Chapter 14 Money and Banking: Business Essentials, Canadian Edition, 9e (Ebert)

Business Essentials, Canadian Edition, 9e (Ebert)
Chapter 14 Money and Banking
14.1 Multiple Choice Questions
1) Which of the following is a form of money?

A) Japanese yen
B) Bonds
C) A gold medallion
D) IBM common stock
E) A credit card
Answer: A
Diff: 2 Type: MC Page Ref: 310
Skill: Comprehension
Objective: 14.1
2) Money is
A) important in a market economy, but not in a command economy.
B) tokens that represent a countries resources that are accepted in every place of the world.
C) any object generally accepted by people as payment for goods and services.
D) that with which an individuals' efforts must be rewarded.
E) wealth.
Answer: C
Objective: 14.1
3) What caused the decline of barter as a means of obtaining something needed by a consumer?
A) Development of the central bank system
B) The discovery of gold
C) The invention of the credit card
D) The use of bonds
E) The introduction of money
Answer: E
Objective: 14.1
1
Copyright © 2020 Pearson Canada Inc.
4) All of the following are criteria for something to be considered as money except
A) divisibility.
B) stability.
C) durability.
D) portability.
E) value.
Answer: E
Objective: 14.1
5) The characteristics of money are

A) divisible, interchangeable, portable, and exchangeable.
B) durable, paper, coin, and stable.
C) interchangeable, divisible, paper, and banks.
D) durable, divisible, stable, and portable.
E) portable, divisible, durable, and interchangeable.
Answer: D
Objective: 14.1
6) Since a cow is large, bulky, and hard to handle, it fails to meet the money criterion of being
A) stable.
B) portable.
C) divisible.
D) durable.
E) valuable.
Answer: B
Objective: 14.1
7) Which of the following best describes the portability characteristic of money?

A) It neither dies nor spoils, and if it wears out, it can be replaced.
B) Units of money can be matched with the value of goods.
C) It can be exchanged across national borders.
D) It allows people to measure the relative value of goods and services.
E) It is light and easy to handle.
Answer: E
Objective: 14.1
2
8) Because meat spoils, it fails to meet the money criterion of being
A) valuable.
B) divisible.
C) stable.
D) durable.
E) portable.
Answer: D
Objective: 14.1
9) Which of the following is a consequence of the divisibility characteristic of money?

A) Units of money do not expire after a certain time limit.
B) Units of money can be accurately matched with the value of goods.
C) Units of money are easily carried.
D) Units of money have relatively stable value.
E) Units of money of different nations are easily converted to other units of money.
Answer: B
Objective: 14.1
10) Which of the following best describes the stability characteristic of money?
B) Units of money of different nations are easily converted to other units of money.
C) Units of money can be matched with the value of goods.
D) Units of money allow people to measure the relative value of goods and services.
E) Units of money have relatively constant value.
Answer: E
Objective: 14.1
11) Which of the following best describes the durability characteristic of money?
B) Units of money can be matched with the value of goods.
C) Units of money allow people to measure the relative value of goods and services.
D) Units of money of different nations are easily converted to other units of money.
E) Units of money have lasting value.
Answer: A
Objective: 14.1
3
12) Depending on the time of the year, meat may be in short supply thus violating the money
criterion of being
A) durable.
B) stable.
C) portable.
D) valuable.
E) divisible.
Answer: B
Objective: 14.1
13) A dollar can be exchanged for four quarters thus demonstrating that it is
A) durable.
B) stable.
C) divisible.
D) portable.
E) valuable.
Answer: C
Objective: 14.1
14) Because the Canadian dollar varies only slightly in its ability to purchase goods it is
considered
A) divisible.
B) stable.
C) valuable.
D) portable.
E) durable.
Answer: B
Objective: 14.1
15) If today's currency wears out it can be replaced, thus demonstrating that it is
A) portable.
B) divisible.
C) durable.
D) stable.
E) valuable.
Answer: C
Objective: 14.1
4
16) The expression "$1000 worth of clothes" represents
A) a unit of account.
B) a store of value.
C) a medium of exchange.
D) the stability of money.
E) the durability of money.
Answer: A
Objective: 14.1
17) Money frees society from a system of barter. In doing so, money is performing which of the
following functions?
A) Store of value
B) Measure of worth
C) Unit of account
D) Determination factor
E) Medium of exchange
Answer: E
Objective: 14.1
18) An order instructing the bank to pay a given sum to a specified person or firm is
A) a time deposit.
B) currency.
C) a bank rate.
D) a term deposit.
E) a cheque.
Answer: E
Skill: Knowledge
Objective: 14.1
19) Which of the following influences the value of money?

A) The supply of money
B) Barter
C) Durability
D) Divisibility
E) Portability
Answer: A
Objective: 14.1
5
20) When does the value of money increase?
A) When money serves as a store of value
B) When the supply of money is stable
C) When money is durable
D) When the money supply is low
E) When the money supply increases
Answer: D
Objective: 14.1
21) Which of the following is contained in the M-1 measurement of the money supply?
A) The number of new automobiles produced in the nation
B) Currency and demand deposits
C) Credit card cash advances
D) The number of new homes started in the month
E) Time deposits
Answer: B
Skill: Knowledge
Objective: 14.1
22) Which of the following is not part of the M-1 supply?

A) Currency at hand
B) Currency amount of written cheques
C) Currency available through a debit card
D) Currency in chequing accounts
E) Currency value of time deposits
Answer: E
Skill: Knowledge
Objective: 14.1
23) As of April 2018, the value of M-1 was

A) $38.5 million.
B) $987 million.
C) $877 billion.
D) $975.2 billion.
E) $1.6 trillion.
Answer: C
Skill: Knowledge
Objective: 14.1
6
24) As of April 2018, the value of M-2 was
A) $345 million.
B) $443.5 million.
C) $1596 billion.
D) $212.4 billion.
E) $967.5 billion.
Answer: C
Skill: Knowledge
Objective: 14.1
25) Which of the following is not part of the M-2 money supply?
A) Debit card account
B) Time deposits
C) Money market mutual funds
D) Savings account
E) Credit card account
Answer: E
Skill: Knowledge
Objective: 14.1
26) If Chris takes the money from her paycheque and gives half of it to her landlord to pay last
month's rent, how is she using the money?
A) As a unit of account
B) As a store of value
C) As a source of currency
D) As a medium of exchange
E) As a standard of value
Answer: D
Objective: 14.1
27) Ken and Tina have decided to put $10 in a jar every week until they have saved enough to
buy a new dining room set. How are they primarily using this money?
A) As a unit of account
B) As a store of value
C) As a source of currency
D) As a standard of value
E) As a medium of exchange
Answer: B
Objective: 14.1
7
28) Stephen got his paycheque on Friday. After a good time at the ballgame on Saturday, he
purchased some groceries, bought a new pair of pants and made his car payment. This illustrates
the ________ function of money.
A) store of value
B) basis for banking system
C) medium of exchange
D) payment for labour
E) unit of account
Answer: C
Objective: 14.1
29) Money, in the form of currency, can be used for future purchases and thus illustrates the
________ function of money.
A) basis for banking system
B) store of value
C) medium of exchange
D) payment for labour
E) unit of account
Answer: B
Objective: 14.1
30) Scott saw Laura's paycheque and discovered that she makes $200 a month more than he
does. He concludes that her job must be more important than his. This illustrates the ________
function of money.
A) store of value
B) medium of exchange
C) payment for labour
D) unit of account
E) basis for banking system
Answer: D
Objective: 14.1
8
31) Money lets you measure the relative values of goods and services. In so doing, money is
performing which of the following functions?
A) Store of value
B) Medium of exchange
C) Determination factor
D) Monetary flagging
E) Unit of account
Answer: E
Objective: 14.1
32) Which of the following is not part of the M-1 money supply?
A) Credit cards
B) Currency
C) Demand deposits
D) Cheques
E) All of these are part of M-1.
Answer: A
Objective: 14.1
33) Which of the following is considered part of the M-1 money supply?
A) Stocks in a major auto company
B) Bonds
C) Certificates of deposit
D) Term deposits
E) These options are not part of the M-1 money supply.
Answer: E
Skill: Knowledge
Objective: 14.1
34) Joe is a research economist for the Royal Bank. His most reliable measure of money would
be
A) currency plus demand deposits.
B) M-2.
C) demand deposits.
D) M-1.
E) currency.
Answer: B
Objective: 14.1
9
35) Which of the following is contained in the M-1 measurement of the money supply?
A) The number of new automobiles produced in the nation in the previous month
B) The number of new homes started in the month
C) Time deposits
D) Credit card balances
E) Cash and the money in chequing accounts
Answer: E
Skill: Knowledge
Objective: 14.1
36) The M-2 measurement of the money supply includes everything in M-1 plus
A) time deposits.
B) money market mutual funds.
C) time deposits, money market mutual funds, and savings deposits.
D) corporate bonds, corporate stocks, and commercial paper.
E) corporate stocks, money market mutual funds, and corporate bonds.
Answer: C
Skill: Knowledge
Objective: 14.1
37) Which of the following accounts for nearly all the nation's money supply?
A) M-1
B) Currency
C) Demand deposits
D) Currency plus demand deposits
E) M-2
Answer: E
Skill: Knowledge
Objective: 14.1
38) Which of the following is not included in either M-1 or M-2?

