econ 102 chapter 24

12)The official definitions of money can include all of the following except A) cheques. B) currency outside banks. C) non-chequable deposits. D) personal chequable deposits. E) deposits at trust and mortgage loan companies. 2

A

22)Which one of the following is considered to be money? A) A chequable deposit. B) A debit card. C) A blank cheque. D) A credit card. E) A Canada Savings Bond.

A

24)Which one of the following is not money? A) A credit card. B) A non-chequable deposit. C) Canadian currency. D) A chequable deposit. E) A fixed term deposit.

A

27)Barter can only take place if there is A) a double coincidence of wants. B) a double coincidence of money. C) money. D) no inflation. E) none of the above.

A

39)Which one of the following is not a service of depository institutions? A) Providing a place for reserve account deposits. B) Lowering the cost of monitoring borrowers. C) Creating liquidity. D) Pooling risk. E) Lowering the cost of borrowing.

A

42)The Bank of Canada is the lender of last resort. This means banks may borrow money from the Bank of Canada A) if the banking system as a whole is short of reserves. B) to finance a sudden and dramatic increase in overseas reserves. C) overnight. D) whenever they are short of reserves. E) if they have sufficient securities to support the loan.

A

48)Which of the following is an economic function of a chartered bank? A) Pooling risk. B) Supervising financial markets. C) Conducting monetary policy. D) Issuing bank notes. E) None of the above.

A

5)Money's function as a unit of account can best be described as A) an agreed measure for stating the prices of goods and services. B) an entry in an accounting ledger. C) a method of recording transactions. D) a generally accepted medium of exchange. E) a commodity that can be exchanged for another commodity.

A

50)The Monetary Base consists of the sum of A) Bank of Canada notes held outside the Bank of Canada, bank deposits at the Bank of Canada, and coins held by banks and the public. B) Bank of Canada notes held within the Bank of Canada, bank deposits at the Bank of Canada, and coins held by banks and the public. C) Bank of Canada notes held within the Bank of Canada, bank deposits at the Bank of Canada, and coins held by banks. D) Bank of Canada notes held outside the Bank of Canada, bank deposits at the Bank of Canada, and notes and coins held by banks. E) Bank of Canada notes held outside the Bank of Canada, the desired reserves of chartered banks, and coins held by banks.

A

51)The reserve ratio of a depository institution is the A) ratio of a bank's total reserves that are held in its vault or on deposit with the Bank of Canada to total deposits. B) ratio of a bank's total reserves that are held in an account with the Bank of Canada only to total deposits. C) ratio of a bank's total reserves that a bank regards as necessary to conduct its business to total deposits. D) ratio of a bank's total reserves that are held in its vault in cash only to total deposits. E) ratio of excess reserves to total deposits.

A

52)The reserve ratio of a depository institution is the A) ratio of a bank's total reserves that are held in its vault or on deposit with the Bank of Canada to total deposits. B) ratio of excess reserves to total deposits. C) ratio of a bank's total reserves that are held in its vault in cash only to total deposits. D) ratio of a bank's total reserves that a bank regards as necessary to conduct its business to total deposits. E) ratio of a bank's total reserves that are held in an account with the Bank of Canada only to total deposits.

A

53)If a customer of a bank makes a withdrawal from his chequable deposit account, A) the bank's reserve ratio decreases. B) M1 decreases. C) the bank's reserve ratio increases. D) M2 decreases. E) the bank's reserve ratio remains the same.

A

57)Whenever actual reserves exceed desired reserves, the bank A) can make new loans. B) will go out of business. C) will borrow funds from another bank. D) will raise the interest rate on its loans. E) needs to call in loans.

A

60)If people decide to transfer their currency into their bank deposits then, all else constant, their decisions will A) increase the actual reserves of banks. B) cause lower inflation. C) cause the quantity of money to increase immediately. D) cause the quantity of money to decrease. E) cause higher real interest rates.

A

68)The opportunity cost of holding money increases when the A) interest rate rises. B) purchasing power of money increases. C) price of goods and services decrease. D) income of consumers increases. E) income of consumers decreases.

