Question 1

If the reserve ratio is 20 per cent and a bank receives a new deposit of $100, then this bank:

Accepted Answer

A)  must increase its required reserves by $20 
B)  will initially see its total reserves increase by $100 
C)  will be able to make a new loan of $80 
D)  all of the above 
A)  must increase its required reserves by $20 
B)  will initially see its total reserves increase by $100 
C)  will be able to make a new loan of $80 
D)  all of the above D

Question 2

Explain what will happen to the money supply under each of the following circumstances:
a. The public decides to increase the amount of currency it holds.
b. Banks decide to hold fewer excess reserves.

Accepted Answer

a. If the public decides to hold more currency, it can do so only by taking reserves out of the banking system. With fewer reserves in the banking system, there will be less bank money, hence the money supply will fall.
b. If banks decide to hold fewer excess reserves, they will lend more reserves, lowering the reserve ratio and increasing the money multiplier. Additional bank money will be created, and the money supply will increase.

Question 3

What are the problems facing the RBA in its management of the money supply?

Accepted Answer

a. The RBA does not control the amount of money that households deposit in banks.
b. The RBA cannot control the amount of money that bankers choose to lend.

Question 4

The value of money:

Accepted Answer

A)  increases when prices rise 
B)  increases when the price of bonds falls 
C)  increases when prices fall 
D)  decreases when prices fall 
A)  increases when prices rise 
B)  increases when the price of bonds falls 
C)  increases when prices fall 
D)  decreases when prices fall

Question 5

If you deposited $100 of your currency into a bank, and the reserve ratio were 5 per cent, then the banking system could create as much as $1900 in additional money.

Accepted Answer

A) True 
 B)False

Question 6

Fiat money is:

Accepted Answer

A)  money based on the value of a commodity, such as a car 
B)  money without intrinsic value 
C)  commodity money 
D)  paper or plastic money under gold standard 
A)  money based on the value of a commodity, such as a car 
B)  money without intrinsic value 
C)  commodity money 
D)  paper or plastic money under gold standard

Question 7

The gold standard is used as the basis for a nation's money supply.

Accepted Answer

A) True 
 B)False

Question 8

If the RBA sold government securities, then:

Accepted Answer

A)  the money supply would increase 
B)  the money supply would not change 
C)  the money supply would decrease 
D)  none of the above 
A)  the money supply would increase 
B)  the money supply would not change 
C)  the money supply would decrease 
D)  none of the above

Question 9

Money is the set of assets in the economy that people regularly use to buy goods and services from other people.

Accepted Answer

A) True 
 B)False

Question 10

Use the following balance sheet for the First Bank of Oz:   If $1000 is deposited into the First Bank of Oz, then:

Accepted Answer

A)  assets will increase by $1000 
B)  liabilities will decrease by $1000 
C)  total reserves will initially increase by $150 
D)  required reserves will increase by $850 
A)  assets will increase by $1000 
B)  liabilities will decrease by $1000 
C)  total reserves will initially increase by $150 
D)  required reserves will increase by $850

Question 11

If the reserve ratio is 10 per cent, the money multiplier is:

Accepted Answer

A)  10 
B)  10 per cent 
C)  90 per cent 
D)  90 
A)  10 
B)  10 per cent 
C)  90 per cent 
D)  90

Question 12

If the reserve requirement is increased to 25 per cent, then the First Bank of Oz:

Accepted Answer

A)  can create money by making a new loan 
B)  can hold excess reserves 
C)  cannot make a new loan 
D)  both B and C 
A)  can create money by making a new loan 
B)  can hold excess reserves 
C)  cannot make a new loan 
D)  both B and C

Question 13

Which of the following statements about credit cards is correct?

