Question 1

A bank has excess liquid assets to lend but is unable to find anyone to borrow the money. This will___________ the size of the money multiplier.

Accepted Answer

When a bank has excess reserves and cannot lend them out, it reduces the money multiplier because the potential for creating additional money through lending is not realized.

Question 2

When financial institutions securitise debt and sell it to other financial institutions the level of risk in the financial sector may___________ due to an excessive___________ in lending.

Accepted Answer

Securitisation can lead to an increase in risk because it may encourage excessive lending, as financial institutions might feel less exposed to risk after transferring it to others.

Question 3

The capital adequacy ratio requirement for Australian banks is:

Accepted Answer

The capital adequacy ratio requirement for Australian banks is 8 percent, as per the Basel III international regulatory framework.

Question 4

Suppose all financial intermediaries in the financial sector have a liquidity ratio of 20%. If a new deposit of $1000 is made, total deposits can increase by:

Accepted Answer

The liquidity ratio of 20% means that financial intermediaries must keep 20% of deposits as reserves and can lend out the remaining 80%. The money multiplier is 1 divided by the liquidity ratio (0.20), which equals 5. Therefore, a new deposit of $1000 can increase total deposits by $1000 x 5 = $5000.

Question 5

The central bank of Australia is known as the:

Accepted Answer

The central bank of Australia is the Reserve Bank of Australia, which is responsible for monetary policy, issuing currency, and maintaining financial stability.

Question 6

Money demand is a function of all the following variables except the:

Accepted Answer

Money demand is influenced by nominal national income, speculation about future asset prices, and the frequency of payments, so it depends on all of the above factors.

Question 7

Suppose all financial intermediaries in the financial sector have a liquidity ratio of 25%. If a new deposit of $10 000 is made, total deposits can increase by a maximum of:

Accepted Answer

The answer of Suppose all financial intermediaries in the financial...

Question 8

Mike makes excellent cheesecake and Sue is very good at changing the oil in a car. Sue agrees to change the oil in Mike's car, if he makes her a cheesecake. This is an example of:

Accepted Answer

This is an example of barter, which is the direct exchange of goods and services without using money.

Question 9

The banking system has deposits of $100 million and no excess liquidity. Suppose all the banks decide to reduce their liquidity ratio from 25% to 20%. If there are no leakages from the banking system, the banking system:

Accepted Answer

The reduction in the liquidity ratio from 25% to 20% allows banks to hold less in reserves. With $100 million in deposits, a 5% reduction in the liquidity ratio frees up $5 million for additional loans.

Question 10

In calculating its capital adequacy ratio, a bank allocates its cash reserves a risk factor of:

Accepted Answer

Cash reserves are considered risk-free assets, so they are assigned a risk factor of zero in capital adequacy calculations.

Question 11

Lucy works at the World Bank. She values the vegetables produced for home consumption by small farmers in Fiji in Fiji dollars to better estimate the value of total production in Fiji. This is an example of money serving as:

Accepted Answer

Money is being used as a means of evaluation to estimate the value of total production by assigning a monetary value to the vegetables produced for home consumption.

Question 12

Oz Bank has $500 million in deposits. Oz Bank is meeting its liquidity ratio requirement and has no excess liquidity. It has $125 million in liquid assets. Oz Bank has a liquidity ratio of:

Accepted Answer

The liquidity ratio is calculated as liquid assets divided by total deposits. Here, $125 million in liquid assets divided by $500 million in deposits equals 0.25, or 25%.

Question 13

To be suitable as a medium of exchange money must be:

Accepted Answer

Money must be divisible, difficult to forge, and portable to function effectively as a medium of exchange.

Question 14

Assume that banks become more conservative in their lending policies, and start holding some excess liquid assets. Compared to a situation in which banks are not holding excess reserves, the size of the money multiplier will be:

Accepted Answer

When banks hold excess reserves, they lend out less money, which reduces the money multiplier effect.

Question 15

A medium of exchange is:

Accepted Answer

A medium of exchange is something that is widely accepted as payment for goods and services, facilitating transactions between buyers and sellers.

Question 16

Assume that some people who receive bank loans do not deposit the full amount of the loan into a bank. This will cause the money multiplier to be ___________the bank deposits multiplier.

Accepted Answer

If people do not deposit the full amount of the loan into a bank, the money multiplier will be smaller than the bank deposits multiplier because less money is available to be re-loaned and re-deposited, reducing the overall effect of the multiplier.

Question 17

Which of the following statements is correct?

Accepted Answer

A rise in money supply typically lowers interest rates, which can lead to a depreciation of the exchange rate, making exports cheaper and imports more expensive, thus increasing exports and decreasing imports.

Question 18

The market in which the equilibrium level of the interest rate is determined is the:

Accepted Answer

The equilibrium level of the interest rate is determined in the money market, where the supply and demand for money intersect.

Question 19

Which of the following will cause a movement along the demand for money curve?

Accepted Answer

The answer of Which of the following will cause a...

Question 20

Floral Plus, a wholesale supplier of real and silk flowers, has 200 different products in inventory. Floral Plus reports its inventory is worth $500 000. This is an example of using money as:

Accepted Answer

The answer of Floral Plus, a wholesale supplier of real...

Quiz 11: Banking, Money and Interest Rates