A

69)Choose the correct statement. A) The quantity of money measured in dollars is nominal money. B) The quantity of money measured in constant dollars is nominal money. C) As the interest rate rises, the quantity of real money demanded increases. D) As real GDP increase the quantity of nominal money demanded decreases. E) The quantity of nominal money demanded is inversely related to the price level.

A

86)If households and firms find they are holding more money than desired, they will A) buy bonds, and the interest rate will fall. B) sell bonds, and the interest rate will rise. C) sell bonds, and the interest rate will fall. D) buy bonds, and the interest rate will rise. E) buy goods, and the price level will rise.

A

9)The higher and more unpredictable the changes in a monetary unit, the A) less likely it will be used as a store of value. B) more confidence people will have in holding it for the future. C) more likely it will be used as a store of value. D) more likely it will be used as a standard of deferred payment. E) less likely contracts will be written to counterbalance the uncertainty of its value in the future.

A

92)If the price of a bond is $1,000 and the fixed annual income from the bond is $100, then the interest rate on the bond is A) 10 percent. B) 20 percent. C) 200 percent. D) 5 percent. E) none of the above.

A

11)Money can take the form of any one of the following except A) Bank of Canada notes. B) a credit card. C) a saving deposit. D) a chequing deposit. E) coins.

B

20)Which one of the following is not a store of value? A) Fixed term deposits. B) Credit cards. C) Personal chequable deposits. D) Non-chequable deposits. E) Non-personal chequable deposits.

B

23)Which one of the following is considered to be money? A) A debit card. B) Currency. C) A cheque. D) A credit card. E) All of the above.

B

29)If Wolfgang transfers $1,000 out of his non-chequable deposit account and places it in his chequable deposit account, A) M1 falls and M2 remains the same. B) M1 rises and M2 remains the same. C) M1 falls and M2 rises. D) M1 falls and M3 rises. E) M1 and M2 fall.

B

32)Refer to Fact 24.1.1. The quantity of money as measured by M1 is equal to A) $7,000. B) $6,000. C) $2,500. D) $1,500. E) $6,500.

B

36)Which one of the following is not a depository institution? A) A foreign-owned chartered bank. B) A car insurance company. C) A trust and mortgage loan company. D) A credit union. E) A caisse populaire. Actual reserves in banking system $1,000 Total chequable deposits $5,500 Securities held by chartered banks $1,000 Currency outside banks $500 6

B

43)Longer term Canadian government bonds, compared with government of Canada Treasury bills, A) are more readily convertible to cash without risk of monetary loss. B) fluctuate in value, are riskier and therefore carry a higher interest rate. C) bear a lower interest rate. D) can be sold more quickly. E) are more readily convertible to cash but take longer to sell.

B

55)Excess reserves are A) liquidity funds minus actual reserves. B) actual reserves minus desired reserves. C) required reserves minus desired reserves. D) required reserves minus actual reserves. E) desired reserves minus actual reserves.

B

66)The Canadian money multiplier is calculated as the A) change in quantity of bank notes divided by the change in monetary base. B) change in the quantity of money divided by the change in the monetary base. C) change in monetary base divided by the change in quantity of money. D) change in monetary base divided by the change in deposits. E) change in monetary base divided by the change in monetary holdings of households.

B

67)The quantity of money that the banking system can create is limited by A) bank managers' decisions. B) the monetary base, desired reserves, and desired currency holdings. C) the credit ratings of the consumers who are applying for loans. D) the quantity of bank notes released by the Bank of Canada. E) the number of consumers who apply for loans.

B

7)Which of the following is a function of money? A) A means of pooling risk. B) A medium of exchange. C) A means of reducing transactions costs. D) A measure of liquidity. E) A store of exchange.

B

73)Everything else remaining the same, an increase in real GDP A) decreases the demand for real money up to a point, and then demand will automatically rise. B) increases the demand for real money. C) does not change the demand for real money. D) increases the demand for real money up to a point, and then demand will automatically fall. E) decreases the demand for real money.

