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Testbank to accompany

Financial Markets, Institutions & Money rd 3 edition Prepared by Dr Frédérique Bracoud University of Queensland

© John Wiley & Sons Australia, Ltd 2013

Chapter 3: The Reserve Bank of Australia and interest rates

Chapter 3: The Reserve Bank of Australia and interest rates True False Questions 1.

The funds held by commercial banks in the ESAs at the RBA are included in money base. *a. b.

the

True False

Correct answer: a

2.

Exchange settlement funds (ESF) are funds that commercial banks hold at corresponding commercial banks for cheque clearing purposes. a. *b.

True False

Correct answer: b

3.

M1 includes financial assets such as currency in circulation and current accounts at authorised deposit-taking institutions (ADIs). *a. b.

True False

Correct answer: a

4.

When a commercial bank orders currency from the Reserve Bank of Australia (RBA), the money base increases. a. *b.

True False

Correct answer: b

5.

The money supply measurement that emphasises the transactional nature of money is M3. a.

True

© John Wiley & Sons Australia, Ltd 2013

3.2

Testbank to accompany Financial Markets, Institutions and Money 3e

*b.

False

Correct answer: b 6. The funds held by commercial banks in the ESAs at the RBA are included in the money base but not in M1 or M3. *a. b.

True False

Correct answer: a

7.

The cash rate is a market-determined rate resulting from the demand and supply of ESF. *a. b.

True False

Correct answer: a

8.

The cash rate is the Reserve Bank of Australia (RBA)’s lending rate to commercial banks. a. *b.

True False

Correct answer: b

9.

When reserve requirements are increased while the supply of central bank money remains identical, the overnight interbank rate should increase. *a. b.

True False

Correct answer: a

10.

Reserve requirements are not currently used by the Reserve Bank of Australia (RBA). *a. b.

True False

Correct answer: a

© John Wiley & Sons Australia, Ltd 2013

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Chapter 3: The Reserve Bank of Australia and interest rates

11.

Open markets operations by the Reserve Bank of Australia (RBA) aim at affecting the supply of ESF in order to influence the cash rate. *a. b.

True False

Correct answer: a

12.

Open market operations consisting in the purchase of securities by the Reserve Bank of Australia (RBA) decrease the supply of ESF. a. *b.

True False

Correct answer: b

13.

The purchase of forex by the Reserve Bank of Australia (RBA) from banks increases the supply of ESF. *a. b.

True False

Correct answer: a

14.

Frictional unemployment is caused by a mismatch between the workers’ skills and the skills required in available jobs. a. *b.

True False

Correct answer: b 15.

Stability of the currency is the unique official aim of the Reserve Bank of Australia (RBA) stipulated in the Reserve bank Act 1059. a. *b.

True False

Correct answer: b

© John Wiley & Sons Australia, Ltd 2013

3.4

Testbank to accompany Financial Markets, Institutions and Money 3e

16.

Equitable distribution of wealth is an official aim of the Reserve Bank of Australia (RBA) stipulated in the Reserve bank Act 1059. a. *b.

True False

Correct answer: b

17.

Stability of price implies that every price in the economy remains at the same level. a. *b.

True False

Correct answer: b

18.

Inflation is the continuous increase in the average price level. *a. b.

True False

Correct answer: a

19.

Unemployment due to a different geographical location between people searching for a job and jobs on offer is called structural unemployment. *a. b.

True False

Correct answer: a

20.

An increase in the cash rate target by the Reserve Bank of Australia (RBA) is likely to enhance net exports. a. *b.

True False

Correct answer: b

21.

Monetary policy is thought to affect the economy through the spending channel. *a. b.

True False

© John Wiley & Sons Australia, Ltd 2013

3.5

Chapter 3: The Reserve Bank of Australia and interest rates

Correct answer: a 22.

A tightening of monetary policy is expected to increase consumption, investment and net exports. a. *b.

