a.What are the three basic functions of money?

• A medium of exchange, a record of account, and assessment of value
• An account of exchange, a medium of account, and store of value
• A medium of exchange, a store of account, and unit of value
• A medium of exchange, a unit of account, and store of value

b.Which of the following is likely to happen if an economy faces runaway inflation?

• the value of other assets like gold falls thereby increasing the value of money.
• people can buy any amount of goods with a given amount of money.
• people sell assets like real estate.
• people revert to barter because money fails as a medium of exchange.

c.Drastic inflation greatly _________ money's use as a measure of value (unit of account) because

• reduces; it is impossible to adjust instantaneously all prices strictly in line with their relative values.
• increases; it is impossible to adjust instantaneously all prices strictly in line with their relative values.
• reduces; the worth of all of the goods in the economy relative to each other changes drastically.
• increases; the worth of all of the goods in the economy relative to each other changes drastically.

d.The rule of 70 (which provides an estimate of the amount of time it will take for some variable, like money holdings to double) can show us how during a drastic inflation

• money's usefulness as a store of value is destroyed.
• the relative value of products falls as inflation continues.
• the relative value of products change.
• the amount of money in everyone's bank accounts will double.

a.What are the componentsof the M1+ money supply?

• Currency in circulation and savings deposits
• Currency in circulation and chequable deposits
• Savings deposits and chequable deposits
• Currency in circulation and chequable deposits including deposits at credit unions

b.What is the largest component of M1+?

• Chequable deposits
• Coins
• Currency
• Savings deposits

c.Which of the components of M1+ is legal tender?

• Term deposits
• Currency
• Savings deposits
• Chequable deposits

d.The face value of a coin is greater than its intrinsic value because

• otherwise people would not be able to use the coins.
• otherwise people would sell it for its intrinsic value.
• there are too few resources to make coins that have intrinsic value.
• the law requires this.

e.What near-monies, or portion of near-monies, are included in M2 money supply? Exclude those also included in M2+ or M2++.

• All nonchequable savings deposits, term deposits and money market mutual funds including at credit unions and other similar institutions
• Nonchequable savings deposits, term deposits and money market mutual funds
• Nonchequable savings deposits and term deposits at chartered banks
• Personal savings deposits, non-personal (business) notice deposits and non-money market mutual funds

f.Near-monies represent

• wealth.
• income supplements.
• term deposits.
• money.

a.Which of the following statements is true?

• The money supply in Canada is backed by government's ability to keep the value of money relatively stable.
• The money supply is backed by Treasury notes.
• The gold standard applies to a small fraction of the money supply.
• Half the money supply is backed by gold.

b.The value of money is determined by

• the Bank of Canada.
• the foreign exchange rate.
• people's willingness to accept it in exchange for goods and services.
• the cache of gold owned by the Treasury.

c.The purchasing power of money is

• inversely related to the price level.
• directly related to the price level.
• directly related to its supply.
• inversely related to its acceptability.

d.Who in Canada is responsible for maintaining money's purchasing power?

• The Federal Government
• The Bank of Canada
• The Senate
• The Council of the Federation

a.The financial crisis of 2007-2008 was exacerbated by subprime mortgage loans. These loans were made to borrowers

• at exceptionally low rates.
• who were not first-time home buyers.
• purchasing low-priced homes.
• who were more likely to default on their loans.

b.Subprime mortgage loans were one of the factors that exacerbated the financial crisis of 2007-2008 because they resulted in

• refinancing on the part of current homeowners.
• an increase in demand for housing and a rapid increase in home prices that was unsustainable.
• an increase in the supply of housing and a rapid increase in home prices that was sustainable.
• many lenders competing for the same business.

c.Mortgage backed securities were one of the factors that exacerbated the financial crisis of 2007-2008 because they

• reduced the risk exposure, or cost, that banks faced after issuing these subprime loans, and encouraged this type of lending.
• changed the risk exposure, or benefit, that banks faced after issuing these subprime loans, and discouraged this type of lending.
• reduced the regulation, or expense, that banks faced after issuing these subprime loans, and encouraged this type of lending.
• increased the risk exposure, or cost, that banks faced after issuing these subprime loans, and discouraged this type of lending.

d.American International Group (AIG) exacerbated the financial crises of 2007-20078 by

• hiding collateralized default swaps that had embedded mortgage-loan risk.
• issuing billions of dollars of collateralized default swaps that had embedded mortgage-loan risk.
• buying collateralized default swaps that had embedded mortgage-loan risk.
• eliminating collateralized default swaps that had embedded mortgage-loan risk.

a.The financial crisis of 2007-2008 was exacerbated by subprime mortgage loans. These loans were made to borrowers

• at exceptionally low rates.
• who were more likely to default on their loans.
• purchasing low-priced homes.
• who were not first-time home buyers.

b.Subprime mortgage loans were one of the factors that exacerbated the financial crisis of 2007-2008 because they resulted in

• an increase in the supply of housing and a rapid increase in home prices that was sustainable.
• refinancing on the part of current homeowners.
• many lenders competing for the same business.
• an increase in demand for housing and a rapid increase in home prices that was unsustainable.

