代写 The Monetary System

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Tutorial 7 – The Monetary System

Week 8

Guided answers

1. Money is:

a. equivalent to income

b. equivalent to wealth

c. an asset used as a medium of exchange

d. backed by gold

ANS: C

Money is an asset that is widely used and accepted in the normal course of market transactions (specifically, the buying and selling of goods and services).

2. The M1 measure of money consists of the sum of:

a. currency, cheque account deposits and travellers’ cheques

b. currency and travellers’ cheques

c. currency, cheque account deposits and savings account deposits

d. cheque account deposits and travellers’ cheques

ANS: A

3. There is a _____:

short-run trade-off between prices and interest rates

long-run trade-off between inflation and unemployment

short-run trade-off between inflation and unemployment

short-run trade-off between inflation and the money supply

ANS: C

The Reserve Bank of Australia (RBA) can choose to pursue the goal of “inflationary pressures” via the use of raised interest rates in order to reduce Aggregate Expenditures (AE) in the economy or it may choose to pursue the goal of “unemployment” by reducing interest rates in order to stimulate/ increase aggregate expenditures.

Because the goal of inflation implies the use of high interest rates whilst the goal of unemployment implies the use of low interest rates, both goals cannot be successfully pursued by the RBA simultaneously. Further, the pursuit of one goal moves the economy further away from the attainment of the other goal. Therefore, there is a trade of between inflation and unemployment as the pursuit of one objective leads to worsening problems with the other objective.

4. Under a fractional-reserve banking system, banks:

hold only a fraction of their deposits as reserves

generally lend out a majority of their deposits

can create money by lending out reserves

all of the above

ANS: D

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5. If the public switches from doing most of its shopping with currency to using cheques instead, and the Reserve Bank takes no action, the money supply will:

increase

decrease

not change

either increase or decrease

ANS: A

Cheques are a method of deferred payment where the exact amount is transferred out of the cheque account once the cheque has been presented at a bank and cleared. The use of cheques instead of cash means that only exact amounts of money, equal to the value of transactions are being demanded. This implies more money will remain in the banks, as people are no longer carrying extra cash in hard currency. Consequently, with more deposits remaining in banks for longer, the banks have more excess cash reserves available for creating new loans and so the money supply will likely increase.

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

must increase its required reserves by $20

will initially see its total reserves increase by $100

will be able to make a new loan of $80

all of the above

ANS: D

7. If a bank uses $80 of reserves to make a new loan when the reserve ratio is 25 per cent, then:

the money supply initially increases by $20

the money supply initially decreases by $80

the level of wealth in the economy will not have changed

the money supply will eventually increase by more than $20 but less than $80

ANS: C

New loans lead to an expansion of the money supply. Changes in true wealth however are linked to changes in GDP per capita. That is, the level of goods and services that each average person is endowed with. Increases in the money supply alone, that is not accompanied by increases in GDP per capita do not represent a true change in the wealth of a nation.

8. A decrease in reserve requirements will likely result in banks:

a. holding fewer reserves

b. making more loans

c. increasing the money supply

d. all of the above

ANS: D
代写 The Monetary System

A decrease in reserve requirements means that banks are now required to hold a smaller portion of deposits as required reserves. This means banks have more money available for creating loans. As banks create a larger number of loans, the money supply increases.

9. If you withdraw $100 from your bank, then:

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the reserves of your bank will initially fall by $100

the money supply will initially increase by $100

the money supply will initially decrease by $100

the required reserves for your bank will fall by more than $100

ANS: A

10. If banks choose to hold more excess reserves, then:

the total reserves in the banking system will decrease

the money supply will fall

the money multiplier will increase

the discount rate will decrease

ANS: B

By holding more reserves, banks are implicitly making fewer loans so the money supply decreases.

11. Bank runs:

occur when the discount rate rises

occur when large numbers of depositors all try to withdraw their deposits at the same time

are only a problem in a 100 per cent reserve banking system

none of the above

ANS: B

12. One of the functions of money comes from the use of money to transfer purchasing power to the future. This is called:

a. medium of exchange

b. unit of account

c. store of value

d. measure of liquidity

ANS: C

13. After the Reserve Bank increases reserves in the banking system through open-market purchases, banks create new deposits through multiple rounds of lending and accepting deposits, until the:

Reserve Bank requires them to stop

deposit insurance limit is reached

actual reserve-deposit ratio is greater than the desired reserve-deposit ratio

actual reserve-deposit ratio is equal to the desired reserve-deposit ratio

ANS: D

When this statement holds true for the entire banking system, then no more additional loans can be made, consequently the “money creation” process stops at this point.

14. Store of value deteriorates when:

when only the cost of fruit and vegetables increases

when there are inflationary expectations

when there are deflationary expectations

none of the above

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ANS: B

代写 The Monetary System