True False

Correct answer: b

23.

A loosening of monetary policy is expected to weaken the domestic currency with respect to foreign currencies and stimulate net exports. *a. b.

True False

Correct answer: a

24.

A tightening of monetary policy usually induces a fall in financial assets prices. *a. b.

True False

Correct answer: a

25.

The effect on real GDP and inflation of the stimulation of spending induced by an expansionary monetary policy depends on the degree of use of the factors of production in the economy. *a. b.

True False

Correct answer: a

© John Wiley & Sons Australia, Ltd 2013

3.6

Testbank to accompany Financial Markets, Institutions and Money 3e

Multiple Choice Questions 26.

Which of the following is part of M1? *a. b. c. d.

Bank current accounts held by the private nonbank sector Loans made by banks to the private nonbank sector Bank term deposits held by the private nonbank sector Bank saving deposits held by the private nonbank sector

Correct answer: a Learning Objective 3.1~ explain how the Reserve Bank of Australia (RBA) measures the money supply. Feedback: M1 captures the transactional nature of money. It therefore includes the assets of the private nonbank sector that can easily be used as a means of payment, mainly current accounts in banks. Loans are assets for banks but liabilities for the private non-bank sector that borrows. As a consequence loans cannot be used as a means of payments (even though they are at the origin of the creation of deposits that are included in M1). Term deposits and savings cannot be directly used as means of payments and need to be transferred into the current account first; therefore they are store of value (savings for future consumption).

27.

Which of the following is part of M1? a. b. *c. d.

Accounts held by banks at the central bank Accounts held by the government at the central bank Bank current accounts held by the private nonbank sector Loans made by banks to the private nonbank sector

Correct answer: c Learning Objective 3.1~ explain how the Reserve Bank of Australia (RBA) measures the money supply. Feedback: M1 captures the transactional nature of money. It therefore includes the assets of the private nonbank sector that can easily be used as a means of payment, mainly current accounts in banks. Loans are assets for banks but liabilities for the private non-bank sector that borrows. As a consequence loans cannot be used as a means of payments (even though they are at the origin of the creation of deposits that are included in M1). Accounts held by banks and government at the central bank are also used for transactions but they are NOT included in M1 or any larger measurement of the money supply because only means of payment of the private nonbank sector are considered for monetary aggregates. Instead accounts held by banks at the central bank are parts of the money base.

© John Wiley & Sons Australia, Ltd 2013

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Chapter 3: The Reserve Bank of Australia and interest rates

28.

Which of the following is part of M1? *a. b. c. d.

Currency held by nonbank businesses Bank saving deposits held by nonbank businesses Borrowing by nonbank businesses from banks Bank term deposits held by nonbank businesses

Correct answer: a Learning Objective 3.1~ explain how the Reserve Bank of Australia (RBA) measures the money supply.

29.

Which of the following is part of M1? a. b. *c. d.

Interbank loans Bank loans to the private nonbank sector Domestic currency held by the private nonbank sector Foreign currency held by the private nonbank sector

Correct answer: c Learning Objective 3.1~ explain how the Reserve Bank of Australia (RBA) measures the money supply.

30.

Which of the following is part of M1? *a. b. c. d.

Bank current accounts held by households Bank saving deposits held by households Bank term deposits held by households Current accounts held by households in nonbank financial institutions

Correct answer: a Learning Objective 3.1~ explain how the Reserve Bank of Australia (RBA) measures the money supply.

31.

Which of the following does NOT belong to M1? a. b. c. *d.

Currency held by households Bank current accounts held by the private nonbank sector Currency held by nonbank businesses Bank saving accounts held by the private nonbank sector

Correct answer: d Learning Objective 3.1~ explain how the Reserve Bank of Australia (RBA) measures the money supply.

© John Wiley & Sons Australia, Ltd 2013

3.8

Testbank to accompany Financial Markets, Institutions and Money 3e

32.

