Sample Quizzes For Preparation: Money and Banking

A2 Level Economics – Topic 9.4: Money and Banking

Question 1: What is the most essential function of money in an advanced economy?

A. Unit of account
B. Store of value
C. Medium of exchange
D. Standard of deferred payment

Question 2: Which of the following is NOT a characteristic of good money?

A. Durability
B. Portability
C. High production cost
D. Divisibility

Question 3: Which component is included in the definition of narrow money?

A. Time deposits
B. Term deposits
C. Savings accounts
D. Demand deposits

Question 4: Which function of money helps to compare the value of goods and services?

A. Store of value
B. Unit of account
C. Medium of exchange
D. Standard of deferred payment

Question 5: What does the equation MV = PT represent?

A. Marginal utility theory
B. Loanable funds theory
C. Quantity theory of money
D. Liquidity preference theory

Question 6: In MV = PT, what does T represent?

A. Time
B. Taxes
C. Transactions or Real Output
D. Treasury value

Question 7: Which assumption underlies the classical quantity theory of money?

A. Price level is variable
B. Money supply is irrelevant
C. Velocity of circulation is constant
D. Government spending is fixed

Question 8: Which of the following is a liability of a commercial bank?

A. Loans made to customers
B. Government bonds held
C. Customers’ deposits
D. Property owned by the bank

Question 9: A savings account is best associated with which function of commercial banks?

A. Investment
B. Providing equity
C. Providing deposit facilities
D. Conducting fiscal policy

Question 10: Overdrafts are a form of what kind of banking service?

A. Long-term investment
B. Loaning money
C. Reserve banking
D. Risk management

Question 11: What is the function of a reserve ratio?

A. Prevent money laundering
B. Minimize bank profitability
C. Maintain bank liquidity
D. Maximize lending

Question 12: The capital ratio measures what?

A. Customer profitability
B. Proportion of equity to total deposits
C. Bank’s equity to risk-weighted assets
D. Loans issued as percentage of savings

Question 13: Which of the following is NOT a primary objective of commercial banks?

A. Liquidity
B. Security
C. Profitability
D. Tax minimization

Question 14: What is the credit multiplier formula?

A. 1 / inflation rate
B. 1 / reserve ratio
C. Reserve ratio × GDP
D. Nominal interest rate / inflation

Question 15: Quantitative easing typically involves:

A. Selling government bonds to banks
B. Increasing taxation to reduce debt
C. Buying assets to inject liquidity
D. Reducing interest rates manually

Question 16: Which item directly increases the domestic money supply?

A. Trade surplus
B. Deflation
C. Increased exports
D. Commercial bank lending

Question 17: Which is NOT a cause of changes in the money supply?

A. Credit creation
B. Deficit financing
C. Multiplier leakages
D. Balance of payments

Question 18: Which policy would most likely reduce inflation?

A. Expansionary fiscal policy
B. Decrease in interest rates
C. Open market purchase of securities
D. Increasing reserve requirements

Question 19: The liquidity preference theory explains:

A. Why velocity is unstable
B. Demand for money based on interest rate
C. Exchange rate volatility
D. Determinants of supply of money

Question 20: Which motive is least relevant for a millionaire investor holding cash?

A. Transaction
B. Precautionary
C. Speculative
D. Liquidity trap

Question 21: In liquidity preference theory, what happens when interest rates rise?

A. Money demand increases
B. Money demand decreases
C. Velocity of circulation falls
D. Price level increases

Question 22: Loanable funds theory assumes interest rates are determined by:

A. Government policy
B. Supply and demand for money
C. Fiscal injections
D. Foreign exchange reserves

Question 23: Which theory assumes money supply is fixed and vertical?

A. Loanable funds theory
B. Keynesian money market
C. Demand-pull inflation theory
D. Phillips Curve

Question 24: Which factor shifts the money demand curve to the right?

A. Higher interest rates
B. Lower income levels
C. Higher GDP/income
D. Increased taxes

Question 25: Which statement about commercial banks is TRUE?

A. They create money by printing notes
B. They are owned by central governments
C. They lend more than their deposits
D. They create money through credit creation

Question 26: Which of these is a function of a central bank?

A. Issuing overdrafts
B. Creating fiscal policy
C. Supervising monetary policy
D. Offering high-interest savings

Question 27: In the loanable funds market, a fall in savings will:

A. Reduce interest rates
B. Increase investment
C. Increase interest rates
D. Increase inflation

Question 28: Which monetary policy tool directly affects the credit creation capacity of banks?

A. Open market operations
B. Government spending
C. Reserve requirement ratio
D. Public sector borrowing

Question 29: What is the aim of inflation-targeting policy?

A. Maximize employment
B. Stabilize exchange rate
C. Control price levels
D. Reduce trade deficit

Question 30: Why might interest rate changes be ineffective in a liquidity trap?

A. Money supply is too low
B. People hold onto cash despite low rates
C. Velocity of money is high
D. Banks refuse to issue loans at any cost

Answer Key and Detailed Explanations:

1. C ✔ – Medium of exchange is the core function enabling trade
2. C ✔ – High production cost is undesirable
3. D ✔ – Narrow money includes demand deposits
4. B ✔ – Unit of account enables price comparison
5. C ✔ – MV = PT is the quantity theory of money
6. C ✔ – T = volume of transactions or real output
7. C ✔ – Constant V and T are key assumptions
8. C ✔ – Deposits are liabilities for banks
9. C ✔ – Savings accounts are deposit facilities
10. B ✔ – Overdrafts are a type of short-term loan
11. C ✔ – Reserve ratio helps banks maintain liquidity
12. C ✔ – Capital ratio measures equity vs risk-weighted assets
13. D ✔ – Tax minimization is not a core banking objective
14. B ✔ – Multiplier = 1 / reserve ratio
15. C ✔ – QE increases liquidity by buying assets
16. D ✔ – Lending increases the money supply
17. C ✔ – Multiplier leakages reduce effects, not a cause
18. D ✔ – Higher reserve ratio limits credit, reducing inflation
19. B ✔ – Liquidity preference explains money demand via interest
20. A ✔ – Transaction motive is minor for wealthy individuals
21. B ✔ – Higher rates → lower demand for holding cash
22. B ✔ – Loanable funds theory: savings vs investment
23. B ✔ – Keynesian theory assumes fixed money supply
24. C ✔ – Higher income → greater money demand
25. D ✔ – Credit creation = money supply expansion
26. C ✔ – Central banks manage monetary policy
27. C ✔ – Lower savings = fewer funds = higher interest
28. C ✔ – Reserve ratio affects banks’ lending power
29. C ✔ – Inflation targeting aims to stabilize price level
30. B ✔ – In liquidity traps, people hold cash → policy ineffective