True/False
Indicate whether the
sentence or statement is true or false.
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1.
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Money and wealth are the same thing.
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2.
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Fiat money is money that is used in
Italy.
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3.
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Commodity money has value independent of its use as
money.
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4.
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A depository institution is one that accepts
deposits, and so provides people with a safe place to keep their money, but does not make
loans.
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5.
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When you are willing to go to sleep tonight with
£100 in your wallet and you have complete confidence that you can spend it tomorrow and receive
the same amount of goods as you would have received had you spent it today, money has demonstrated
its function as a medium of exchange.
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6.
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Money has three functions: It acts as a medium of
exchange, a unit of account, and a hedge against inflation.
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7.
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The Bank of England is the central bank of the
United Kingdom and its Monetary Policy Committee comprises members appointed by the Bank and by the
Chancellor of the Exchequer (the UK finance minister).
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8.
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If there is 100 per cent reserve banking, the money
supply is unaffected by the proportion of its money that the public chooses to hold as currency
rather than as bank deposits.
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9.
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A repurchase agreement is an agreement between the
central bank and a commercial bank whereby a bond or other non-monetary asset is sold by one to the
other with an agreement to reverse the transaction a short time later.
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10.
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The central bank cannot control the amount of money
that the economy’s commercial banks lend because the banks may choose what proportion of
deposits to hold as reserves.
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11.
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If the central bank wishes to contract the money
supply, it could do any of the following: sell government bonds, raise the reserve requirement, and
raise the refinancing rate.
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12.
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When the central bank in an economy raises the
refinancing rate it encourages commercial banks to reduce their lending, thereby tending to reduce
the money supply.
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Multiple Choice
Identify the
letter of the choice that best completes the statement or answers the question.
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13.
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Which of the following is not a function of
money?
a. | hedge against inflation | b. | medium of exchange | c. | unit of
account | d. | store of value |
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14.
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An example of fiat money is
a. | paper euros. | b. | gold. | c. | silver
coins. | d. | cigarettes. |
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15.
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Commodity money
a. | has no intrinsic value. | b. | has intrinsic value. | c. | is used
exclusively in the economies of western Europe and north America. | d. | is used as reserves to back fiat money. |
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16.
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Which of the following statements about money is
not true?
a. | A debit card is not really money because it is only a
means of transferring money between accounts. | b. | All the wealth
that people hold, in whatever form, should be considered as money. | c. | Wealth held in the current account you hold with your bank is almost as
convenient for buying things as wealth held in your wallet, so the wealth in current accounts should
be included in measures of money. | d. | In a complex
economy it is not easy to draw a clear dividing line between assets that should be considered as
money and those that should not. |
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17.
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Which of the following statements is not
true?
a. | The purchase of government bonds from the public
increases the money supply. | b. | The US Federal
Reserve is run by its Board of Governors, which comprises seven people who are appointed by the US
President. | c. | When the central
bank sells government bonds to the public, the money supply decreases. | d. | Monetary policy in the UK is set by the Chancellor of the Exchequer in
consultation with the Bank of England. | e. | Monetary policy in
the euro area is set by the Governing Council of the European Central
Bank. |
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18.
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Banca Solida has, in the past, always operated with
a reserve ratio of 25 per cent. It has now been taken over by Gung-Ho Bank which operates with a
reserve ratio of 12½ per cent. Assuming that Banca Solida adopts the business practices of its
new owner, what will be the effect on money supply in the country in which Banca Solida
operates?
a. | Money supply will increase because Banca Solida will
increase its loans. | b. | The effect on
money supply cannot be determined from the information given. | c. | Money supply will decrease because the loans will have to be
repaid. | d. | Money supply will be unchanged because the central bank
has made no policy changes. |
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19.
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If the banks in an economy operate with a reserve
ratio of 20 per cent then the money multiplier is:
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20.
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Suppose Gerard moves his €1,000 demand
deposit from Bank A to Bank B. If both banks operate with a reserve ratio of 10 per cent, what is the
potential change in money supply as a result of Gerard’s action?
a. | €10,000 | b. | €1,000 | c. | €9,000 | d. | €0 |
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21.