A) Certificates of Deposit
B) Time deposits
C) Savings accounts
D) Credit cards
E) Chequing accounts
Answer: D
Skill: Knowledge
Objective: 14.1
10
39) ________ are operated by investment companies that bring together pools of assets from
many investors and purchases a collection of short-term, low-risk financial securities.
A) All mutual funds
B) Global development funds
D) Schedule B banks
E) Pension funds
Answer: C
Skill: Knowledge
Objective: 14.1
40) All of the following are true about credit cards except
A) credit cards are a store of value.
B) credit cards are quite convenient.
C) 2 to 5 percent of total credit-sales dollars goes to card issuers.
D) credit cards serve as a temporary medium of exchange.
E) credit cards are extremely profitable for the companies that issue them.
Answer: A
Diff: 2 Type: MC Page Ref: 311-312
Objective: 14.1
41) Experts are increasingly sounding a warning about mounting credit card debt. Given that,
which of the following would be an unwise strategy for a credit card company?
A) Making sure the company's credit card rules are clear and easy-to-understand
B) Charging the same interest rate as other credit card companies
C) Ensuring that fees for exceeding credit limits are no higher than necessary
D) Increasing the value of the promotional items that are used to attract new credit card
customers
E) Offering free debt counselling to credit card customers
Answer: D
Objective: 14.1
42) You are applying for a bank loan and the loan officer wants to know about your personal
wealth. She is inquiring about
A) the money you have in your wallet.
B) the money in your chequing and savings account.
C) the money you have invested.
D) the amount of equity you have in your home.
E) all of these.
Answer: E
Objective: 14.1
11
43) Joanne has money in a ________; this requires notice prior to making a withdrawal and
cannot be transferred to others by a written cheque.
A) demand deposit
B) money market fund
C) jar
D) certified cheque
E) time deposit
Answer: E
Objective: 14.1
44) Canadians hold a total of ________ credit cards.

A) 5 million
B) 20.6 million
C) 43.1 million
D) 74.3 million
E) 190.8 million
Answer: D
Skill: Knowledge
Objective: 14.1
45) ________ are operated by investment companies that bring together pools of assets from
many investors.
A) Term deposits
B) Demand deposits
C) Time deposits
D) Money market mutual funds
E) Savings deposits
Answer: D
Skill: Knowledge
Objective: 14.1
12
46) Canadian Heritage, an investment company that groups together pools of assets, showed an
average return of 3.75% for the last three months. Canadian Heritage set up ________ for its
investors.
A) time deposits
B) money market mutual funds
C) demand deposits
D) hedge funds
E) term deposits
Answer: B
Objective: 14.1
47) Which of the following is correct regarding credit cards?

A) They are a store of value.
B) They are not a money substitute.
C) They are a permanent medium of exchange.
D) They are becoming more important but are still not a major factor in the purchase of
consumer goods.
E) They are often referred to as "plastic money."
Answer: E
Objective: 14.1
48) Which of the following is not one of the "four financial pillars"?
A) Investment dealers
B) Life insurance companies
C) Credit card companies
D) Trust companies
E) Chartered banks
Answer: C
Skill: Knowledge
Objective: 14.2
13
49) When buying from a supplier in France, an Ontario-based company has arranged for its bank
to pay the supplier the cost of the desired material when it has passed customs in Canada. Which
of the following terms is this type of bank promise called?
A) Banker's acceptance
B) Bank trust service
C) Certified cheque
D) Letter of credit
E) Currency exchange agreement
Answer: D
Skill: Knowledge
Objective: 14.2
50) The main function of financial institutions is to

A) offer trust services.
B) create money.
C) provide loans to small businesses.
D) offer chequing and savings accounts.
E) facilitate the flow of money from sectors with surpluses to those with deficits.
Answer: E
Objective: 14.2
51) Deregulation of banks has caused banks to

A) decrease the amount of funds they lend to small business.
B) abandon plans for expansion into foreign markets.
C) stop issuing commercial paper.
D) increase their level of foreign ownership.
E) diversify to provide a wider array of financial products to their clients.
Answer: E
Objective: 14.2
52) The largest bank in Canada (in terms of sales revenue) is

A) Canadian Imperial Bank of Commerce.
B) Bank of Montreal.
C) Toronto-Dominion Bank.
D) Royal Bank of Canada.
E) National Bank.
Answer: D
Skill: Knowledge
Objective: 14.2
14
53) Which of the following changes have occurred in banking because of deregulation?
A) Large business firms have increased their reliance on bank loans.
B) Banks can now make whatever profits they can manage.
C) Banks are providing a narrower and more highly focused array of financial products to their
customers than they did before deregulation.
D) Banks have increased the training given to employees.
E) Bank profits are now being sent to foreign financial companies.
Answer: D
Objective: 14.2
54) A ________ is a privately owned, profit-seeking firm that serves individuals, non-business
organizations, and businesses as a financial intermediary.
A) pension fund
B) credit union
C) chartered bank
D) trustee
E) trust company
Answer: C
Skill: Knowledge
Objective: 14.2
55) Which of the following statements about chartered banks is false?

A) A chartered bank is privately owned.
B) A chartered bank is profit-seeking.
C) Chartered banks are the main source of short-term loans for businesses.
D) A chartered bank is required to use funds obtained from savers to purchase portfolios of
government bonds.
E) A chartered bank serves individuals, non-business organizations, and businesses as a financial
intermediary.
Answer: D
Objective: 14.2
56) The principal source of short-term loans for business firms is

A) contractual savings institutions.
B) trust companies.
C) chartered banks.
D) investment companies.
E) loans from relatives of the owners.
Answer: C
Skill: Knowledge
Objective: 14.2
15
57) Canada has a ________ banking system.
A) multi-sectoral
B) governmental
C) unitary
D) bilingual
E) branch
Answer: E
Skill: Knowledge
Objective: 14.2
58) In February 2018, Canadian chartered banks had assets totalling

A) $112 billion.
B) $298 billion.
C) $563 billion.
D) $2.39 trillion.
E) $4.65 trillion.
Answer: D
Skill: Knowledge
Objective: 14.2
59) The prime rate of interest is the rate charged

A) on time deposits.
B) on consumer installment loans.
C) to successful businesses.
D) on all mortgages and occasionally on car loans.
E) to the riskiest borrowers.
Answer: C
Skill: Knowledge
Objective: 14.2
60) The interest rate available to a bank's most creditworthy customers is the
A) discount rate.
B) optimal rate.
C) key rate.
D) funds rate.
E) prime rate.
Answer: E
Skill: Knowledge
Objective: 14.2
16
61) A card that allows an individual to transfer money between bank accounts is a(n)
A) smart card.
B) e-card.
C) NetCash.
D) e-cash.
E) debit card.
Answer: E
Skill: Knowledge
Objective: 14.2
62) When a bank makes your monthly bill payments and manages your investment portfolio, this
is known as
A) a trust service.
B) a smart card.
C) an ABM.
D) a direct deposit.
E) a point-of-sale transfer.
Answer: A
Skill: Knowledge
Objective: 14.2
63) There are about ________ debit card transactions each year on the Interac network.
A) 5.7 billion
B) 100 million
C) 500 million
D) 1.6 billion
E) 17.3 billion
Answer: A
Skill: Knowledge
Objective: 14.2
64) When credit and debit card information is embedded in smartphones, you have
A) a mobile digital wallet.
B) a system which is designed to allow hackers to steal your money.
C) a smart card.
D) a point-of-sale transfer system.
E) a debit card.
Answer: A
Objective: 14.2
17
65) After using her ________ card to make a purchase, Janet checks an electronic display to
determine how much money is left on the card.
A) debit
B) smart
C) direct purchase
D) direct deposit
E) credit
Answer: B
Objective: 14.2
66) A(n) ________ is a bank's promise to pay a specified amount of money at a future date.
A) bankers' acceptance
B) electronic funds transfer
C) promissory note
D) bank loan
E) letter of credit
Answer: A
Skill: Knowledge
Objective: 14.2
67) What is a debit card?

