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Economics
Course
Economics 1022A/B
Professor
Prof
Semester
Winter

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Economics: Canada in the Global Environment, 7e (Parkin) Chapter 24 Money, the Price Level, and Inflation 24.1 What Is Money? 1) Money is A) equivalent to barter. B) currency plus credit cards plus debit cards. C) the same as gold. D) a means of payment. E) currency plus coins. Answer: D Diff: 1 Topic: What Is Money? 2) Which of the following best fits the definition of money? A) Gold. B) Any commodity or token that is generally acceptable as a means of payment. C) An obligation between the parties to a transaction. D) Any unit of account. E) Any medium of exchange. Answer: B Diff: 1 Topic: What Is Money? 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) specialization is impossible in the society in which you live. C) there exists a double coincidence of wants. D) there exists a double system of money. E) there exists a monetary exchange system. Answer: C Diff: 1 Topic: What Is Money? 4) Without money to act as a medium of exchange, A) the standard of living in the economy would increase. B) barter exchange would allow for a much simpler yet increased standard of living. C) the increased transaction costs associated with trading would prohibit some trades from taking place. D) independence in production would lead to a proliferation of new products. E) all exchanges that take place under a monetary system would still take place. Answer: C Diff: 1 Topic: What Is Money? 1 © 2010 Pearson Education Canada 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 commodity that can be exchanged for another commodity. E) a generally accepted medium of exchange. Answer: A Diff: 1 Topic: What Is Money? 6) Which one of the following is not a function of money? A) medium of exchange B) means of payment C) store of value D) measure of liquidity E) unit of account Answer: D Diff: 2 Topic: What Is Money? 7) Which of the following is a function of money? A) A medium of exchange. B) A measure of liquidity. C) A means of pooling risk. D) A store of exchange. E) A means of reducing transactions costs. Answer: A Diff: 1 Topic: What Is Money? Source: Study Guide 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 guarantee of a double coincidence of wants. C) an efficient means of writing contracts over a long time period. D) something that can be held and exchanged later for goods and services. E) a generally acceptable exchange system. Answer: D Diff: 2 Topic: What Is Money? 2 © 2010 Pearson Education Canada 9) The higher and more unpredictable the changes in a monetary unit, the A) more likely it will be used as a store of value. B) less likely it will be used as a store of value. C) more confidence people will have in holding it for the future. D) less likely contracts will be written to counterbalance the uncertainty of its value in the future. E) more likely it will be used as a standard of deferred payment. Answer: B Diff: 2 Topic: What Is Money? 10) The higher and more unpredictable the changes in the monetary unit, the A) lower the opportunity cost of using it as a medium of exchange. 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) less likely barter exchange will replace it. E) lower the opportunity cost of using it as a standard of deferred payment. Answer: C Diff: 2 Topic: What Is Money? 11) Money can take the form of any one of the following except A) a credit card. B) a chequing deposit. C) a saving deposit. D) Bank of Canada notes. E) coins. Answer: A Diff: 2 Topic: What Is Money? 12) The official definitions of money can include all of the following except A) currency outside banks. B) personal chequable deposits. C) non-chequable deposits. D) deposits at trust and mortgage loan companies. E) cheques. Answer: E Diff: 2 Topic: What Is Money? 3 © 2010 Pearson Education Canada 13) Which of the following is not considered money in Canada today? A) Deposits at credit unions. B) Bank of Canada notes. C) Deposits at banks. D) Coins. E) Debit cards. Answer: E Diff: 2 Topic: What Is Money? 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. Answer: D Diff: 2 Topic: What Is Money? 15) The largest component of M1 is A) currency outside banks. B) personal chequable deposits. C) non-personal chequable deposits. D) fixed term deposits. E) non-personal non-chequable deposits. Answer: C Diff: 1 Topic: What Is Money? 16) Using a credit card can best be likened to A) taking out a loan. B) a barter exchange. C) using any other form of money, because you can immediately take the goods you purchase home. D) writing a cheque on your chequable deposit. E) withdrawing money from a savings account. Answer: A Diff: 2 Topic: What Is Money? 