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Reserve requirements that may be imposed on an
economy’s banks by its central bank specify that banks’ reserves must be a minimum
percentage of their
a. | assets. | b. | deposits. | c. | loans. | d. | government
bonds. |
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22.
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Which of the following policy actions by a central
bank is likely to increase the money supply?
a. | Increasing the refinancing
rate. | b. | All of these will increase the money
supply. | c. | Buying government bonds in open market
operations. | d. | Increasing reserve
requirements. |
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23.
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The refinancing rate is
a. | the interest rate at which commercial banks lend to and
borrow from each other. | b. | the interest rate
the European Central Bank pays on reserves. | c. | the interest rate
the public pays when borrowing from banks. | d. | the interest rate
the European Central Bank charges on loans to banks. | e. | the interest rate banks pay on the public's
deposits. |
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24.
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Suppose the Bank of England purchases a £1,000
government bond from you. If you deposit the entire £1,000 in your bank, what is the total
potential change in the money supply as a result of the Bank of England’s action if the your
bank’s reserve ratio is 20 per cent?
a. | £4,000 | b. | £5,000 | c. | £1,000 | d. | £0 |
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25.
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Suppose all banks maintain a 100 percent reserve
ratio. If an individual deposits €1,000 of currency in a bank,
a. | the money supply increases by more than
€1,000. | b. | the money supply
increases by less than €1,000. | c. | the money supply
decreases by less than €1,000. | d. | the money supply
decreases by more than €1,000. | e. | the money supply
is unaffected. |
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26.
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Given the following T-account, what is the largest
new loan this bank can prudently make if it wishes to maintain a reserve ratio of 10 per
cent?
Banca Solida | Assets | Liabilities | | Reserves | €150 | Deposits | €1000 | | Loans | €850 | | | | | | |
a. | none of these answers | b. | €50 | c. | €0 | d. | €150 | e. | €1,000 |
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27.
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The three main tools of monetary policy
are
a. | fiat, commodity, and deposit
money. | b. | open-market operations, reserve requirements, and the
refinancing rate. | c. | the money supply,
government purchases, and taxation. | d. | government
expenditures, taxation, and reserve requirements. | e. | coin, currency, and demand deposits. |
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28.
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Suppose the central bank purchases a government
bond from a person who deposits the entire amount received from the sale in her bank, the money
supply will
a. | rise by an amount that depends on the bank’s
reserve ratio. | b. | rise by less than
the amount of the deposit. | c. | fall by exactly
the amount of the deposit as long as the bank does not change its reserve
ratio. | d. | fall by exactly the amount of the deposit as long as the
bank does not change its reserve ratio. | e. | be
unchanged. |
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29.
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If there is a general shortage of liquidity in the
money market then
a. | the banks will increase their
lending. | b. | the short-term interest rate at which the
economy’s commercial banks lend to and borrow from each other will fall and the central bank
may be expected to reduce the supply of liquidity to the banks. | c. | the short-term interest rate at which the economy’s commercial banks
lend to and borrow from each other will rise and the long-term interest rate may be expected to rise
as a result. | d. | the long-term
interest rate in the economy will rise and the central bank will raise its interest rate in
response. | e. | the short-term interest rate at which the
economy’s commercial banks lend to and borrow from each other will rise and the central bank
may be expected to increase the supply of liquidity to the
banks. |
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30.
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Which one of the following is not
true?
a. | The difference between the price at which a commercial
bank sells an asset to the central bank and the price it agrees to buy it back can be expressed as an
annualized percentage of the selling price, and this is called the refinancing
rate. | b. | Commercial banks may borrow from and lend to each other
and the interest rate at which they do this is called the refinancing
rate. | c. | In the UK the refinancing rate is known as the repo rate
and in the USA it is referred to as the discount rate. | d. | If the central bank has bought some assets from a commercial bank with an
agreement that the commercial bank will buy them back at a later date, then this would be called a
repo. | e. | If the central bank raises its refinancing rate then the
commercial banks will try to reduce their lending and so reduce the need to borrow from the central
bank. |
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