True/False
Indicate whether the
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
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 | c. | unit of account | b. | medium of
exchange | d. | store of
value |
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14.
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An example of fiat money is
a. | paper euros. | c. | silver coins. | b. | gold. | 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. | €0 | c. | €9,000 | b. | €1,000 | d. | €10,000 |
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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. | c. | loans. | b. | deposits. | 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 the interest rate
a. | at which commercial banks lend to and borrow from each other. | b. | the European Central
Bank pays on reserves. | c. | the public pays when borrowing from
banks. | d. | the European Central Bank charges on loans to banks. | e. | 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. | £0 | c. | £4,000 | b. | £1,000 | d. | £5,000 |
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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, the money supply
a. | increases by more than €1,000. | b. | increases by less than
€1,000. | c. | decreases by less than €1,000. | d. | decreases by more than
€1,000. | e. | 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. | €0 | b. | €50 | c. | €150 | d. | €1,000 | e. | none of these
answers |
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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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