A) The same thing as a demand deposit
B) Money that moves along multiple channels of consumers and businesses via digital electronic
transmissions
C) A type of plastic money that immediately reduces the balance in the user's bank account when
it is used
D) An electronic purse that can be programmed with electronic money at ATM machines
E) The same thing as a time deposit
Answer: C
Objective: 14.2
68) Jack is one of the bank's most creditworthy customers. The interest rate available to Jack is
the
A) reserve requirement rate.
B) overnight rate.
C) prime rate.
D) discount rate.
E) rediscount rate.
Answer: C
Objective: 14.2
18
69) Which of the following is most likely to get an unsecured loan?
A) A retail florist shop with collateral
B) A wholesale grocer with a marginal credit history
C) A lawyer with collateral
D) A large manufacturing firm with an excellent credit rating
E) A farmer
Answer: D
Objective: 14.2
70) Which of the following is correct with regard to Canadian banks?

A) They are not allowed to provide financing to small businesses because those businesses are
too risky.
B) They are not allowed to sell shares of stock to the general public.
C) They are allowed to provide insurance services, but not in their bank branches.
D) They are protected from competition from foreign controlled banks.
E) All of these are correct.
Answer: C
Objective: 14.2
71) Which of the following reasons is the primary motivator for a bank to try to acquire new
depositors?
A) A new deposit account will make more funds available to pay the interest on other deposit
accounts.
B) A new deposit account will make more funds available to pay the bank's employees.
C) A new deposit account will make more funds available to give out in loans.
D) A new deposit account will make more funds available to give out in dividends to its
investors.
E) A new deposit account will make more funds available to facilitate brokerage transactions.
Answer: C
Objective: 14.2
19
72) If the reserve requirement was 10 percent, a $100 deposit could result in a ________ increase
in new deposits for all banks in the system.
A) $200
B) $500
C) $1000
D) $10 000
E) $100 000
Answer: C
Skill: Application
Objective: 14.2
73) Which of the following statements best explains how financial institutions create money?
A) By opening new chequing accounts and giving more people access to readily available cash,
financial institutions expand the money supply.
B) By issuing money through government contracts, financial institutions expand the money
supply.
C) By taking deposits and loaning out these funds, financial institutions expand the money
supply.
D) By collecting interest on its accounts through investments, financial institutions expand the
money supply.
E) By giving interest from its accounts to its clients, financial institutions expand the money
supply.
Answer: C
Objective: 14.2
74) Which of the following might the Bank of Canada do to increase the money supply?
A) Sell government securities
B) Increase the bank rate
C) Impose a new tax
D) Buy government securities
E) Increase the reserve rate
Answer: D
Objective: 14.3
20
75) Which of the following will result in an decrease of the money supply?
A) An increase in taxes
B) Purchase of securities by the Bank of Canada
C) A decrease in the bank rate
D) An increase in the discount rate
E) A decrease in reserve requirements
Answer: D
Objective: 14.3
76) The interest rate at which chartered banks can borrow from the Bank of Canada is the
A) preferred rate.
B) prime rate.
C) prime plus 1 percent.
D) bond rate.
E) bank rate.
Answer: E
Skill: Knowledge
Objective: 14.3
77) Which of the following statements best describes why a decrease in reserve requirements
often results in an increase in the money supply?
A) A decrease in reserve requirements gives banks more money to better determine their interest
rates.
B) A decrease in reserve requirements gives banks more money to pay off their debts.
C) A decrease in reserve requirements gives banks more money to lend out.
D) A decrease in reserve requirements gives banks more money to offer in dividend payments to
their clients.
E) A decrease in reserve requirements gives banks more money to reward their employees for
meritorious financial ventures.
Answer: C
Skill: Knowledge
Objective: 14.3
78) The main purpose of the Bank of Canada is to

A) set prime interest rates.
B) assist in the merger of troubled banks with healthier institutions.
C) bail out banks like the Northland and CCB.
D) deregulate the banking industry.
E) control the nation's money supply.
Answer: E
Objective: 14.3
21
79) When the Bank of Canada wants to slow down business activity and decrease the money
supply, it
A) lowers the bank rate.
B) lowers the reserve requirement.
C) decreases government spending.
D) buys government securities.
E) raises the bank rate.
Answer: E
Objective: 14.3
80) When the Bank of Canada wants to stimulate business activity and increase the money
supply, it
A) buys government securities.
B) raises the reserve requirement.
C) decreases government spending.
D) raises the bank rate.
E) sells government securities.
Answer: A
Objective: 14.3
81) Which of the following Bank of Canada actions would be consistent with an expansionary
policy?
A) Sell government securities
B) Raise the margin requirement
C) Buy government securities
D) Raise the reserve requirement
E) Raise the bank rate
Answer: C
Objective: 14.3
82) If the Bank of Canada wanted to stimulate business activity, it could ________, but if it
wanted to slow down business activity it could ________.
A) sell government securities; raise the reserve requirement
B) raise the margin requirement; raise the reserve requirement
C) buy government securities; sell government securities
D) sell government securities; buy government securities
E) raise the bank rate; lower the bank rate
Answer: C
Objective: 14.3
22
83) If the Bank of Canada wants to decrease the money supply, it can ________; if it wants to
increase the money supply, it can ________.
A) sell government securities; buy government securities
B) raise the bank rate; buy government securities
C) increase the value of the Canadian dollar; decrease the value of the Canadian dollar
D) lower the bank rate; sell government securities
E) buy government securities; sell government securities
Answer: A
Objective: 14.3
84) An alternative bank that safeguards funds and estates in its care is called a
A) trustee.
B) credit union.
C) trust company.
D) pension fund.
E) Schedule B bank.
Answer: C
Skill: Knowledge
Objective: 14.4
85) Which of the following provides cooperative savings and lending services to its members?
A) Schedule B bank
B) Trustee
C) Credit union
D) Trust company
E) Pension fund
Answer: C
Skill: Knowledge
Objective: 14.4
86) A corporation selling bonds to investors will often use a ________ to protect the
bondholders' interests.
A) trust company
B) chartered bank
C) credit union
D) caisse populaire
E) finance company
Answer: A
Skill: Knowledge
Objective: 14.4
23
87) A ________ company shares risks with its policyholders in return for payment of a premium.
A) life insurance
B) venture capital
C) credit union
D) sales finance
E) factoring
Answer: A
Skill: Knowledge
Objective: 14.4
88) Geoff works for a company that buys accounts receivables from a firm for less than face
value but collects the face value of the accounts. Geoff works for a
A) sales finance company.
B) credit union.
C) trust company.
D) consumer finance company.
E) factoring company.
Answer: E
Objective: 14.4
89) In 2017, venture capital firms in Canada raised