c.Mortgage backed securities were one of the factors that exacerbated the financial crisis of 2007-2008 because they

• increased the risk exposure, or cost, that banks faced after issuing these subprime loans, and discouraged this type of lending.
• changed the risk exposure, or benefit, that banks faced after issuing these subprime loans, and discouraged this type of lending.
• reduced the risk exposure, or cost, that banks faced after issuing these subprime loans, and encouraged this type of lending.
• reduced the regulation, or expense, that banks faced after issuing these subprime loans, and encouraged this type of lending.

d.American International Group (AIG) exacerbated the financial crises of 2007-20078 by

• eliminating collateralized default swaps that had embedded mortgage-loan risk.
• hiding collateralized default swaps that had embedded mortgage-loan risk.
• issuing billions of dollars of collateralized default swaps that had embedded mortgage-loan risk.
• buying collateralized default swaps that had embedded mortgage-loan risk.

a.Merchants accepted gold receipts as a means of payment even though the receipts were issued by goldsmiths, not the government, because

• it was the only type of payment offered.
• the goldsmith would issue a receipt to the depositor.
• the government's currency could not be trusted.
• they knew that it could be exchanged for gold.

b.By issuing loans in the form of gold receipts, there was additional risk because the

• goldsmith could issue more receipts than he had in gold and this could make a panic.
• gold could be stolen.
• receipts could be copied.
• government could demand all the gold.

a.The banking system in Canada is referred to as a fractional reserve banking system because

• a fraction of all monetary assets are held in banks
• a fraction of the money is lent out.
• banks keep a fraction of reserves available.
• banks hold a fraction of deposits on reserve.

b.In a fractional reserve system, deposit insurance

• raises the fraction of deposits that a bank must keep available.
• encourages customers to withdraw their deposits before anyone else can.
• provides additional funds that can be lent out.
• guarantees that depositors will always get their money, avoiding bank runs.

a.An asset on a bank's balance sheet is something

• created by the bank, whereas a liability is something sold by the bank.
• sold by the bank, whereas a liability is something bought by the bank.
• owned by the bank, whereas a liability is something owed by the bank.
• owed by the bank, whereas a liability is something owned by the bank.

b.Net worth is equal to

• assets minus liabilities.
• (assets plus liabilities)/assets.
• assets plus liabilities.
• liabilities minus assets.

c.A balance sheet must always balance because the sum of

• liabilities must equal the sum of assets plus net worth.
• assets must equal the sum of liabilities plus net worth.
• net worth must equal the sum of liabilities plus assets.
• assets must equal the difference between liabilities and net worth.

d.The major assets on a commercial bank's balance sheet include

• reserves, securities, loans, and chequable deposits.
• reserves, chequable deposits, loans, and vault cash.
• chequable deposits, securities, loans, and vault cash.
• reserves, securities, loans, and vault cash.

e.The major claims on a commercial bank's balance sheet are

• reserves.
• chequable deposits.
• vault cash.
• loans.

Consider the following statement: "Whenever currency is deposited into a chartered bank, cash goes out of circulation and, as a result, the supply of money is reduced."

Is this statement true or false?

• False because the M1 money supply consists of currency outside of the banks and chequing account deposits of the public in the chartered bank.
• False because the deposit into a chartered bank increases M1.
• True because the M1 money supply consists of currency outside of the banks and chequing account deposits of the public in the chartered bank.
• True because the deposit into a chartered bank decreases M1.

Consider the following statement: "When a chartered bank makes loans, it creates money; when loans are repaid, money is destroyed."

This statement is

• incorrect because lending decreases the money supply, and the repayment increases deposits, lowering the money supply.
• incorrect because lending decreases the money supply, and the repayment reduces chequable deposits, raising the money supply.
• correct because lending decreases the money supply, and the repayment reduces chequable deposits, raising the money supply.
• correct because lending increases the money supply, and the repayment reduces chequable deposits, lowering the money supply.

a.A single commercial bank can safely lend only an amount equal to its excess reserves, but the commercial banking system can lend by a multiple of its excess reserves because

• the system has more funds than any single bank.
• one bank loses reserves to other banks, but the system does not.
• one bank gains reserves, but the system loses these reserves.
• this is the legal restriction on banks, but it does not apply to the system.

b.What is the monetary multiplier?

• 1 + reserve ratio
• 1 / reserve ratio
• reserve ratio - 1
• 1- reserve ratio

c.The monetary multiplier is

• inversely related to the reserve ratio.
• directly related to the reserve ratio.
• one plus the required reserve ratio.
• one minus the reserve ratio.

A decrease in the reserve requirement causes the size of the money multiplier to

• increase, the amount of excess reserves in the banking system to rise, and the money supply to increase
• decrease, the amount of excess reserves in the banking system to rise, and the money supply to increase.
• decrease, the amount of excess reserves in the banking system to rise, and the money supply to decrease.
• increase, the amount of excess reserves in the banking system to rise, and the money supply to decrease.