Money and Banking: practice questions

6 questions · 11 marks · free, no account · Read the notes first

1. Question 1Multiple choice · 1 mark

   Shops display the prices of all goods in Hong Kong dollars, so shoppers can compare their values easily. This shows money serving as a

   A

   unit of account.

   B

   medium of exchange.

   C

   store of value.

   D

   standard of deferred payment.

2. Question 2Multiple choice · 1 mark

   Mr Chan withdraws $10 000 from his savings account at a licensed bank and keeps it as cash. What happens to Hong Kong's money supply?

   A

   M1 rises by $10 000; M2 and M3 are unchanged.

   B

   M1, M2 and M3 are all unchanged.

   C

   M2 falls by $10 000; M1 is unchanged.

   D

   M1 falls by $10 000; M2 and M3 are unchanged.

3. Question 3Multiple choice · 1 mark

   The required reserve ratio is 20%. A customer deposits $1000 in cash into a bank. Assuming no cash leakage and no excess reserves kept, what is the maximum increase in total deposits in the banking system?

   A

   $1000

   B

   $5000

   C

   $4000

   D

   $200

4. Question 4Multiple choice · 1 mark

   According to the quantity theory of money, if the velocity of circulation and real output are constant, a 5% increase in the money supply will

   A

   raise real output by 5%.

   B

   lower the velocity of circulation by 5%.

   C

   leave the general price level unchanged.

   D

   raise the general price level by 5%.

5. Question 54 marks

   A bank receives a new cash deposit of $10 000. The required reserve ratio is 10%.

   (a) Find the maximum amount this bank can lend out at first.

   (b) Find the maximum change in total deposits in the banking system.

   (c) Give TWO reasons why the actual change in deposits may be smaller.

   Show worked solution

   (a) Required reserves = 10% × $10 000 = $1000, so excess reserves, the maximum the bank can lend, are $9000. (1)

   (b) Banking multiplier $= \frac{1}{0.1} = 10$. Maximum change in deposits = $10 000 × 10 = $100 000. (1)

   (c) Any TWO (1 mark each):

   • Cash leakage: the public keeps part of the loans as cash.
   • Excess reserves: banks keep more reserves than required.
   • Insufficient demand for loans: there are not enough creditworthy borrowers.
6. Question 63 marks

   The nominal interest rate on a loan is 5% and the expected inflation rate is 3%. (a) Find the expected real interest rate. (b) If the actual inflation rate turns out to be 6%, explain whether the borrower or the lender gains.

   Show worked solution

   (a) Expected real interest rate = 5% − 3% = 2%. (1)

   (b) The actual real interest rate = 5% − 6% = −1%, lower than expected. (1) The money repaid has less purchasing power than planned, so the borrower gains and the lender loses. (1)