Accepted Answer

A)  Credit cards are a method of payment 
B)  Credit cards are included in measures of the quantity of money 
C)  Credit cards are a method of deferring payment 
D)  Credit cards are considered a form of money 
A)  Credit cards are a method of payment 
B)  Credit cards are included in measures of the quantity of money 
C)  Credit cards are a method of deferring payment 
D)  Credit cards are considered a form of money

Question 14

When the RBA is trying to control rising inflation, it:

Accepted Answer

A)  decreases the interest rate that financial institutions can earn on overnight loans of their currency 
B)  targets inflation is at 2-3 percent 
C)  increases the interest rate that financial institutions can earn on overnight loans of their currency 
D)  all of the above 
A)  decreases the interest rate that financial institutions can earn on overnight loans of their currency 
B)  targets inflation is at 2-3 percent 
C)  increases the interest rate that financial institutions can earn on overnight loans of their currency 
D)  all of the above

Question 15

The RBA is required to ensure that:

Accepted Answer

A)  prices of all products need to increase by a maximum of 3 per cent per annum 
B)  target inflation is at 2-3 per cent 
C)  there is adequate money available for the government's projects 
D)  all of the above 
A)  prices of all products need to increase by a maximum of 3 per cent per annum 
B)  target inflation is at 2-3 per cent 
C)  there is adequate money available for the government's projects 
D)  all of the above

Question 16

Bank runs:

Accepted Answer

A)  occur when the discount rate rises 
B)  occur when large numbers of depositors all try to withdraw their deposits at the same time 
C)  are only a problem in a 100 per cent reserve banking system 
D)  none of the above 
A)  occur when the discount rate rises 
B)  occur when large numbers of depositors all try to withdraw their deposits at the same time 
C)  are only a problem in a 100 per cent reserve banking system 
D)  none of the above

Question 17

If the reserve ratio is 100 per cent, depositing $500 of paper money in a bank will increase the money supply by:

Accepted Answer

A)  $500 
B)  $0 
C)  $5000 
D)  $500 000 
A)  $500 
B)  $0 
C)  $5000 
D)  $500 000

Question 18

A decrease in reserve requirements lowers the reserve ratio, raises the money multiplier and increases the money supply.

Accepted Answer

A) True 
 B)False

Question 19

A decrease in reserve requirements will likely result in banks:

Accepted Answer

A)  holding fewer reserves 
B)  making more loans 
C)  increasing the money supply 
D)  all of the above 
A)  holding fewer reserves 
B)  making more loans 
C)  increasing the money supply 
D)  all of the above

Question 20

Store of value deteriorates when:

Accepted Answer

A)  when only the cost of fruit and vegetables increases 
B)  when there are inflationary expectations 
C)  when there are deflationary expectations 
D)  none of the above 
A)  when only the cost of fruit and vegetables increases 
B)  when there are inflationary expectations 
C)  when there are deflationary expectations 
D)  none of the above

Exam 29: The Monetary System

If the reserve ratio is 20 per cent and a bank receives a new deposit of $100, then this bank:

Explain what will happen to the money supply under each of the following circumstances: a. The public decides to increase the amount of currency it holds. b. Banks decide to hold fewer excess reserves.

What are the problems facing the RBA in its management of the money supply?

The value of money:

If you deposited $100 of your currency into a bank, and the reserve ratio were 5 per cent, then the banking system could create as much as $1900 in additional money.

Fiat money is:

The gold standard is used as the basis for a nation's money supply.

If the RBA sold government securities, then:

Money is the set of assets in the economy that people regularly use to buy goods and services from other people.

Use the following balance sheet for the First Bank of Oz: If $1000 is deposited into the First Bank of Oz, then:

If the reserve ratio is 10 per cent, the money multiplier is:

If the reserve requirement is increased to 25 per cent, then the First Bank of Oz:

Which of the following statements about credit cards is correct?

When the RBA is trying to control rising inflation, it:

The RBA is required to ensure that:

Bank runs:

If the reserve ratio is 100 per cent, depositing $500 of paper money in a bank will increase the money supply by:

A decrease in reserve requirements lowers the reserve ratio, raises the money multiplier and increases the money supply.

A decrease in reserve requirements will likely result in banks:

Store of value deteriorates when:

Ten Lessons From Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand and Government Policies

Consumers, Producers and the Efficiency of Markets

Application: The Costs of Taxation

Application: International Trade

Externalities

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Business Strategy

Competition Policy

Monopolistic Competition

The Markets for the Factors of Production

Earnings, Unions and Discrimination

Income Inequity and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment and the Financial System

The Natural Rate of Unemployment

Inflation: Its Causes and Costs

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

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