Which of the following does NOT belong to M1? a. b. *c. d.

Currency held by the private nonbank sector Bank current accounts held by households Bank term deposits held by the private nonbank sector Bank current accounts held by businesses

Correct answer: c Learning Objective 3.1~ explain how the Reserve Bank of Australia (RBA) measures the money supply.

33.

Which of the following is included in M3? a. b. c. *d.

Bank saving deposits held by the government Bank term deposits held by the government Saving deposits held by households in nonbank financial institutions Bank term deposits held by households

Correct answer: d Learning Objective 3.1~ explain how the Reserve Bank of Australia (RBA) measures the money supply. Feedback: M3 captures both the transactional nature of money (like M1) and the store of value dimension of money (unlike M1). As a consequence M3 embeds M1 but also includes some financial assets that cannot be used for payment directly but are still easily convertible to M1, such as saving and term deposits. As for M1 the focus is on the assets of the private nonbank sector; that is the reason why the deposits owned by the government are not counted in M1 and in M3. Deposits held by households in nonbank financial institutions are part of Broad money but not M3.

34.

Which of the following is included in the money base? a. *b. c. d.

Bank current accounts held by the private nonbank sector Accounts held by the banks at the central bank Accounts held by the government at the central bank Bank term deposits held by the private nonbank sector

Correct answer: b Learning Objective 3.1~ explain how the Reserve Bank of Australia (RBA) measures the money supply.

© John Wiley & Sons Australia, Ltd 2013

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Chapter 3: The Reserve Bank of Australia and interest rates

35.

Which of the following is included in the money base? *a. b. c. d.

Currency held by the private nonbank sector Bank saving deposits held by the private nonbank sector Bank term deposits held by the private nonbank sector Accounts held by the government at the central bank

Correct answer: a Learning Objective 3.1~ explain how the Reserve Bank of Australia (RBA) measures the money supply.

36.

Broad money is *a. b. c. d.

M3 plus borrowings from the private sector by non-bank financial institutions (NBFIs) less currency and bank deposits of NBFIs. M3 plus borrowings by the private sector from non-bank financial institutions (NBFIs) less currency and bank deposits of NBFIs. M3 plus borrowings from the private sector by non-bank financial institutions (NBFIs) less currency and bank deposits held by the private sector. M3 minus borrowings from the private sector by non-bank financial institutions (NBFIs) plus currency and bank deposits of NBFIs.

Correct answer: a Learning Objective 3.1~ explain how the Reserve Bank of Australia (RBA) measures the money supply.

© John Wiley & Sons Australia, Ltd 2013

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Testbank to accompany Financial Markets, Institutions and Money 3e

37.

When the government collects taxes from households a. *b. c. d.

the money supply increases. the money supply decreases. the currency held by banks increases. the currency held by banks decreases.

Correct answer: b Learning Objective 3.1~ explain how the Reserve Bank of Australia (RBA) measures the money supply. Feedback: Households pay their taxes with the funds in their bank current accounts, therefore the balances in bank current accounts decrease in the process. Bank current accounts owned by the private nonbank sector (including households) are part of all measurements of money supply M1, M3 or broad money. (Note that the terminology ‘money supply’ does not apply to money base). The bank assets will be affected by the transactions described in the sense that any transaction where money is transferred in or out a bank current account to another account in another institution will be mirrored by a similar transfer in the ESA (account at the RBA) of the bank in which the current account has been used. For instance the balance of the ESA owned by the bank of the taxpayer will be decreased to mirror the decrease in the balance in the bank current account of the taxpayer. The account of the government at the RBA (not called ESA though) will get a larger balance as a consequence of the transfer from the ESA. The money in the liabilities of the central bank (ESA and government accounts) can only circulate among accounts at the central bank [central bank network] while money in the liabilities of commercial banks (M1, M3) can only circulate among commercial bank accounts [commercial banks network]. The two networks do not communicate. In our example the funds left the bank account of the taxpayer and simply disappeared from the system: the money supply M1 and M3 has decreased. The funds received by the government are the funds coming from the ESA of the commercial bank of the taxpayer (same network). The ESF supply has decreased (the government account is not ESF) like the money supply M1 or M3. However the currency held by banks (notes and coins in the vaults and in ATMs) has not been affected. The mechanisms described here were explained in chapter 2.