A) $40 million.
B) $95 million.
C) $507 million.
D) $3.5 billion.
E) $22.4 billion.
Answer: C
Skill: Knowledge
Objective: 14.4
90) A financial corporation that specializes in financing installment purchases made by

individuals and firms is called a
A) consumer finance company.
B) factoring company.
C) credit union.
D) sales finance company.
E) commercial finance company.
Answer: D
Skill: Knowledge
Objective: 14.4
24
91) Suppose that, as a small business, you decide to buy a new copying machine. Since you
cannot afford to pay cash, you finance the machine over 12 months. The copy machine itself will
serve as loan collateral. The major source of credit is a(n)
A) investment company.
B) sales finance company.
C) venture capital firm.
D) consumer finance company.
E) factoring company.
Answer: B
Objective: 14.4
92) A pool of funds managed to provide retirement income for its members is called a(n)
A) trust service.
B) insurance company.
C) finance company.
D) factoring company.
E) pension fund.
Answer: E
Skill: Knowledge
Objective: 14.4
93) ________ provides funds for new or expanding firms thought to have significant potential
and may demand an ownership stake in the business.
A) A pension fund
B) The International Monetary Fund (IMF)
C) A chartered bank
D) A global bank
E) A venture capital fund
Answer: E
Skill: Knowledge
Objective: 14.4
94) Financing a new innovative company, with a high potential growth ceiling, in an untested
business is risky, so the most likely route to financing would be to go to
A) a venture capital firm.
B) the Economic Development Bank.
C) an institutional lender.
D) the Industrial Development Bank.
E) a brokerage house.
Answer: A
Objective: 14.4
25
95) One function of investment dealers is to
A) manage pensions for large Canadian corporations.
B) create stability in the money supply.
C) provide equity start-up loans for small business.
D) underwrite new stock and bond issues.
E) provide debt financing to small businesses.
Answer: D
Skill: Knowledge
Objective: 14.4
96) Which of the following is correct with regard to government sources of funds for businesses?
A) The Business Development Bank of Canada helps small companies sell stock to the general
public.
B) The Export Development Corporation finances and insures export sales for Canadian
companies.
C) The Canada Mortgage and Housing Corporation makes mortgages available to businesses, but
it does not guarantee those mortgages.
D) The Department of Business Expansion gives grants for businesses that provide services, but
not for business that provide physical products.
E) All of these are correct.
Answer: B
Objective: 14.4
97) The ________ makes term loans, primarily to small firms judged to have growth potential
but which are unable to secure funds on reasonable terms from traditional sources.
A) International Monetary Fund
B) Business Development Bank of Canada
C) Department of Business Expansion
D) Government Pension Fund
E) Export Development Corporation
Answer: B
Skill: Knowledge
Objective: 14.4
26
98) The value of the Canadian dollar
A) is always valued at the same exchange rate.
B) typically trades above the U.S. dollar.
C) typically values at par with the U.S. dollar.
D) reflects the overall supply and demand for Canadian dollars both at home and abroad.
E) none of these.
Answer: D
Objective: 14.5
99) Regarding the international payments process, which statement is true?

A) In international trade, money will flow from the country with the strongest currency to that of
the weakest.
B) The World Bank monitors the trade of its members to ensure that money is flowing properly
between the various countries.
C) The World Bank monitors the national banks of its members to ensure that money is flowing
properly between the various countries.
D) By international law, international trade must involve money flowing between two countries.
E) Money does not actually have to flow between two countries.
Answer: E
Objective: 14.5
100) Which of the following is the main justification for the World Bank to fund national
improvements by making loans to build roads and hospitals?
A) The resulting improvements will help stabilize the political situation, and hence the
international trade, of certain developing countries.
B) The resulting improvements will help increase the productive capacity, and hence the
C) The resulting improvements will help increase the population morale, and hence the
D) The resulting improvements will help increase the overall quality of life, and hence the
E) The resulting improvements will help increase the value of the currency, and hence the
Answer: E
Objective: 14.5
27
101) Which of the following describes the requirements that the International Monetary Fund has
made on certain developing countries?
A) That the government decrease spending in order to bring inflation under control
B) That private industries decrease prices in order to bring inflation under control
C) That the government increase loans in order to create more money in the local markets
D) That the local banks increase loans in order to create more money in the local markets
E) That the government and private industries partner in creating more jobs in the region
Answer: A
Objective: 14.5
102) The determination of whether a currency is overvalued or undervalued is usually based on a

comparison with
A) the Japanese yen.
B) the U.S. dollar.
C) the British pound.
D) the euro.
E) none of these.
Answer: B
Skill: Knowledge
Objective: 14.5
103) The law of one price says that

A) almost all countries will have a trade deficit.
B) identical products should sell for the same price in all countries.
C) a good must be available for the same price in every province in Canada.
D) the price of a Rolex watch is the same in all countries.
E) all currencies are overvalued.
Answer: B
Objective: 14.5
104) According to the Big Mac index,

A) Big Macs must be priced higher in China than in Canada.
B) the price of a Big Mac is used to determine if a given currency is overvalued or undervalued.
C) Big Macs are better than Mom's homemade hamburgers.
D) Big Macs are always cheaper in France than they are in Canada.
E) Big Macs are priced the same all over the world.
Answer: B
Objective: 14.5
28
105) Which of the following would not be expected when a country's currency becomes
overvalued?
A) Its export goods become too expensive.
B) Its high costs make the country less competitive.
C) Its exchange rate is higher than warranted by its economic conditions.
D) Fewer goods are purchased by other countries.
E) The costs of exported goods declines.
Answer: E
Objective: 14.5
106) The United Nations agency that provides a limited scope of financial services, such as
funding national improvements in developing countries is the
A) International Monetary Fund (IMF).
B) Interbank Bank.
C) World Bank.
D) Bank of Canada.
E) Global Bank.
Answer: C
Skill: Knowledge
Objective: 14.5
107) Which of the following is not a purpose of the International Monetary Fund?
A) Encourage development of a system for international payments
B) Promote social programs in nations suffering from negative trade balances
C) Encourage members to cooperate on international monetary issues
D) Promote the stability of exchange rates
E) Provide temporary short-term loans to member countries
Answer: B
Objective: 14.5
108) All of the following are purposes of the International Monetary Fund except
A) promoting the stability of exchange rates.
B) providing temporary loans to member countries.
C) encouraging members to cooperate on international monetary ideas.
D) equalizing exchange rates as much as possible to facilitate world trade.
E) encouraging development of a system for international payments.
Answer: D
Objective: 14.5
29
109) What is any object generally accepted by people as payment for goods and services?
A) Barter
B) Currency
C) Money
D) Capital
E) Asset
Answer: C
Skill: Knowledge
Objective: 14.1
ESL: Alternate/ESL
110) Which of the following is a characteristic of money?

A) Durability
B) Convertibility
C) Security
D) Compact
E) Flexible
Answer: A
Skill: Knowledge
Objective: 14.1
ESL: Alternate/ESL
111) Money lets us measure the relative value of goods and services. This demonstrates which of
the three functions of money?
A) Unit of account
B) Medium of exchange
C) Store of value
D) Net worth measurement
E) Wealth determinant
Answer: A
Skill: Knowledge
Objective: 14.1
ESL: Alternate/ESL
30
112) Paper money and coins issued by the government are
A) coinage.
B) cash.
C) legal tender.
D) currency.
E) counterfeit.
Answer: D
Skill: Knowledge
Objective: 14.1
ESL: Alternate/ESL
113) Which of the following is a deposit that requires prior notice to make a withdrawal and
cannot be transferred to others by cheque?
A) Secured deposit
B) Demand deposit
C) GIC
D) Certificate of deposit
E) Time deposit
Answer: E
Skill: Knowledge
Objective: 14.1
ESL: Alternate/ESL
114) Which of the following are funds operated by investment companies that bring together
pools of assets from many investors to buy short-term, low-risk financial securities?
A) Balanced funds
B) Global equity funds
D) Diversified funds
E) Pension funds
Answer: C
Skill: Knowledge
Objective: 14.1
ESL: Alternate/ESL
31
115) Which of the following is not one of the four financial pillars in Canada?
A) Chartered Banks
B) Life insurance companies
C) Bank of Canada
D) Investment dealers
E) Alternate banks
Answer: C
Skill: Knowledge
Objective: 14.2
ESL: Alternate/ESL
116) A privately owned, profit-seeking firm that serves individuals, non-business organizations
and businesses as a financial intermediary is a(n)
A) credit union.
B) trust company.
C) investment dealer.
D) chartered bank.
E) sales finance company.
Answer: D
Skill: Knowledge
Objective: 14.2
ESL: Alternate/ESL
117) Which of the following is the main source of short-term loans for business firms?
A) Credit unions
B) Investment dealers
C) Venture capital
D) Trade credit
E) Chartered banks
Answer: E
Skill: Knowledge
Objective: 14.2
ESL: Alternate/ESL
32
118) Making your monthly bill payments, managing your investment portfolio and managing
estates of deceased persons are all offered by many banks and are called
A) trust services.
B) investment services.
C) financial maintenance.
D) financial advocacy.
E) pension services.
Answer: A
Skill: Knowledge
Objective: 14.2
ESL: Alternate/ESL
119) A loan backed by collateral is which of the following?