B

84)Which one of the following will shift the demand for money curve rightward? A) A decrease in the price level. B) An increase in real GDP. C) An increase in the interest rate. D) A decrease in the interest rate. E) An increase in the price level.

B

10)The higher and more unpredictable the changes in the monetary unit, the A) lower the opportunity cost of using it as a standard of deferred payment. B) lower the opportunity cost of using it as a store of value. C) higher the opportunity cost of using it as a store of value. D) lower the opportunity cost of using it as a medium of exchange. E) less likely barter exchange will replace it.

C

17)Which of the following assets is the most liquid? A) A credit card. B) A line of credit. C) Cash. D) A Canada Savings Bond. E) A house.

C

21)Which of the following is a store of value? A) A cheque. B) A credit card. C) A fixed term deposit. D) A debit card. E) All of the above.

C

25)Anything can be money as long as it A) meets the double coincidence of wants. B) has low transaction costs. C) is acceptable as a medium of exchange. D) is not too bulky. E) has intrinsic worth. 4

C

28)If Wolfgang transfers $1,000 out of his chequable deposit account and places it in his non-chequable deposit account, A) M1 falls and M2 rises. B) M1 rises and M2 remains the same. C) M1 falls and M2 remains the same. D) M1 and M2 fall. E) M1 falls and M3 rises.

C

3)If you can find someone to swap what you have for what you want, then A) money is necessary for the exchange to work. B) there exists a double system of money. C) there exists a double coincidence of wants. D) specialization is impossible in the society in which you live. E) there exists a monetary exchange system.

C

34)A private firm that takes deposits from households and firms and makes loans to other households and firms is A) a credit company. B) a stockbroker. C) a depository institution. D) a usurer. E) an insurance company.

C

49)Which of the following does not affect the size of the monetary base? A) The amount of notes issued by the Bank of Canada. B) The amount of coins issued by the Canadian Mint. C) The amount of loans issued by chartered banks. D) The amount of chartered bank deposits at the Bank of Canada. E) None of the above.

C

61)Suppose that a country has $50 billion in bank reserves, $100 billion in currency held by the public, and $500 billion in bank deposits. The currency drain ratio is A) 10%. B) 18%. C) 20%. D) 50%. E) 30%.

C

70)If the price level doubles, all else constant, the quantity of A) real money demanded will double. B) real money demanded will half. C) nominal money demanded will double. D) nominal money demanded will remain constant. E) nominal money demanded will half.

C

81)The amount of real money people want to hold will increase if either the amount they are spending increases or the A) price level decreases. B) price of bond falls. C) interest rate decreases. D) price level increases. E) interest rate increases.

C

89)Money market equilibrium occurs A) when the level of real GDP is constant. B) when bond prices are constant. C) when the quantity of real money supplied equals the quantity of real money demanded. D) only under a fixed exchange rate. E) when interest rates are constant.

C

90)If the interest rate is above the equilibrium rate, how is equilibrium achieved in the money market? A) People buy goods to get rid of their excess money, lowering the price of goods and lowering the interest rate. B) People sell goods to get rid of their excess money, lowering the price of goods and lowering the interest rate. C) People buy bonds to get rid of their excess money, raising the price of bonds and lowering the interest rate. D) People sell bonds to get rid of their excess money, lowering the price of bonds and lowering the interest rate. E) People sell bonds to get rid of their excess money, raising the price of bonds and lowering the interest rate.

C

13)Which of the following is not considered money in Canada today? A) Bank of Canada notes. B) Deposits at banks. C) Coins. D) Debit cards. E) Deposits at credit unions.

D

14)Which one of the following items is not included in the M1 definition of money? A) Currency outside banks. B) Personal chequable deposits. C) Non-personal chequable deposits. D) Fixed term deposits. E) Neither B nor D are part of M1.

D

18)If the prices of goods and services are stated in terms of kilograms of salt, then salt is A) quasi-money. B) a store of value. C) a standard of deferred payment. D) a unit of account. E) a medium of exchange.

