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AP Intermediate 2nd Year Money and Banking — practice questions

Explore 24 free Money and Banking questions in AP Intermediate 2nd Year Economics. Open each question or exercise to read its content, reference answers and available explanation.

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Money and Banking questions and exercises with answers

Showing questions 1–24 of 24.

How does an outright open market operation differ from a repo?Read the answer and worked solution →The banking system can create credit primarily because depositorsRead the answer and worked solution →In the RBI's measures of money supply, M1 is defined asRead the answer and worked solution →Which pair of monetary aggregates is classified as broad money?Read the answer and worked solution →Which measure of money supply is the one most commonly used?Read the answer and worked solution →Income of Rs 100 arrives on day one and is spent evenly through the month. The average transaction demand for money isRead the answer and worked solution →Money serving as an intermediary between the buyer and the seller is money acting as a:Read the answer and worked solution →The second function of money named is that money must serve as a:Read the answer and worked solution →Money serving as the ruler by which we measure values is money as a:Read the answer and worked solution →How many definitions of the money supply are given?Read the answer and worked solution →M1 is defined as coins and currency in circulation, traveler's checks and:Read the answer and worked solution →M2 is described as a definition of money that is, compared with M1:Read the answer and worked solution →M2 includes everything in M1 but also adds other types of:Read the answer and worked solution →Savings deposits are described as bank accounts on which you cannot:Read the answer and worked solution →Checkable deposits are counted in M1 because they can easily be used as a:Read the answer and worked solution →A world without money would require what economists call a double coincidence of:Read the answer and worked solution →Banks are described as a critical intermediary in what is called the:Read the answer and worked solution →A balance sheet is described as an accounting tool that lists assets and:Read the answer and worked solution →Net worth is defined as the asset value minus:Read the answer and worked solution →In a multi-bank system, the amount of money the system can create is determined using the:Read the answer and worked solution →A bank's reserves are classified on its balance sheet as:Read the answer and worked solution →Savings deposits sit in M2 rather than M1 because they cannot directly serve as a:Read the answer and worked solution →Cowrie shells used for centuries as a medium of exchange are an example of:Read the answer and worked solution →An economy where every trade needs a double coincidence of wants is best described as one using:Read the answer and worked solution →

Worked practice questions

How does an outright open market operation differ from a repo?

  1. It is conducted by commercial banks
  2. Its effect on money is permanent
  3. It is settled only in foreign currency
  4. It applies only to equity shares
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Correct answer: B. Its effect on money is permanent

1. In an outright operation the central bank buys or sells securities with no promise to reverse the trade. 2. The money injected or absorbed therefore stays in or out of the system. 3. So the effect is **permanent**, unlike a repo, which specifies a date and price for the reverse leg. 4. Both instruments deal in government securities and both are conducted by the central bank, so the remaining options misstate the mechanics. _Source: syllabus Introductory Macroeconomics, Ch 3 "Money and Banking", section 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY_

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The banking system can create credit primarily because depositors

  1. must give one year's notice
  2. earn no interest on deposits
  3. do not all withdraw at the same time
  4. are legally barred from withdrawing
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Correct answer: C. do not all withdraw at the same time

1. A bank holds deposits it has promised to repay on demand. 2. In practice **not every depositor withdraws at once**. 3. So a bank can safely lend out part of those funds, and the loan reappears as a new deposit. 4. That repetition is what creates credit. Depositors are not barred from withdrawing, which is precisely why a reserve is still required. _Source: syllabus Introductory Macroeconomics, Ch 3 "Money and Banking", section 3.3 MONEY CREATION BY BANKING SYSTEM_

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In the RBI's measures of money supply, M1 is defined as

  1. currency plus time deposits
  2. demand deposits alone
  3. currency plus post office savings
  4. currency plus demand deposits
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Correct answer: D. currency plus demand deposits

1. CU stands for currency held by the public and DD for demand deposits with banks. 2. M1 = **CU + DD**. 3. Adding post office savings deposits gives M2, and adding net time deposits of commercial banks gives M3. 4. Time deposits are therefore excluded from M1, which is what makes the second option wrong. _Source: syllabus Introductory Macroeconomics, Ch 3 "Money and Banking", section 3.2 DEMAND FOR MONEY AND SUPPLY OF MONEY_

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