A) Pledged
B) Unsecured
C) Secured
D) Factored
E) Defended
Answer: C
Skill: Knowledge
Objective: 14.2
ESL: Alternate/ESL
120) Large firms with excellent credit records pay the lowest rate of interest which is called the
A) prime rate.
B) bank rate.
C) overnight rate.
D) preferred rate.
E) rediscount rate.
Answer: A
Skill: Knowledge
Objective: 14.2
ESL: Alternate/ESL
33
121) Which of the following is the rate at which chartered banks can borrow from the Bank of
Canada?
A) Prime rate
B) Discount rate
C) Bank rate
D) Preferred rate
E) Common rate
Answer: C
Skill: Knowledge
Objective: 14.3
ESL: Alternate/ESL
122) If the Bank of Canada wants to increase the money supply, what can it do?
A) Buy government securities
B) Sell government securities
C) Raise the bank rate
D) Lower the prime rate
E) Raise taxes
Answer: A
Skill: Knowledge
Objective: 14.3
ESL: Alternate/ESL
123) Which of the following safeguards property like funds and estates?
A) Chartered bank
B) Credit union
C) Financial advisor
D) Trust company
E) Investment bank
Answer: D
Skill: Knowledge
Objective: 14.4
ESL: Alternate/ESL
34
124) A cooperative savings and lending association formed by a group with common interests is
known as which of the following?
A) Venture capital
B) Trust company
C) Caisse populaire
D) Chartered bank
E) Credit union
Answer: E
Skill: Knowledge
Objective: 14.4
ESL: Alternate/ESL
125) What type of company shares risk with its policyholders in return for a payment of
premiums?
A) Sales finance
B) Credit union
C) Factoring
D) Life insurance
E) Investment
Answer: D
Skill: Knowledge
Objective: 14.4
ESL: Alternate/ESL
126) What type of company buys accounts receivable from a firm for less than their face value
and then collects the face value of the receivables?
A) Factoring
B) Life insurance
C) Sales finance
D) Trust
E) Credit union
Answer: A
Skill: Knowledge
Objective: 14.4
ESL: Alternate/ESL
35
127) What type of company specializes in financing installment purchases made by individuals
or firms?
A) Factoring
B) Sales finance
C) Consumer finance
D) Trust
E) Credit union
Answer: B
Skill: Knowledge
Objective: 14.4
ESL: Alternate/ESL
128) What type of company provides funds for new or expanding firms thought to have
significant potential?
A) Consumer finance
B) Venture capital
C) Factoring
D) Sales finance
E) Investment bank
Answer: B
Skill: Knowledge
Objective: 14.4
ESL: Alternate/ESL
129) Which of the following accumulates money that will be paid out to plan subscribers?
A) Mutual fund
B) Sinking fund
C) Closed fund
D) Open fund
E) Pension fund
Answer: E
Skill: Knowledge
Objective: 14.4
ESL: Alternate/ESL
36
130) Which of the following make term loans primarily to smaller firms judged to have growth
potential but unable to secure funds at reasonable terms from traditional sources?
A) Sales finance company
B) Credit union
C) Business Development Bank of Canada
D) Consumer finance company
E) Startup funding bank
Answer: C
Skill: Knowledge
Objective: 14.4
ESL: Alternate/ESL
131) Which of the following is the principle that identical products should sell for the same price
in all countries?
A) Law of one price
B) Purchasing power parity
C) Global equality pricing
D) Antidumping principle
E) International price balancing
Answer: A
Skill: Knowledge
Objective: 14.5
ESL: Alternate/ESL
132) Which of the following is a United Nations agency that provides a limited scope of
financial services such as funding national improvements in undeveloped countries?
A) Planet Assistance Fund
B) International Monetary Fund
C) World Bank
D) Global Restoration Bank
E) World Trade Organization
Answer: C
Skill: Knowledge
Objective: 14.5
ESL: Alternate/ESL
37
133) A United Nations agency consisting of 188 nations that have combined resources to
promote stable exchange rates, provide temporary short-term loans and serve other purposes is
known as which of the following?
A) World Bank
B) International Monetary Fund
C) Global Equality Fund
D) Exchange Rate Equalization Agency
E) Planet Currency Stabilization Agency
Answer: B
Skill: Knowledge
Objective: 14.5
ESL: Alternate/ESL
14.2 Critical Thinking Questions
1) StarMart is a retail chain with more than 120 stores spread across the country. The company is
ready to enter into a co-branding agreement with Axiom Financial Services. StarMart's
customers will be provided with an Axiom-Star credit card providing them with reward points
every time they swipe their credit cards at StarMart. Cardholders will be able to redeem points
for special discounts, free merchandise, and exclusive services. StarMart is planning on a
targeted direct marketing campaign as well as promotional efforts on social media platforms. The
agreement essentially leverages StarMart's knowledge of consumer buying patterns and their
relationships with Axiom's access to financial information.
A senior manager argues that the negative perception associated with mounting credit card debt
will affect StarMart. Which of the following would be the most effective measure StarMart could
take to address this potential problem?
A) Offering to forgive all debt more than 90 days old
B) Making it clear that StarMart is a different entity than Axiom-Star
C) Pointing out the records and practices of the worst-behaved credit companies
D) Extending the expiration date of StarMart reward points
E) Extending credit only to those who are very likely to be able to pay their bills
Answer: E
Diff: 3 Type: MC
Skill: Analysis
38
2) StarMart is a retail chain with more than 120 stores spread across the country. The company is
ready to enter into a co-branding agreement with Axiom Financial Services. StarMart's
customers will be provided with an Axiom-Star credit card providing them with reward points
every time they swipe their credit cards at StarMart. Cardholders will be able to redeem points
for special discounts, free merchandise, and exclusive services. StarMart is planning on a
targeted direct marketing campaign as well as promotional efforts on social media platforms. The
agreement essentially leverages StarMart's knowledge of consumer buying patterns and their
relationships with Axiom's access to financial information.
A senior manager argues that the negative perception associated with mounting credit card debt
will affect StarMart. Which of the following would be the least effective measure StarMart could
take to address this potential problem?
A) Publicizing the company's policies in clear and easy-to-understand language
B) Charging no more than the typical interest rate for month-to-month debt
C) Ensuring that fees for exceeding credit limits are no higher than necessary
D) Increasing the value of the promotional items that attract new credit card customers
E) Offering free debt counselling to Axiom-Star customers
Answer: D
Diff: 3 Type: MC
Skill: Analysis
3) Subprime loans have higher interest rates than conventional loans. Subprime loans are
designed for borrowers with low credit scores who would not qualify for conventional loans. The
borrower pays a higher rate to compensate the lender for the greater risk of a default. Subprime
loans typically have adjustable rates, meaning that the interest rate can change over the life of the
loan. Borrowers who take out adjustable subprime loans usually try to keep the rate as low as
possible at the start of the loan, even when doing so would lead to higher payments over the
entire life of the loan. After many people defaulted on their subprime loans, research revealed
that the majority of people who took out subprime loans could have qualified for conventional
loans.
The statements above most strongly suggest that if all subprime loan borrowers had taken out the
loan that was most appropriate for their needs, then what would have been the outcome?
A) None of them would have taken out an adjustable loan.
B) None of them would have taken out a subprime loan.
C) Most of them would have paid less in interest.
D) Most of them would have taken out a conventional loan to cover any expenses not covered by
a subprime loan.
E) Most of them would have paid money at the start of the loan in order to get a reduced interest
rate over the life of the loan.
Answer: C
Diff: 3 Type: MC
Skill: Analysis
39
4) Subprime loans have higher interest rates than conventional loans. Subprime loans are
designed for borrowers with low credit scores who would not qualify for conventional loans. The
borrower pays a higher rate to compensate the lender for the greater risk of a default. Subprime
loans typically have adjustable rates, meaning that the interest rate can change over the life of the
loan. Borrowers who take out adjustable subprime loans usually try to keep the rate as low as
possible at the start of the loan, even when doing so would lead to higher payments over the
entire life of the loan. After many people defaulted on their subprime loans, research revealed
that the majority of people who took out subprime loans could have qualified for conventional
loans.
Taking out a subprime loan to buy a house is most likely to be a reasonable financial decision
when which of the following is true?
A) Qualifying for a conventional loan is impossible.
B) Owning a home is an important life goal for the borrower.
C) Adjustable rates are likely to be higher than fixed rates.
D) The borrower reasonably expects to have greater financial means in the near future.
E) The previous owner of the house took out a subprime loan.
Answer: D
Diff: 3 Type: MC
Skill: Analysis
5) Domino Grace is a financial services company. It has started using scientific principles of
management to analyze the compensation system for its financial advisors. Under the current
system, revenue goals are based on the financial advisors' performances in the previous year.
Domino Grace managers believe that the financial advisors could generate much more revenue if
they were encouraged to offer derivatives, a complex but potentially profitable investment
category.
Which of the following, if true, would strengthen the argument of Domino Grace's management?
A) Higher revenues would lead to higher profits for Domino Grace.
B) If the derivative investments perform poorly, managers at Domino Grace will not pay any
financial penalties.
C) Domino Grace financial advisors are well-trained in handling complicated investment
options.
D) Many other investment firms have offered derivatives.
E) Derivative investments are so complicated that most investors will not understand what they
are buying.
Answer: C
Diff: 3 Type: MC
Skill: Analysis
40
category.
Which of the following, if true, would weaken the argument of Domino Grace's management?
A) Competitors of Domino Grace have lured new customers by offering access to exotic new
investment options.
B) A new political administration is expected to pass new financial regulations affecting
derivative investments.
C) Derivative investments are similar to most investments in that when a trade is made, a gain on
one side is mirrored by a loss on the other.
D) Many of the investors who are interested in derivative investments are also interested in
traditional investments.
E) The opinions of Domino Grace stockholders are representative of the opinions of the
investment community in general.
Answer: B
Diff: 3 Type: MC
Skill: Analysis
category.
Suppose that investments in derivatives generated $5 million of revenue for Domino Grace
during this calendar year. The managers who proposed offering derivatives contend that this
statistic demonstrates that offering derivatives increased Domino Grace revenues this calendar
year by $5 million. Which of the following points out a flaw in this argument?
A) It assumes that offering derivatives could not have generated less than $5 million.
B) It claims without warrant that offering derivatives will generate high revenues in future years.
C) It fails to demonstrate that offering derivatives generated more money than any alternative
would generate.
D) It fails to account for the revenues that could have been generated by alternative uses of the
resources that went into offering derivatives.
E) It ignores the possibility that some investors lost money by investing in derivatives through
Domino Grace.
Answer: D
Diff: 3 Type: MC
Skill: Analysis
41
8) Gizmo Sprockets is a distributor of home appliance parts. Having been in business for more
than ten years, it now has contracts with thousands of retailers and repair shops throughout the
country. The CEO wants Gizmo to go international, opening some locations in large economies
such Brazil and India. He thinks that since the principles of business, in a free market, are
essentially the same anywhere, the expansion of Gizmo's business into other countries should be
straightforward. In other words, because the company has been successful in Canada, it will also
be successful in international markets.
Gizmo's marketing director argues that because the global economy is interconnected, if Gizmo
continues to be profitable in Canada, it should be able to invest that money to do well
internationally. Which of the following, if true, would most weaken her argument?
A) Gizmo's existing products can be used in other countries.
B) The currency exchange rate between countries can fluctuate.
C) Current Gizmo employees will need some cultural training to do business effectively in other
countries.
D) Investors will not be willing to put money into Gizmo's foreign business expansion without a
business plan.
E) Marketing strategies that are successful in Canada are not always successful overseas.
Answer: B
Diff: 3 Type: MC
Skill: Analysis
9) Douglas & Reynolds, a financial firm, has recently fallen on hard times. Its CEO notes that the
firm has lost money for three straight years. Over the same period, the euro has lost 15 percent of
its value, while the Chinese yuan has increased its value by 15 percent. He therefore concludes
that the company should discontinue its foreign currency investments in the euro in favour of the
yuan in order to increase its profits.
Which of the following, if true, most weakens the CEO's argument?
A) Over the last ten years, investments in the yuan have only marginally outperformed
investments in the euro.
B) Research shows that a vast majority of American voters approve of European governments
and disapprove of the Chinese government.
C) The amount of capital the company currently has invested in the euro is significantly larger
than the amount invested in the yuan.
D) In the past six months, Europe has shown signs of recovering from a financial crisis, while
China has shown signs of entering one.
E) A competing firm recorded record profits after shifting its investments from Japanese yen to
Canadian dollars.
Answer: D
Diff: 3 Type: MC
Skill: Analysis
42
10) The Greenmax beverage company has built a successful business, having secured a small but
consistent slice of the energy drink market. The company is preparing to go global with its brand
and market its product overseas.
Greenmax's chief financial officer likes the idea of expanding into markets in the southern
hemisphere because he argues that this will help the company generate a consistent year-round
cash flow. Which of the following, if true, would strengthen the CFO's argument?
A) Energy drinks are popular in many different parts of the world.
B) Demand for energy drinks is much greater in developed countries than in emerging markets.
C) Greenmax has tapped about as much of the energy drink market share in Canada as it can get.
D) The energy drink market in the southern hemisphere is dominated by the biggest name
brands.
E) Demand for energy drinks is heavily seasonal, with products selling much better at the hottest
times of the year than others.
Answer: E
Diff: 3 Type: MC
Skill: Analysis
14.3 True/False Questions
1) The desired characteristics of money include portability, divisibility, durability, and stability.
Answer: TRUE
Diff: 1 Type: TF Page Ref: 310
Skill: Knowledge
Objective: 14.1
2) Gold satisfies the requirements of portability, divisibility, durability, and stability better than
paper money does.
Answer: FALSE
Objective: 14.1
3) Heather told her friends she just bought $1000 worth of new clothes. Heather's statement
illustrates the "unit of account" function of money.
Answer: TRUE
Objective: 14.1
4) Money functions as a medium of exchange, a unit of account, and a store of value.

