Question 1

The Reserve Bank of Australia is not responsible for which of the following?

Accepted Answer

The Reserve Bank of Australia is responsible for monetary policy, including inflation targeting, holding foreign currency reserves, and acting as a lender of last resort. However, the issuance of coins is the responsibility of the Royal Australian Mint, not the Reserve Bank of Australia.

Question 2

The interest rate is determined in the:

Accepted Answer

The interest rate is determined in the money market and influences the level of planned investment, which in turn affects the goods market.

Question 3

When economists speak of the "demand for money", which of the following questions are they asking?

Accepted Answer

Economists refer to the "demand for money" as the desire to hold financial assets in the form of money (cash or bank deposits) rather than other forms of assets, like stocks or bonds.

Question 4

If the ABC Farmer's Bank has total assets of $100 million, of which $20 million are in liquid form, the bank's liquidity ratio is:

Accepted Answer

The liquidity ratio is calculated by dividing the bank's liquid assets by its total assets. In this case, the bank's liquid assets are $20 million and its total assets are $100 million, so the liquidity ratio is $20 million / $100 million = 0.2, or 20%.

Question 5

The main reason that people hold money to buy things is referred to as the:

Accepted Answer

The transactions motive refers to the need to hold money for everyday purchases and expenses.

Question 6

An increase in nominal GDP will cause:

Accepted Answer

An increase in nominal GDP increases the demand for money as people need more money for transactions, causing a rightward shift in the demand for money curve.

Question 7

M3 is equal to:

Accepted Answer

M3 is a measure of the money supply that includes currency, current deposits, and other deposits with banks.

Question 8

The ABC Farmer's Bank has the following assets: which is the most liquid?

Accepted Answer

Deposits with the Reserve Bank of Australia are the most liquid because they can be quickly converted to cash and are readily accessible.

Question 9

If output increases and the interest rate remains constant, there will be:

Accepted Answer

When output increases, economic activity rises, leading to higher demand for transactions and thus an increase in the quantity of money demanded, assuming the interest rate remains constant.

Question 10

A fall in the money supply is likely to cause the interest rate to___________ and investment expenditure to___________ .

Accepted Answer

A fall in the money supply typically leads to higher interest rates as there is less money available for borrowing. Higher interest rates generally discourage investment expenditure, leading to a decrease.

Question 11

Which of the following is NOT a non- bank financial intermediary?

Accepted Answer

Westpac is a bank, whereas the other options are non-bank financial intermediaries.

Question 12

If the liquidity ratio is 10%, the bank multiplier is:

Accepted Answer

The answer of If the liquidity ratio is 10%, the...

Question 13

If the liquidity ratio is 20%, the bank multiplier is:

Accepted Answer

The bank multiplier, also known as the money multiplier, is calculated as the reciprocal of the reserve ratio (liquidity ratio). If the liquidity ratio is 20%, the multiplier is 1/0.2 = 5.

Question 14

If people start to sell a currency and buy gold it suggests that they distrust that currency as:

Accepted Answer

When people sell a currency to buy gold, it indicates they distrust the currency's ability to maintain its value over time, which is its function as a store of value.

Question 15

If there is an endogenous money supply, this means that:

Accepted Answer

In an endogenous money supply framework, the money supply is determined by the demand for loans and the interest rate, meaning it adjusts to the needs of the economy rather than being fixed or independently set.

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 ___________than it would have been if all loans are deposited in banks.

Accepted Answer

If some people do not deposit the full amount of their loans into banks, there is less money available for banks to lend out again, which reduces the money multiplier effect.

Question 17

A loan made by a bank is considered___________ of that bank.

Accepted Answer

A loan made by a bank is considered an asset because it represents money that the bank expects to receive back with interest.

Question 18

Which of the following is NOT a role or function of financial intermediaries?

Accepted Answer

Financial intermediaries do not always channel funds to receive low but safe returns; they aim to balance risk and return based on the needs of their clients and market conditions.

Question 19

A deposit made into a bank is considered___________ of that bank.

Accepted Answer

A deposit made into a bank is considered a liability because the bank owes this amount to the depositor and must return it upon request.

Question 20

An increase in aggregate output causes the demand for money to___________ and the interest rate to .

Accepted Answer

The answer of An increase in aggregate output causes the...

Quiz 11: Banking, Money and Interest Rates