D

19)Which one of the following is a component of M2 but not of M1? A) Currency in a bank vault. B) Currency outside banks. C) Personal chequable deposits. D) Personal non-chequable deposits. E) Canada Savings Bonds. 3

D

2)Which of the following best fits the definition of money? A) Gold. B) An obligation between the parties to a transaction. C) Any medium of exchange. D) Any commodity or token that is generally acceptable as a means of payment. E) Any unit of account.

D

26)Consider the following data from the economy of Adanac: · Currency outside banks: $15 billion · Personal and non-personal chequable deposits: $40 billion · Personal non-chequable deposits: $50 billion · Non-personal non-chequable deposits: $125 billion · Fixed term deposits: $200 billion What is the value of M1 and the value of M2 in this economy in billions of dollars? A) 110; 235. B) 60; 430. C) 55; 230. D) 55; 430. E) 105; 230.

D

31)Liquidity is A) a high-risk asset. B) the same as currency. C) the degree of certainty of the price of an asset. D) the ease with which an asset can be converted into a medium of exchange. E) net flow of gold into the Bank of Canada. 5 Use the information below to answer the following question. Fact 24.1.1 The information describes a hypothetical banking system. Assume that all banks are holding their desired reserves.

D

35)Which one of the following is not a depository institution? A) A trust and mortgage loan company. B) A caisse populaire. C) A credit union. D) A car insurance company. E) A foreign-owned chartered bank.

D

38)The reserves of a bank include A) the cash in its vault plus the value of its chequable deposits. B) all of its common stock holdings, the cash in its vault, and all deposits held on account with the Bank of Canada. C) the cash in its vault plus any gold held for the bank at the Bank of Canada. D) the cash in its vault plus any deposits held on account at the Bank of Canada. E) the cash in its vault plus any deposits held on account with the Bank of Canada plus the value of any government bonds that it holds.

D

4)Without money to act as a medium of exchange, A) barter exchange would allow for a much simpler yet increased standard of living. B) all exchanges that take place under a monetary system would still take place. C) the standard of living in the economy would increase. D) the increased transaction costs associated with trading would prohibit some trades from taking place. E) independence in production would lead to a proliferation of new products.

D

40)Pooling risk A) refers to a default contract made by a bank to other banks. B) is now illegal under the Nuisance Act of 1987. C) refers to the lower cost of obtaining funds from a depository institution. D) refers to spreading the risk of loan default among all the depositors within the depository institution. E) occurs when one person lends to an entire group or pool of borrowers.

D

41)The Bank of Canada does not do which of the following? A) Issue bank notes. B) Supervise chartered banks. C) Hold government of Canada securities. D) Lend money to the public. E) Act as a lender of last resort to banks.

D

45)Which of the following statements about the Large Value Transfer System is true? A) On an average day, it handles $17 billion worth of payments. B) It allows all bank borrowers to pay their loans. C) It is operated by the government of Canada. D) It allows financial institutions and their customers to make large payments instantly. E) It is owned by the Bank of Canada.

D

46)Which of the following is not true about the Automated Clearing Settlement System ACSS)? It deals with payments A) of small value. B) such as cheques and small-value electronic payments. C) not processed by LVTS. D) of approximately $140 billion per day. E) processed through electronic machines.

D

54)A bank can create money by A) printing more cheques. B) converting reserves into securities. C) selling some of its securities. D) lending its excess reserves. E) increasing its reserves.

D

56)Whenever desired reserves exceed actual reserves, the bank A) can make new loans. B) has excess reserves. C) is in a profit-making position. D) will call in loans. E) will go out of business.

D

6)Which one of the following is not a function of money? A) store of value B) unit of account C) medium of exchange D) measure of liquidity E) means of payment

D

72)Nominal money is equal to real A) GDP times the GDP deflator. B) money divided by the price level. C) GDP times real money. D) money times the price level. E) GDP times the price level. 12

D

82)The amount of real money people want to hold will decrease if either the rate of interest increases or A) the price level increases. B) the price level decreases. C) the price of bonds increase. D) real GDP decreases. E) real GDP increases.