Answer: TRUE
Skill: Knowledge
Objective: 14.1
43
5) Currency and money are the same thing.
Answer: FALSE
Skill: Knowledge
Objective: 14.1
6) Money serves as a medium of exchange, which means, for example, that it replaces the need
for barter among individuals.
Answer: TRUE
Objective: 14.1
7) The M-1 money supply account measures only the most liquid forms of money, such as cash.
Answer: TRUE
Skill: Knowledge
Objective: 14.1
8) The reason why a savings account is not considered a component of the M-1 money supply is
that it earns interest.
Answer: FALSE
Skill: Knowledge
Objective: 14.1
9) The M-2 money supply includes everything that is in the M-1 money supply.
Answer: TRUE
Skill: Knowledge
Objective: 14.1
10) The divisibility characteristic of money is illustrated by a financial company's ability to

divide its monetary assets among several investments.
Answer: TRUE
Skill: Knowledge
Objective: 14.1
11) A personal chequing account represents demand deposits because the bank must pay "on
demand" to the person receiving the cheque.
Answer: TRUE
Skill: Knowledge
Objective: 14.1
44
12) The value of money will fluctuate in response to the laws of supply and demand just as the
value of a corn crop will fluctuate by the same laws.
Answer: TRUE
Objective: 14.1
13) When the money supply is high, the value of the dollar rises.
Answer: FALSE
Objective: 14.1
14) M-1 is a more reliable measure of money supply than M-2.

Answer: FALSE
Objective: 14.1
15) M-1 includes M-2 plus currency, demand deposits, and other chequable deposits.
Answer: FALSE
Skill: Knowledge
Objective: 14.1
16) The M-2 measurement of the money supply includes time deposits, money market mutual
funds, and savings deposits.
Answer: TRUE
Skill: Knowledge
Objective: 14.1
17) Credit cards serve as a temporary medium of exchange but are not a store of value; therefore,
they are do not qualify as a form of money.
Answer: TRUE
Skill: Knowledge
Objective: 14.1
18) Certificates of deposits (CDs) and saving certificates are classified as time deposits.
Answer: TRUE
Skill: Knowledge
Objective: 14.1
45
19) One feature of time deposits is that advance notice is required to make a withdrawal.
Answer: TRUE
Skill: Knowledge
Objective: 14.1
20) Credit cards are widely used in business transactions but are not included in either M-1 or M-
2.
Answer: TRUE
Skill: Knowledge
Objective: 14.1
21) The main function of financial institutions is to facilitate the flow of money from sectors
with surpluses to those with deficits.
Answer: TRUE
Skill: Knowledge
Objective: 14.2
22) Banks are permitted to own securities dealers.

