fiat money?

A)It has no intrinsic value.
B)It is backed by gold.
C)It has intrinsic value equal to its value in exchange.
D)It is an illiquid asset.

Question 16

What do economists use the word "money" to refer to?

A)income generated by the production of goods and services
B)those assets regularly used to buy goods and services
C)the value of a person's assets
D)the value of stocks and bonds

Question 17

Which of the following does M1 include?

A)currency
B)savings deposits
C)travellers' cheques
D)foreign currency accounts

Question 18

Which of the following best defines liquidity?

A)It is the ease with which an asset is converted to the medium of exchange.
B)It is a measurement of the intrinsic value of commodity money.
C)It is the suitability of an asset to serve as a store of value.
D)It refers to how many times a dollar changes hands in a given year.

Question 19

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

A)You list prices for candy sold on your Web site, www.sweettooth.com, in dollars.
B)You pay for your NHL tickets with dollars.
C)You keep $10 in your backpack for emergencies.
D)You sell a used copy of your textbook for $40.

Question 20

Which of the following best illustrates the medium of exchange function of money?

A)You keep some money hidden in your shoe.
B)You keep track of the value of your assets in terms of currency.
C)You pay for your double latte using currency.
D)You lend $25 to your friend.

Question 21

Which of the following best characterizes credit cards?

A)They are a payment form of money.
B)They are part of the M1 money supply.
C)They are a method of deferring payment.
D)They are a unit of account.

Question 22

How does M1 compare with M2?

A)M1 is smaller and less liquid than M2.
B)M1 is smaller but more liquid than M2.
C)M1 is larger than and less liquid than M2.
D)M1 is larger than but more liquid than M2.

Question 23

What is the approximate amount of currency per person in Canada?

A)$275
B)$858
C)$1025
D)$2052

Question 24

Which of the following is the function of debit cards?

A)They defer payments.
B)They are equivalent to credit cards.
C)They are included in M2.
D)They are used as a method of payment.

Question 25

Which of the following is included in the M2 definition of the money supply?

A)credit cards
B)term deposits
C)corporate bonds
D)foreign currency accounts

Question 26

For how long is the governor of the Bank of Canada appointed?

A)life
B)a seven-year term
C)a five-year term
D)a two-year term

Question 27

Which of the following agencies is responsible for regulating the money supply in Canada?

A)the Comptroller of the Currency
B)the Bank of Canada
C)the TD Bank
D)the Canadian Payments Association

Question 28

Which of the following might explain why Canada has so much currency per person?

A)Canadian citizens are holding a lot of foreign currency.
B)Currency may be a preferable store of wealth for criminals.
C)People use credit and debit cards more frequently.
D)Much of Canadian currency is held by foreigners.

Question 29

How are demand deposits treated in M1 as compared to M2?

A)They are included in M1 but not M2.
B)They are included in M2 but not M1.
C)They are included in M1 and M2.
D)They are included in neither M1 nor M2.

Question 30

Which of the following is included in M2 but not in M1?

A)demand deposits
B)corporate bonds
C)currency
D)term deposits

Question 31

Table 29-1

Refer to Table 29-1. What is the M1 money supply?

A)$175 billion
B)$215 billion
C)$216 billion
D)$226 billion

Question 32

Table 29-1

Refer to Table 29-1. What is the M2 money supply?

A)$125 billion
B)$210 billion
C)$341 billion
D)$421 billion

Question 33

Which of the following does the Bank of Canada NOT do?

A)control the supply of money
B)control the value of money
C)make loans to individuals
D)regulate the banking system

Question 34

How are term deposits treated in M1 as compared to M2?

A)They are included in M1 but not M2.
B)They are included in M1 and M2.
C)They are included in M2 but not M1.
D)They are included in neither M1 nor M2.

Question 35

Given the size of the Canadian money stock, is the amount of currency per person reasonable?

A)Yes, the amount of currency per person is about right.
B)There is no way of determining the amount of currency in circulation.
C)No, there is too little currency per person.
D)No, there is too much currency per person.