4 © 2010 Pearson Education Canada 17) Which of the following assets is the most liquid? A) A Canada Savings Bond. B) A credit card. C) A house. D) Cash. E) A line of credit. Answer: D Diff: 2 Topic: What Is Money? 18) If the prices of goods and services are stated in terms of kilograms of salt, then salt is A) a unit of account. B) a standard of deferred payment. C) a store of value. D) quasi-money. E) a medium of exchange. Answer: A Diff: 2 Topic: What Is Money? 19) Which one of the following is a component of M2 but not of M1? A) Currency outside banks. B) Personal chequable deposits. C) Personal non-chequable deposits. D) Currency in a bank vault. E) Canada Savings Bonds. Answer: C Diff: 1 Topic: What Is Money? Source: Study Guide 20) Which one of the following is not a store of value? A) Credit cards. B) Personal chequable deposits. C) Fixed term deposits. D) Non-personal chequable deposits. E) Non-chequable deposits. Answer: A Diff: 2 Topic: What Is Money? Source: Study Guide 5 © 2010 Pearson Education Canada 21) Which of the following is a store of value? A) A credit card. B) A cheque. C) A debit card. D) A fixed term deposit. E) All of the above. Answer: D Diff: 2 Topic: What Is Money? 22) Which one of the following is considered to be money? A) A chequable deposit. B) A blank cheque. C) A credit card. D) A debit card. E) A Canada Savings Bond. Answer: A Diff: 2 Topic: What Is Money? 23) Which one of the following is considered to be money? A) A cheque. B) A debit card. C) A credit card. D) Currency. E) All of the above. Answer: D Diff: 2 Topic: What Is Money? 24) Which one of the following is not money? A) A chequable deposit. B) Canadian currency. C) A credit card. D) A non-chequable deposit. E) A fixed term deposit. Answer: C Diff: 2 Topic: What Is Money? 6 © 2010 Pearson Education Canada 25) Anything can be money as long as it A) has low transaction costs. B) is not too bulky. C) has intrinsic worth. D) meets the double coincidence of wants. E) is acceptable as a medium of exchange. Answer: E Diff: 2 Topic: What Is Money? 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) 105; 230. B) 110; 235. C) 55; 430. D) 55; 230. E) 60; 430. Answer: C Diff: 2 Topic: What Is Money? 27) Barter can only take place if there is A) money. B) a double coincidence of wants. C) a double coincidence of money. D) no inflation. E) none of the above. Answer: B Diff: 1 Topic: What Is Money? 7 © 2010 Pearson Education Canada 28) If Wolfgang transfers $1,000 out of his chequable deposit account and places it in his non- chequable deposit account, A) M1 and M2 fall. B) M1 falls and M2 rises. C) M1 falls and M3 rises. D) M1 falls and M2 remains the same. E) M1 rises and M2 remains the same. Answer: D Diff: 2 Topic: What Is Money? 29) If Wolfgang transfers $1,000 out of his non-chequable deposit account and places it in his chequable deposit account, A) M1 and M2 fall. B) M1 falls and M2 rises. C) M1 falls and M3 rises. D) M1 falls and M2 remains the same. E) M1 rises and M2 remains the same. Answer: E Diff: 2 Topic: What Is Money? 30) Which one of the following is most liquid? A) Chequable deposits. B) Real estate. C) Government bonds. D) Debit cards. E) Cheques. Answer: A Diff: 1 Topic: What Is Money? 31) Liquidity is A) the ease with which an asset can be converted into a medium of exchange. B) the degree of certainty of the price of an asset. C) a high-risk asset. D) net flow of gold into the Bank of Canada. E) the same as currency. Answer: A Diff: 1 Topic: What Is Money? 8 © 2010 Pearson Education Canada 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. Actual reserves in banking system $1,000 Total chequable deposits $5,500 Securities held by chartered banks $1,000 Currency outside banks $500 32) Refer to Fact 24.1.1. The quantity of money as measured by M1 is equal to A) $2,500. B) $1,500. C) $6,500. D) $7,000. E) $6,000. Answer: E Diff: 2 Topic: What Is Money? 24.2 The Banking System 1) Which one of the following would not be considered a depository institution? A) The Bank of Canada. B) A credit union. C) A caisse populaire. D) A trust and mortgage loan company. E) The Bank of Montreal. Answer: A Diff: 1 Topic: The Banking System 2) A private firm that takes deposits from households and firms and makes loans to other households and firms is A) a usurer. B) a depository institution. C) a credit company. D) a stockbroker. E) an insurance company. Answer: B Diff: 1 Topic: The Banking System 9 © 2010 Pearson Education Canada 3) Which one of the following is not a depository institution? A) A trust and mortgage loan company. B) A foreign-owned chartered bank. C) A credit union. D) A caisse populaire. E) A car insurance company. Answer: E Diff: 1 Topic: The Banking System 4) In 2008, chartered banks held reserves equal to approximately ________ percent of deposits. A) 0.4 B) 0.04 C) 4.0 D) 0.14 E) 14.0 Answer: A Diff: 1 Topic: The Banking System 5) The reserves of a bank include A) the cash in