Answer: TRUE
Skill: Knowledge
Objective: 14.2
23) Deregulation has allowed banks to shift away from their historical role as intermediaries
between depositors and borrowers.
Answer: TRUE
Skill: Knowledge
Objective: 14.2
24) Banks are the major source of short-term loans for business.
Answer: TRUE
Skill: Knowledge
Objective: 14.2
25) A chartered bank is a privately owned, profit seeking business firm.

Answer: TRUE
Skill: Knowledge
Objective: 14.2
46
26) A banker's acceptance promises that the bank will pay some specified amount at a future
date.
Answer: TRUE
Skill: Knowledge
Objective: 14.2
27) Smart cards are credit card sized plastic cards that can be programmed with electronic
money.
Answer: TRUE
Skill: Knowledge
Objective: 14.2
28) The prime rate of interest is the lowest rate charged to a bank's best customers.
Answer: TRUE
Skill: Knowledge
Objective: 14.2
29) Canadian chartered banks must maintain a reserve requirement with the Bank of Canada.
Answer: FALSE
Skill: Knowledge
Objective: 14.2
30) Banks create money through contracts with the federal government to mint bills and coins.
Answer: FALSE
Skill: Knowledge
Objective: 14.2
31) The bank rate is the lowest rate a chartered bank charges to its borrowers.
Answer: FALSE
Skill: Knowledge
Objective: 14.2
32) Foreign banks are not allowed to do business in Canada.

Answer: FALSE
Skill: Knowledge
Objective: 14.2
47
33) The Bank of Canada plays an important role in managing the money supply in Canada.
Answer: TRUE
Skill: Knowledge
Objective: 14.3
34) Banks can sell personal insurance in their branches.

Answer: FALSE
Skill: Knowledge
Objective: 14.2
35) In the absence of a reserve requirement, banks can create essentially infinite amounts of
money.
Answer: TRUE
Objective: 14.2
36) When the Bank of Canada buys government securities, this reduces the money supply
because the government has spent some of its money and therefore has less to spend.
Answer: FALSE
Objective: 14.3
37) If the Bank of Canada wants to reduce inflation, it can sell government securities.
Answer: TRUE
Objective: 14.3
38) If the Bank of Canada wants to stimulate business activity, it can buy government securities.
Answer: TRUE
Objective: 14.3
39) If the Bank of Canada wants to slow down business activity, it can raise the bank rate. This
will make banks less willing to make loans to businesses.
Answer: TRUE
Objective: 14.3
48
40) Credit unions lend money to consumers, but not to businesses.
Answer: FALSE
Skill: Knowledge
Objective: 14.4
41) A sales finance company finances installment purchases only for consumers, not businesses.
Answer: FALSE
Skill: Knowledge
Objective: 14.4
42) Venture capital firms are mainly in the business of selling bonds to retired investors who
have a high net worth.
Answer: FALSE
Skill: Knowledge
Objective: 14.4
43) If the value of the Canadian dollar increases, Canadian companies will find it more difficult
to compete internationally because goods exported from Canada will become more expensive for
foreign buyers.
Answer: TRUE
Skill: Knowledge
Objective: 14.5
44) The Business Development Bank of Canada (BDC) insures export sales for Canadian
companies.
Answer: FALSE
Skill: Knowledge
Objective: 14.5
45) A country's currency becomes overvalued when its exchange rate is higher than warranted by
its economic conditions.
Answer: TRUE
Objective: 14.5
46) Devaluing a country's currency decreases its exchange value, and this will make it less
expensive for other countries to buy the country's products.
Answer: TRUE
Objective: 14.5
49
47) The law of one price says that identical products should sell for the same price in all
countries, except for those countries that have a large agricultural sector.
Answer: FALSE
Objective: 14.5
48) The law of one price ensures that no country's currency is overvalued.
Answer: FALSE
Objective: 14.5
49) The World Bank funds national improvements by making loans to build roads, schools,
power plants, and hospitals.
Answer: TRUE
Skill: Knowledge
Objective: 14.5
50) The IMF is a United Nations agency consisting of 189 nations that have combined resources
to promote stable exchange rates, provide temporary short-term loans, and serve other purposes.
Answer: TRUE
Skill: Knowledge
Objective: 14.5
51) Currency is any object generally accepted by people as payment for goods and services.
Answer: FALSE
Diff: 1 Type: TF Page Ref: 310-311
Skill: Knowledge
Objective: 14.1
ESL: Alternate/ESL
52) A deposit that requires prior notice to make a withdrawal; cannot be transferred to others by
cheque is known as a time deposit.
Answer: TRUE
Skill: Knowledge
Objective: 14.1
ESL: Alternate/ESL
50
53) A privately owned, profit-seeking firm that serves individuals, non-business organizations,
and businesses as a financial intermediary is known as a chartered bank.
Answer: TRUE
Skill: Knowledge
Objective: 14.2
ESL: Alternate/ESL
54) Large firms with excellent credit records pay the lowest rate charged to borrowers which is
called the prime rate of interest.
Answer: TRUE
Skill: Knowledge
Objective: 14.2
ESL: Alternate/ESL
55) The rate at which chartered banks can borrow from the Bank of Canada is called the current
rate.
Answer: FALSE
Skill: Knowledge
Objective: 14.3
ESL: Alternate/ESL
56) If the Bank of Canada wants to decrease the money supply, it can sell government securities.
Answer: TRUE
Skill: Knowledge
Objective: 14.3
ESL: Alternate/ESL
57) Cooperative savings and lending associations formed by a group with common interests are
called credit unions.
Answer: TRUE
Skill: Knowledge
Objective: 14.4
ESL: Alternate/ESL
58) Sales finance companies provide funds for new or expanding firms thought to have
significant potential.
Answer: FALSE
Skill: Knowledge
Objective: 14.4
ESL: Alternate/ESL
51
59) The principle that identical products should sell for the same price in all countries is known
as the law of one price.
Answer: TRUE
Skill: Knowledge
Objective: 14.5
ESL: Alternate/ESL
60) The IMF is a United Nations agency that provides a limited scope of financial services, such
as funding national improvements in undeveloped countries.
Answer: FALSE
Skill: Knowledge
Objective: 14.5
ESL: Alternate/ESL
14.4 Short Answer Questions
1) What are the four characteristics of money?

Answer: Portability, divisibility, durability, and stability
Diff: 2 Type: SA Page Ref: 310
Skill: Knowledge
Objective: 14.1
2) List the three functions of money.

Answer: Medium of exchange, store of value, and unit of account
Skill: Knowledge
Objective: 14.1
3) Identify the components of the M-1 money supply.

Answer: Currency and demand deposits
Skill: Knowledge
Objective: 14.1
4) What are the components of the M-2 money supply?

Answer: The M-2 money supply includes everything that is in the M-1 money supply (currency,
cheques, and chequing accounts); in addition, M-2 includes time deposits, money market mutual
funds, and savings accounts. M-2 includes everything in M-1 plus other forms of money that are
not quite as liquid.
Skill: Knowledge
Objective: 14.1
52
5) What is a demand deposit?
Answer: Demand deposits are bank account funds that may be withdrawn at any time.
Objective: 14.1
6) List several examples of electronic funds transfer.

Answer: Automated banking machines, direct deposits and withdrawals, point-of-sale transfers,
smart cards, and mobile wallets
Objective: 14.2
7) What is a letter of credit?

Answer: A promise by the bank to pay a certain amount if specified conditions are met
Objective: 14.2
8) What is the prime rate of interest?

Answer: The lowest interest rate charged to borrowers
Objective: 14.2
9) Why are banks considered creators of money?

Answer: By taking in deposits and making loans, they expand the money supply.
Diff: 2 Type: SA Page Ref: 315-316
Objective: 14.2
10) What is a reserve requirement?

Answer: The reserve requirement is the percentage of its deposits that a bank must hold, in cash
or on deposit, with the Bank of Canada. This requirement was phased out in 1991.
Objective: 14.2
11) What is a smart card?

Answer: A smart card is a plastic card with an embedded computer chip that can be
programmed with electronic money.
Objective: 14.2
53
12) What is a debit card?
Answer: A debit card is a credit card sized plastic card that allows for the transfer of money
between accounts.
Objective: 14.2
13) What is the Bank of Canada?