Question 36

Which of the following is the fundamental function of credit cards?

A)Credit cards are used for deferring payments.
B)Credit cards are used as store of value.
C)Credit cards are used for increasing the money supply.
D)Credit cards are used as investment assets.

Question 37

How are savings deposits treated in M1 as compared to M2?

A)They are included in M1 but not M2.
B)They are included in M2 but not M1.
C)They are included in M1 and M2.
D)They are included in neither M1 nor M2.

Question 38

How are credit card balances treated in M1 as compared to M2?

A)They are included in M1 but not M2.
B)They are included in M2 but not M1.
C)They are included in M1 and M2.
D)They are included in neither M1 nor M2.

Question 39

What is the average currency holding of Canadian dollars relative to Canadian population, and what could explain it?

A)Average currency holdings are about $800. One explanation for this relatively small amount is that people use credit and debit cards to make transactions.
B)Average currency holdings are about $800. One explanation for this relatively small amount is that Canadian citizens hold a lot of foreign currency.
C)Average holdings of currency are about $2052. One explanation for this relatively large amount is that criminals may prefer currency as a medium of exchange.
D)Average holdings are about $2052. One explanation for this relatively large average is that foreign citizens hold a lot of Canadian currency.

Question 40

Who appoints the members of the Board of Directors at the Bank of Canada?

A)the Governor General
B)the Minister of Finance
C)the Director of the IMF
D)the Prime Minister

Question 41

What is the role of the Bank of Canada?

A)to lend money to large companies
B)to make monetary policy
C)to raise taxes
D)to oversee government spending

Question 42

What is the role of the Minister of Finance with respect to the Bank of Canada or the banking system?

A)to control all activities of the Bank of Canada
B)to issue the Governor of Bank of Canada a written directive to resign
C)to issue currency
D)to maintain the stability of the banking system

Question 43

Suppose that the reserve ratio is 5 percent and that a bank has $3000 in deposits. What are its required reserves?

A)$150
B)$50
C)$1500
D)$500

Question 44

How do deposits and reserves appear on a bank's T-account?

A)Both deposits and reserves are assets.
B)Both deposits and reserves are liabilities.
C)Deposits are assets and reserves are liabilities.
D)Reserves are assets and deposits are liabilities.

Question 45

Suppose a bank has a 5 percent reserve ratio, $4000 in deposits, and it loans out all it can, given the reserve ratio. Which of the following describes the bank's assets?

A)It has $20 in reserves and $3980 in loans.
B)It has $200 in reserves and $3800 in loans.
C)It has $200 in reserves and $4000 in loans.
D)It has $5 in reserves and $3995 in loans.

Question 46

Which of the following is a characteristic of the Bank of Nova Scotia?

A)It can issue currency. .
B)It is part of the "big 5" commercial banks group.
C)It acts as a central bank for Nova Scotia.
D)It is owned by the Canadian government.

Question 47

When was the Bank of Canada Act first enacted?

A)1935
B)1867
C)1984
D)1934

Question 48

Who chairs the Board of Directors of the Bank of Canada?

A)the Governor of the Bank of Canada
B)the Prime Minister
C)the Minister of Finance
D)the Governor General

Question 49

Who owns the Bank of Canada?

A)private individuals
B)the Queen
C)the commercial banks
D)the federal government of Canada

Question 50

If you deposit $100 into a demand deposit at a bank, what does this action by itself do to the money supply?

A)It does not change the money supply.
B)It increases the money supply.
C)It decreases the money supply.
D)It has an indeterminate effect on the money supply.

Question 51

What is the reason behind the seven-year appointment for the governor of Bank of Canada?

A)It makes the system compatible with the ones in other countries.
B)It confers stability to the financial system.
C)It allows the governor to become better in doing his or her job.
D)It insulates the governor from political pressure.

Question 52

Which of the following happens in a 100-percent-reserve banking system?

A)Banks can create money by issuing currency.
B)Banks can create money by lending out reserves.
C)The Bank of Canada can increase the money supply with open market sales.
D)Banks hold as many reserves as they hold deposits.

