Chapter Twenty: Money and Monetary Institutions

Table of Contents

1. Chapter Twenty: Money and Monetary Institutions

Chapter Twenty: Money and Monetary Institutions

1	Question 1 Which of the following is not one of the functions of money? a) A medium of exchange. b) A unit of account. c) A store of value. d) A standard of deferred payment. e) A hedge against inflation. Correct.Incorrect. The answer is e) A hedge against inflation.Your answer has been saved.

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Question 2 Gresham's Law states that 'bad money drives out good'. Which of the following explains the original meaning of this law? a) If money is losing its value the people will resort to barter. b) If a debased metallic currency circulates alongside a non-debased currency, people will hoard the non-debased currency, as they know it contains the full value of metal, and they will spend the debased currency quickly. So the debased currency will circulate while the non-debased currency is withdrawn from circulation. c) Paper currency that is convertible into gold will drive gold out of circulation as it is easier to carry. d) People will not be able to tell the difference between good money and bad money so they will assume that it is all bad. e) People will prefer copper to gold as it can be used for smaller denomination transactions. Correct.Incorrect. The answer is b) If a debased metallic currency circulates alongside a non-debased currency, people will hoard the non-debased currency, as they know it contains the full value of metal, and they will spend the debased currency quickly. So the debased currency will circulate while the non-debased currency is withdrawn from circulation.Your answer has been saved.

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Question 3 'Fiat' money is: a) Paper money backed by gold. b) Money based on some valuable commodity. c) Money whose value is based only on its acceptability in payment and which may be reinforced by 'legal tender' status. d) Money used to pay Italian car workers in Turin. e) Money invented by Latin monks. Correct.Incorrect. The answer is c) Money whose value is based only on its acceptability in payment and which may be reinforced by 'legal tender' status.Your answer has been saved.

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Question 4 'High-powered money' is: a) Notes and coin in circulation plus bankers' working balances at the central bank. b) A banker's cheque. c) Any short-term liability of the government. d) Any deposit on which a cheque can be drawn. e) A bank deposit in a strong currency. Correct.Incorrect. The answer is a) Notes and coin in circulation plus bankers' working balances at the central bank.Your answer has been saved.

5	Question 5 If the public's desired cash ratio is 20 per cent and the banks' desired reserve ratio is 10 per cent, what is the size of the money multiplier? a) 10 b) 5 c) 2 d) 4 e) 6 Correct.Incorrect. The answer is d) 4Your answer has been saved.

6	Question 6 If the public's desired cash ratio is 10 per cent and the banks' desired reserve ratio is 10 per cent, what is the size of the money multiplier? a) 10 b) 5 c) 2.5 d) 4 e) 5.5 Correct.Incorrect. The answer is e) 5.5Your answer has been saved.

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Question 7 The money multiplier tells us: a) How much a change in the money supply affects real GDP. b) How much a change in the money supply affects nominal GDP. c) How much the money supply changes in response to a change in the monetary base. d) How much the money supply changes in response to a change in GDP. e) How much the money supply changes in response to a change in the bank rate. Correct.Incorrect. The answer is c) How much the money supply changes in response to a change in the monetary base.Your answer has been saved.

8	Question 8 What do economists mean by the 'Classical dichotomy'? To what extent is the view implied by the 'Classical dichotomy' held by economists today? Hint: re-read 'Money and the economy' pp443-444. In thinking about the question, you may also wish to visit the term 'money neutrality'.

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Question 9 What role does money play in today's society? What would be the implications of moving back to a system of barter? Hint: re-read 'The nature of money' pp444-45. In answering the second question, you may wish to think about the problems you would face if you had to conduct all of next week's transactions without money, for example buying food, DVDs and clothes. Don't forget to consider also the issues that will arise for the sellers of the goods and services you want to consume.

10	Question 10 What did Sir Thomas Gresham (1519-1579) mean when he stated that 'bad money drives out good'? To what extent does Gresham's Law apply to understanding the mechanics of money today? Hint: re-read 'The origins of money' pp446-49. 'Box 20.1' focuses specifically on Gresham's Law.

11	Question 11 What factors contributed to the large number of bank failures in the US during the 1930s? Hint: re-read 'Fractionally backed paper money' pp448. You may wish to consider how 'fiat money' contributes to ensuring confidence in a currency (see 'Fiat money pp448-49).

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Question 12 What is 'high-powered money'? Hint: re-read 'How does money get into the economy?' p449-51. In answering the question, you may also want to ensure that you can explain why 'High-powered money is an asset to anyone in the private sector who holds it, but to the central bank it's a liability' (p449).

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Question 13 What are the main measures of the UK's currency aggregates? Hint: re-read 'Box 20.2 Definitions of UK monetary aggregates' p452. Although it is unlikely that you will be given a direct question asking you to list out each of these measures line by line, it is worthwhile spending some time getting a feel for what each of the measures means. They will be referred to in quality newspapers and other areas of the media.

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Question 14 Assume that there are five banks. Each bank has deposits worth £200. Assuming that each bank wishes to hold cash reserves up to10% of all deposits, draw flow diagrams to show the banks generate a multiple increase in the overall amount of deposited money. Hint: re-read 'The ratios approach to the creation of deposit money' pp 452-55. Assume that no money migrates to other banks outside of the aforementioned five. You may also choose to consider the impact of bank customers choosing to keep a fixed proportion of money as cash, rather than as bank deposits.

15	Question 16 To what extent does the framework you have been considering in Question 13 reflect the way in which modern banks actually conduct their day-to-day business? Hint: re-read 'A competitive banking system' pp 455-56.

16	Question 17 Will the emergence of electronic money (e-money) systems have a major effect on central banks? Hint: re-read 'Box 20.3: The implications of electronic money for the monetary system' p457.

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Question 18 What has been the impact of the massive growth in plastic credit and debit cards? Hint: re-read 'Case Study 1: The changing roles of paper and plastic in the payments system' pp458-59. In addition to the facts and figures provided in the above reference, you may also want to widen your thoughts to consider such things as how people's attitudes towards money have changed and the wider impact of debt in society.

18	Question 19 What is the role of the Bank of England? Hint: re-read 'Case Study 2: The core purpose of the Bank of England' pp 459-60. In answering the question you may also wish to consider what would happen if the Bank of England didn't exist.