its vault plus the value of its chequable deposits. B) the cash in its vault plus any deposits held on account at the Bank of Canada. C) the cash in its vault plus any gold held for the bank at the Bank of Canada. D) all of its common stock holdings, the cash in its vault, and all deposits held on account with 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. Answer: B Diff: 2 Topic: The Banking System 6) Which one of the following is not a service of depository institutions? A) Lowering the cost of borrowing. B) Providing a place for reserve account deposits. C) Pooling risk. D) Creating liquidity. E) Lowering the cost of monitoring borrowers. Answer: B Diff: 2 Topic: The Banking System 10 © 2010 Pearson Education Canada 7) Pooling risk A) refers to a default contract made by a bank to other banks. B) refers to spreading the risk of loan default among all the depositors within the depository institution. C) is now illegal under the Nuisance Act of 1987. D) occurs when one person lends to an entire group or pool of borrowers. E) refers to the lower cost of obtaining funds from a depository institution. Answer: B Diff: 2 Topic: The Banking System 8) The Bank of Canada does not do which of the following? A) Supervise chartered banks. B) Lend money to the public. C) Act as a lender of last resort to banks. D) Issue bank notes. E) Hold government of Canada securities. Answer: B Diff: 1 Topic: The Banking System 9) The Bank of Canada is the lender of last resort. This means banks may borrow money from the Bank of Canada A) whenever they are short of reserves. B) overnight. C) if they have sufficient securities to support the loan. D) if the banking system as a whole is short of reserves. E) to finance a sudden and dramatic increase in overseas reserves. Answer: D Diff: 1 Topic: The Banking System 10) 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) can be sold more quickly. C) are more readily convertible to cash but take longer to sell. D) bear a lower interest rate. E) fluctuate in value, are riskier and therefore carry a higher interest rate. Answer: E Diff: 1 Topic: The Banking System 11 © 2010 Pearson Education Canada 11) Which of the following statements about depository institutions is false? A) They create liquidity by borrowing long and lending short. B) They keep reserves to meet cash withdrawals. C) A credit union is an example of a depository institution. D) They pool, and therefore reduce, risk. E) They borrow at lower interest rates and lend at higher rates. Answer: A Diff: 2 Topic: The Banking System Source: Study Guide 12) Which of the following statements about the Large Value Transfer System is true? A) It allows all bank borrowers to pay their loans. B) It allows financial institutions and their customers to make large payments instantly. C) It is owned by the Bank of Canada. D) On an average day, it handles $17 billion worth of payments. E) It is operated by the government of Canada. Answer: B Diff: 2 Topic: The Banking System 13) Which of the following is not true about the Automated Clearing Settlement System (ACSS)? It deals with payments A) not processed by LVTS. B) of small value. C) processed through electronic machines. D) such as cheques and small-value electronic payments. E) of approximately $140 billion per day. Answer: E Diff: 2 Topic: The Banking System 14) The payments system refers to the system through which A) individuals make payments to each other to settle transactions. B) banks make payments to each other to settle transactions by their customers. C) bankruptcies are declared. D) bank notes are issued by the Bank of Canada. E) the Bank of Canada makes settlements with chartered banks. Answer: B Diff: 2 Topic: The Banking System 12 © 2010 Pearson Education Canada 15) Which of the following is an economic function of a chartered bank? A) Issuing bank notes. B) Pooling risk. C) Supervising financial markets. D) Conducting monetary policy. E) None of the above. Answer: B Diff: 2 Topic: The Banking System 16) 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 loans issued by chartered banks. C) The amount of coins issued by the Canadian Mint. D) The amount of chartered bank deposits at the Bank of Canada. E) None of the above. Answer: B Diff: 2 Topic: The Banking System 17) The Monetary Base consists of the sum of A) Bank of Canada notes held within the Bank of Canada, bank deposits at the Bank of Canada, and coins held by banks. B) Bank of Canada notes held outside the Bank of Canada, the desired reserves of chartered banks, and coins held by banks. C) 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. D) 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. E) Bank of Canada notes held outside the Bank of Canada, bank deposits at the Bank of Canada, and notes and coins held by banks. Answer: C Diff: 1 Topic: The Banking System 13 © 2010 