Question 53

When a bank loans out $1000, what happens to the money supply?

A)It does not change.
B)It decreases.
C)It increases.
D)It has an indeterminate effect on the money supply.

Question 54

Which of the following plays the role of a central bank in Canada?

A)TD Canada Trust
B)the Bank of Montreal
C)the Bank of Canada
D)the Royal Bank of Canada

Question 55

Suppose a bank has $200 000 in deposits and $180 000 in loans. What is its reserve ratio?

A)1 percent
B)5 percent
C)10 percent
D)18 percent

Question 56

Suppose a bank has $10 000 in deposits and $7000 in loans. What is its reserve ratio?

A)3 percent
B)7 percent
C)30 percent
D)70 percent

Question 57

Which of the following is most likely to happen under a fractional reserve banking system?

A)Banks hold more reserves than deposits.
B)Banks generally lend out a majority of the funds deposited.
C)Banks cause the money supply to fall by lending out reserves.
D)Banks only accept savings deposits.

Question 58

Suppose a bank has a 20 percent reserve ratio, $2500 in deposits, and it loans out all it can, given the reserve ratio. Which of the following describes the bank's assets?

A)It has $50 in reserves and $$2500 in loans.
B)It has $50 in reserves and $2450 in loans.
C)It has $500 in reserves and $2000 in loans.
D)It has $500 in reserves and $2500 in loans.

Question 59

Which of the following is one of the functions of the Bank of Canada?

A)to maximize profits on behalf of its shareholders
B)to act as a lender of last resort
C)to convert currency into gold
D)to bail out troubled commercial banks

Question 60

Suppose that the reserve ratio is 7 percent and that a bank has $2000 in deposits. What are its required reserves?

A)$100
B)$120
C)$140
D)$160

Question 61

Use the balance sheet for the following questions.
Table 29-3

Refer to Table 29-3. If the Last Bank of Cedar Bend is holding $5000 in excess reserves, what is the reserve requirement?

A)1/7
B)1/8
C)1/9
D)1/10

Question 62

Table 29-4 The following information pertains to the Bank of Edmonton.

Refer to Table 29-4. Assume that all other banks hold only the required 5 percent of deposits as reserves and people hold only deposits and no currency. If the Bank of Edmonton decides to hold exactly 5 percent reserves, by how much would the economy's money supply increase?

A)$500
B)$1000
C)$1500
D)$2000

Question 63

Table 29-4 The following information pertains to the Bank of Edmonton.

Refer to Table 29-4. Assume that the Bank of Edmonton is holding the required percent of deposits as reserves. Also, assume all other banks hold only the required percent of deposits as reserves, and that people hold only deposits and no currency. What is the money multiplier?

A)1
B)5
C)10
D)15

Question 64

Use the balance sheet below for the following questions.
Table 29-2

Refer to Table 29-2. If $400 is deposited into the First Bank of Mason City, which of the following happens?

A)The bank will be able to make additional loans totalling $400.
B)Excess reserves initially increase by $400.
C)Required reserves initially increase by $8000.
D)Excess reserves initially increase by $320.

Question 65

Use the balance sheet below for the following questions.
Table 29-2

Refer to Table 29-2. What is the reserve ratio?

A)0 percent
B)20 percent
C)80 percent
D)100 percent

Question 66

Table 29-4 The following information pertains to the Bank of Edmonton.

Refer to Table 29-4.If the Bank of Canada requires banks to hold 5 percent of deposits as reserves, how much in excess reserves does the Bank of Edmonton now hold?

A)$5
B)$25
C)$50
D)$55

Question 67

Table 29-4 The following information pertains to the Bank of Edmonton.

Refer to Table 29-4. If the Bank of Edmonton has loaned out all the money it wants, given its deposits, what is its reserve ratio?

A)1 percent
B)5 percent
C)10 percent
D)15 percent

Question 68

Table 29-5 The following information pertains to the Bank of Kingston.