D

87)The opportunity cost of holding currency is A) the real interest rate. B) the inflation rate. C) consumption given up. D) the nominal interest rate. E) the price level.

D

88)The opportunity cost of holding currency is A) the inflation rate. B) consumption given up. C) the price level. D) the nominal interest rate. E) the real interest rate.

D

91)If the interest rate is below the equilibrium, how is equilibrium achieved in the money market? A) People sell bonds to get rid of their excess money, lowering the price of bonds and raising the interest rate. B) People buy goods to get rid of their excess money, lowering the price of goods and raising the interest rate. C) People buy bonds to get rid of their excess money, raising the price of bonds and raising the interest rate. D) People sell bonds to try and raise more money, lowering the price of bonds and raising the interest rate. E) People sell goods to get rid of their excess money, lowering the price of goods and raising the interest rate.

D

)Money is A) currency plus coins. B) the same as gold. C) equivalent to barter. D) currency plus credit cards plus debit cards. E) a means of payment.

E

15)The largest component of M1 is A) non-personal non-chequable deposits. B) currency outside banks. C) personal chequable deposits. D) fixed term deposits. E) non-personal chequable deposits.

E

16)Using a credit card can best be likened to A) using any other form of money, because you can immediately take the goods you purchase home. B) writing a cheque on your chequable deposit. C) withdrawing money from a savings account. D) a barter exchange. E) taking out a loan.

E

30)Which one of the following is most liquid? A) Cheques. B) Government bonds. C) Debit cards. D) Real estate. E) Chequable deposits.

E

33)Which one of the following would not be considered a depository institution? A) A credit union. B) A caisse populaire. C) The Bank of Montreal. D) A trust and mortgage loan company. E) The Bank of Canada.

E

37)In 2008, chartered banks held reserves equal to approximately ________ percent of deposits. A) 0.04 B) 4.0 C) 14.0 D) 0.14 E) 0.4

E

44)Which of the following statements about depository institutions is false? A) They keep reserves to meet cash withdrawals. B) They borrow at lower interest rates and lend at higher rates. C) They pool, and therefore reduce, risk. D) A credit union is an example of a depository institution. E) They create liquidity by borrowing long and lending short.

E

47)The payments system refers to the system through which A) individuals make payments to each other to settle transactions. B) the Bank of Canada makes settlements with chartered banks. C) bankruptcies are declared. D) bank notes are issued by the Bank of Canada. E) banks make payments to each other to settle transactions by their customers.

E

58)The ratio of currency to deposits is the A) excess reserve ratio. B) monetary reserve ratio. C) reserve ratio. D) currency ratio. E) currency drain ratio.

E

59)The money creation process begins when A) desired reserves increase because of an increase in deposits. B) banks lend reserves. C) bank deposits increase. D) the quantity of money increases. E) banks have excess reserves.

E

71)Real money is equal to A) nominal income divided by the velocity of circulation. B) the price level divided by nominal money. C) nominal income divided by the price level. D) nominal money divided by nominal income. E) nominal money divided by the price level.

E

8)Money's function as a store of value can best be described as A) an agreed measure for stating the prices of goods and services. B) a generally acceptable exchange system. C) an efficient means of writing contracts over a long time period. D) a guarantee of a double coincidence of wants. E) something that can be held and exchanged later for goods and services.

E

83)The demand for money in Canada reveals which of the following? A) An inverse relationship between M1 and the interest rate. B) A decrease in the demand for M1 during the 1980s. C) An inverse relationship between M2 and the interest rate. D) A decrease in the demand for M2 during the 1990s. E) All of the above.

E

85)If households and firms find they are holding less money than desired, they will A) buy goods, and the price level will rise. B) buy bonds, and the interest rate will fall. C) sell bonds, and the interest rate will fall. D) buy bonds, and the interest rate will rise. E) sell bonds, and the interest rate will rise.

E