Pearson Education Canada 24.3 How Banks Create Money 1) The reserve ratio of a depository institution is the A) ratio of excess reserves to total deposits. B) ratio of a bank's total reserves that are held in its vault or on deposit with the Bank of Canada 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 are held in an account with the Bank of Canada only to total deposits. E) ratio of a bank's total reserves that a bank regards as necessary to conduct its business to total deposits. Answer: B Diff: 1 Topic: How Banks Create Money 2) If a customer of a bank makes a withdrawal from his chequable deposit account, A) M2 decreases. B) the bank's reserve ratio increases. C) the bank's reserve ratio decreases. D) the bank's reserve ratio remains the same. E) M1 decreases. Answer: C Diff: 2 Topic: How Banks Create Money 3) A bank can create money by A) selling some of its securities. B) increasing its reserves. C) lending its excess reserves. D) printing more cheques. E) converting reserves into securities. Answer: C Diff: 2 Topic: How Banks Create Money 4) Excess reserves are A) desired reserves minus actual reserves. B) required reserves minus actual reserves. C) liquidity funds minus actual reserves. D) actual reserves minus desired reserves. E) required reserves minus desired reserves. Answer: D Diff: 1 Topic: How Banks Create Money 14 © 2010 Pearson Education Canada 5) Whenever desired reserves exceed actual reserves, the bank A) can make new loans. B) will call in loans. C) will go out of business. D) is in a profit-making position. E) has excess reserves. Answer: B Diff: 2 Topic: How Banks Create Money 6) Whenever actual reserves exceed desired reserves, the bank A) can make new loans. B) will go out of business. C) needs to call in loans. D) will borrow funds from another bank. E) will raise the interest rate on its loans. Answer: A Diff: 2 Topic: How Banks Create Money 7) The ratio of currency to deposits is the A) currency drain ratio. B) excess reserve ratio. C) monetary reserve ratio. D) reserve ratio. E) currency ratio. Answer: A Diff: 1 Topic: How Banks Create Money 8) The money creation process begins when A) desired reserves increase because of an increase in deposits. B) the quantity of money increases. C) banks have excess reserves. D) bank deposits increase. E) banks lend reserves. Answer: C Diff: 1 Topic: How Banks Create Money 15 © 2010 Pearson Education Canada 9) If people decide to transfer their currency into their bank deposits then, all else constant, their decisions will A) cause the quantity of money to decrease. B) cause lower inflation. C) cause higher real interest rates. D) cause the quantity of money to increase immediately. E) increase the actual reserves of banks. Answer: E Diff: 2 Topic: How Banks Create Money 10) 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) 18%. B) 50%. C) 30%. D) 10%. E) 20%. Answer: E Diff: 2 Topic: How Banks Create Money Use the information below to answer the following questions. Fact 24.3.1 The Bank of Speedy Creek has chosen the following initial balance sheet: 11) Refer to Fact 24.3.1. Based on the Bank of Speedy Creek's initial balance sheet, what is its desired reserve ratio? A) 4 percent B) 8 percent C) 12.5 percent D) 25 percent E) 40 percent Answer: B Diff: 2 Topic: How Banks Create Money Source: Study Guide 16 © 2010 Pearson Education Canada 12) Refer to Fact 24.3.1. Huck Finn comes along and deposits $10. After Huck's deposit, but before any other actions occur, the total amount of money in the economy A) has stayed the same, with its components unchanged. B) has stayed the same, with currency decreasing and deposits increasing. C) has fallen, with currency decreasing and deposits staying the same. D) has risen, with currency unchanged and deposits increasing. E) has fallen, with currency decreasing and deposits unchanged. Answer: B Diff: 2 Topic: How Banks Create Money Source: Study Guide Use the information below to answer the following questions. Fact 24.3.2 The Bank of Hobbiton has chosen the following initial balance sheet: 13) Refer to Fact 24.3.2. Based on the Bank of Hobbiton's initial balance sheet, what is its desired reserve ratio? A) 10 percent B) 100 percent C) 20 percent D) 5 percent E) not calculable with the available information Answer: D Diff: 2 Topic: How Banks Create Money 14) Refer to Fact 24.3.2. Bilbo Baggins comes to the bank and deposits a $100 bill. After Bilbo's deposit, but before any other actions occur, the total quantity of money in the economy A) has stayed the same, with its components unchanged. B) has stayed the same, with currency decreasing and deposits increasing. C) has fallen, with currency decreasing and deposits staying the same. D) has risen, with currency unchanged and deposits increasing. E) has fallen, with currency decre
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