Refer to Table 29-5. Assume that the Bank of Kingston is holding the required percent of deposits as reserves. Also, assume all other banks hold only the required percent of deposits as reserves. What is the money multiplier?

A)12.5
B)15
C)17.5
D)20

Question 69

If the reserve ratio is 7 percent and a bank receives a new deposit of $300, which of the following will this bank most likely do?

A)It will increase required reserves by $2100.
B)It will initially see reserves increase by $279.
C)It will be able to make new loans up to a maximum of $279.
D)It will be able to increase its required reserves by $30.

Question 70

Use the balance sheet for the following questions.
Table 29-3

Refer to Table 29-3. If the reserve requirement is 10 percent and then someone deposits $50 000 into the bank, what is the bank's reserve position?

A)It will have $57 000 in excess reserves.
B)It will have $52 000 in excess reserves.
C)It will need to raise reserves by $5000.
D)It will have excess reserves of $2000.

Question 71

A central bank raised the reserve requirement ratio from 10 percent to 12 percent. Other things the same, how does the money multiplier change?

A)It increases by 1.67.
B)It decreases by 1.67.
C)It increases by about 2.
D)It decreases by 2.

Question 72

Table 29-5 The following information pertains to the Bank of Kingston.

Refer to Table 29-5. If the Bank of Canada requires a reserve ratio of 4 percent, how much in excess reserves does the Bank of Kingston now hold?

A)$1200
B)$2400
C)$2880
D)$3000

Question 73

Use the balance sheet for the following questions.
Table 29-3

Refer to Table 29-3. If the reserve requirement is 10 percent, what is the state of this bank?

A)It can make a new loan of $18 000.
B)It has less reserves than required.
C)It has excess reserves of less than $8000.
D)It has excess reserves of more than $8000.

Question 74

Table 29-5 The following information pertains to the Bank of Kingston.

Refer to Table 29-5. Assume that all other banks hold only the required 4 percent of deposits as reserves, and that people hold only deposits and no currency. If the Bank of Kingston decides to hold reserves of 4 percent, by how much would the economy's money supply increase?

A)$50 200
B)$60 000
C)$62 000
D)$65 400

Question 75

Use the balance sheet below for the following questions.
Table 29-2

Refer to Table 29-2. If $1000 is deposited into the First Bank of Mason City, which of the following happens?

A)Total reserves will initially increase by $200.
B)Liabilities will decrease by $1000.
C)Assets will increase by $1000.
D)Required reserves will increase by $800.

Question 76

If the reserve ratio is 10 percent and a bank receives a new deposit of $20, which of the following happens to this bank's reserves or deposits?

A)Required reserves must increase by $2.
B)Total reserves will increase by $2.
C)New loans can be made up to a maximum of $2.
D)Total reserves increase by $200.

Question 77

Use the balance sheet for the following questions.
Table 29-3

Refer to Table 29-3. If the reserve requirement is 30 percent, what is this bank's reserve position?

A)It has $29 000 of excess reserves.
B)It needs $10 000 more in reserves to meet its reserve requirements.
C)It needs $29 000 more in reserves to meet its reserve requirements.
D)It just meets its reserve requirement.

Question 78

If the reserve ratio is 10 percent and a bank receives a new deposit of $800, which of the following will this bank most likely do?

A)It will increase its required reserves by $8000.
B)It will make new loans of $8000.
C)It will be able to make new loans of $800.
D)It will initially see its total reserves increase by $800.

Question 79

Table 29-5 The following information pertains to the Bank of Kingston.

Refer to Table 29-5. If the Bank of Kingston has lent out all the money it can given its deposits, then what is its reserve ratio?

A)1 percent
B)5 percent
C)10 percent
D)15 percent

Question 80

If you deposit $5000 into First Hawkeye Bank, what will the bank most likely do?

A)It will eventually increase its required reserves by the reserve ratio times $5000.
B)It will be able to lend out $5,000 times the reserve ratio.
C)It will initially see reserves increase by $5000 divided by the reserve ratio.
D)It will be able to lend out $5000.