© John Wiley & Sons Australia, Ltd 2013

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Chapter 3: The Reserve Bank of Australia and interest rates

38.

When the government provides social benefits to households *a. b. c. d.

the money supply increases. the money supply decreases. the currency held by banks increases. the currency held by banks decreases.

Correct answer: a Learning Objective 3.1~ explain how the Reserve Bank of Australia (RBA) measures the money supply.

39.

When the government issues new Treasury bonds that are bought by the nonbank private sector a. *b. c. d.

the money supply increases. the money supply decreases. the currency held by banks increases. the currency held by banks decreases.

Correct answer: b Learning Objective 3.1~ explain how the Reserve Bank of Australia (RBA) measures the money supply. Feedback: The nonbank private sector pays the Treasury bonds (also called CGS in the past) with the funds in their bank accounts. As bank accounts are part of money supply (M1, M3 and broad money) the money supply decreases when the balances in these accounts decrease. The bank assets will be affected by the transactions described in the sense that any transaction where money is transferred in or out a bank current account to another account in another institution will be mirrored by a similar transfer in the ESA (account at the RBA) of the bank in which the current account has been used. For instance the balance of the ESA owned by the bank of the bond buyer will be decreased to mirror the decrease in the balance in the bank current account of the bond buyer. The account of the government at the RBA (not called ESA though) will get a larger balance as a consequence of the transfer from the ESA. The money in the liabilities of the central bank (ESA and government accounts) can only circulate among accounts at the central bank [central bank network] while money in the liabilities of commercial banks (M1, M3) can only circulate among commercial bank accounts [commercial banks network]. The two networks do not communicate. In our example the funds left the bank account of the bond buyer and simply disappeared from the system: the money supply M1 and M3 has decreased. The funds received by the government are the funds coming from the ESA of the commercial bank of the bond buyer (same network). The ESF supply has decreased (the government account is not ESF) like the money supply M1 or M3. However the currency held by banks (notes and coins in the vaults and in ATMs) has not been affected. The mechanisms described here were explained in chapter 2.

© John Wiley & Sons Australia, Ltd 2013

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Testbank to accompany Financial Markets, Institutions and Money 3e

40.

When the government issues Treasury bonds to the public and spends the totality of the funds raised to subsidize the domestic nonbank businesses, a. b. *c. d.

the money supply increases overall. the money supply decreases overall. the money supply stays the same level overall. the money supply is not affected at all by any of the transactions described.

Correct answer: c Learning Objective 3.1~ explain how the Reserve Bank of Australia (RBA) measures the money supply.

41.

The supply of ESF increases when *a. b. c. d.

the government provides social benefits to Australian households. the government issues Treasury bonds that are bought by the private sector. commercial banks pay back their loans to the central bank. the government sells foreign currencies to the private sector.

Correct answer: a Learning Objective 3.2~ explain how the RBA influences the level of interest rates in the economy.

42.

The supply of ESF increases when a. *b. c. d.

commercial banks withdraw currency from the Reserve Bank of Australia (RBA). the Reserve Bank of Australia (RBA) provides overnight liquidity to the banking sector (discount window). the Reserve Bank of Australia (RBA) sells securities to commercial banks. the government collects taxes.

Correct answer: b Learning Objective 3.2~ explain how the RBA influences the level of interest rates in the economy. .

© John Wiley & Sons Australia, Ltd 2013

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Chapter 3: The Reserve Bank of Australia and interest rat...