Answer: The Bank of Canada is Canada's central bank. It helps in managing the Canadian
economy and regulates certain aspects of chartered bank operations.
Objective: 14.3
14) What feature of a credit union makes it different from all the other financial institutions?
Answer: A credit union provides financial services for a particular group of people. Often this
group will be employees of a particular employer.
Objective: 14.4
15) What do venture capital firms do?

Answer: Venture capital firms provide funds for new or expanding firms that seem to have
significant potential.
Objective: 14.4
16) What is the World Bank?

Answer: The World Bank is a United Nations agency that provides a limited scope of financial
services, such as funding national improvements in underdeveloped countries.
Objective: 14.5
14.5 Essay Questions
1) Briefly describe the attributes an object must possess to be used as money.

Answer:
- Portability: must be able to take it places
- Divisibility: must be able to break it into smaller forms (change)
- Durability: must be able to last a long time and take abuse
- Stability: the value of money must have no shelf life
Diff: 1 Type: ES Page Ref: 310
Objective: 14.1
54
2) Explain why beef would not make an appropriate form of currency in modern society.
Answer:
- Beef is not portable, how would it be taken on a shopping trip? It would likely go bad in a purse
over any length of time!
- It is divisible, but how would we divide it? Would we take knives on a shopping trip?
- It is not durable because it will spoil if not stored properly. Beef has a shelf life.
- It is not stable; there are many farmers who may raise cows, so we have an almost unlimited
supply of it.
Objective: 14.1
3) What does it mean when we say that money functions as a medium of exchange, as a store of
value, and as a unit of account?
Answer: Money functions as a medium of exchange because it can be used for trading goods
and services. It functions as a store of value because it can be saved. It functions as a unit of
account because it can be used for measuring the value of things.
Objective: 14.1
4) What is M-1 and what are the major elements that make it up?
Answer: M-1 is a measure of the money supply that includes only the most liquid forms. It
includes currency, demand deposits, and other chequable deposits.
Objective: 14.1
5) What is M-2 and what are the major elements that make it up?
Answer: M-2 is a measure of the money supply that includes all the components of M-1 plus
forms of money that can easily be converted into spendable forms, including time deposits,
money market mutual funds, and savings deposits.
Objective: 14.1
6) Why are chequing accounts considered a component of M-1, whereas savings accounts are
not?
Answer: M-1 comprises all currency in circulation and immediately available for circulation.
This includes cheques, since it makes the currency in a chequing account immediately useable.
On the other hand, currency in a savings account is not available for immediate use, since it
needs to be withdrawn physically from the bank in order to enter circulation. Like time deposits
and money market mutual funds, savings deposits are not quite as liquid as cheques and other M-
1 forms of money.
Objective: 14.1
55
7) Which of the three functions of money does a time deposit account most exemplify?
Answer: By definition, a time deposit account has a fixed term, at the end of which it is has
accrued a higher value than the original investment. Thus, investment in a time deposit is a
method to store (and gain) value. A time deposit less exemplifies the other two main functions of
money, as a medium of exchange and a measure of worth.
Objective: 14.1
8) Why are credit cards so popular?

Answer: They are convenient for consumers to use, and they are very profitable for the
companies that issue the credit cards because of the fees they collect (annual fees to card holders,
interest on unpaid balances, and fees paid by merchants who accept the cards).
Diff: 1 Type: ES Page Ref: 311-312
Objective: 14.1
9) What steps have credit card issuers taken to deal with credit card fraud?
Answer: The main action credit card companies have taken is to adopt encryption technology.
This involves issuing new cards which contain a computer chip. Consumers insert their card into
the merchant's machine and then enter a PIN number.
Objective: 14.1
10) What is the difference between a credit card and a debit card?
Answer: Credit cards allow users to borrow money and pay the money back over time. Unlike
credit cards, debit cards allow only the transfer of money between accounts. The risk of financial
loss is greater for debit cards compared to credit cards.
Objective: 14.1
11) Identify the types of businesses that make up the Canadian financial system.
Answer:
- Chartered banks: privately owned, profit-seeking firms that serve individuals, non-business
organizations, and businesses as a financial intermediary
- Alternate banks: trust companies, credit unions/caisses populaires
- Specialized lending and savings intermediaries: life insurance companies, factoring companies,
financial corporations, venture capital or development firms, pension funds
- Investment dealers
Objective: 14.2
56
12) What is the main function of financial institutions in Canada?
Answer: The main function of financial institutions is to facilitate the flow of money from
sectors with surpluses to those with deficits by attracting funds into chequing and savings
accounts. Incoming funds are loaned to individuals and businesses, or perhaps invested in
government securities.
Objective: 14.2
13) Describe the changes that have taken place in banking as a result of deregulation.
Answer: Banks are shifting away from their historical role as intermediaries between depositors
and borrowers. They now sell a wider array of financial products and more training is provided
for bankers to cope with these changes.
Objective: 14.2
14) What is the difference between a letter of credit and a banker's acceptance?
Answer: If a Canadian company wants to purchase goods from a foreign supplier, it can pay a
bank a fee to provide either a letter of credit (a promise by the bank to pay a foreign firm a
certain amount of money if specified conditions are met) or a banker's acceptance (a promise that
the bank will pay some specified amount of money at a future date).
Objective: 14.2
15) Compare and contrast the services offered by chartered banks and credit unions.
Answer: Chartered banks provide pension services, trust services, international services,
financial advice, electronic technologies, bank deposits, and bank loans. Banks are also creators
of money. Credit unions are cooperative savings and lending association formed by a group with
common interests. Credit unions are lenders of money to buy durable goods such as cars and
furniture. They also offer short-term, long-term, and mortgage loans.
Objective: 14.2
57
16) Briefly describe three electronic technologies.
Answer:
- Automated teller machines: automatic terminals that let you bank at almost any time of day or
night.
- Pay-by-phone systems: pay bills or transfer funds between accounts by phone
- Direct deposits and withdrawals: allow you to authorize in advance specific, regular deposits or
withdrawals from your account
- Smart card: a credit card-sized computer that can be programmed with "electronic money"
-Blink credit cards: "Blink" technology uses a computer chip that functions with radio-frequency
signals.
-Debit cards: Unlike credit cards, debit cards do not increase the funds at an individual's disposal
but only allow users to transfer money between accounts to make retail purchases. Debit cards
are used more than credit cards as payment for consumer transactions.
- Mobile (digital) wallet: Payment via cellphones using apps. Tim Hortons recently launched an
app that allows customers to pay for their "double-double" with their mobile phones.
Objective: 14.2
17) Summarize the changes in banking that have occurred over the past two decades or so.
Answer: Deregulation is one major change. Banks have been allowed to go beyond their
historical role as intermediaries between depositors and borrowers, and to provide more services
to customers (for example, bereavement services). Banks have also gotten involved in selling
insurance and in investment banking because the fees contribute to their profits. Customer needs
have changed as well. They are no longer content to simply keep money in a bank when they
have other alternatives that yield higher interest rates. They are turning to electronic banks like
President's Choice Financial (a Loblaw subsidiary) that pay higher interest on savings accounts.
Such companies can pay higher rates because they don't incur the costs associated with having
branches like traditional banks do. Traditional banks are responding to this new competition by
selling a growing array of services in their branches. Canada's banks are also experiencing
increased competition because foreign banks are now allowed to do business in Canada.
Objective: 14.2
18) Describe the functions of the Bank of Canada and describe the tools it uses to control the
money supply.
Answer: The Bank of Canada manages the Canadian economy, controls the money supply, and
regulates certain aspects of chartered banking operations. If the Bank of Canada wants to
increase the money supply, it can buy government securities or lower the bank rate. If the Bank
of Canada wants to decrease the money supply, it can sell government securities or increase the
bank rate.
Objective: 14.3
58
19) Explain what is meant by the terms expansionary policy and restrictive policy that may be
implemented by the Bank of Canada.
Answer: The bank can implement either an expansionary policy (by buying government
securities or lowering the bank rate), or a restrictive policy (by selling government securities or
raising the bank rate).
Objective: 14.3
20) Describe the role that trust companies and credit unions play in the Canadian financial
system.
Answer: A trust company safeguards property–funds and estates–entrusted to it. It may also
serve as trustee, transfer agent, and registrar for corporations and provide other services. For
example, a corporation selling bonds to investors appoints a trustee, usually a trust company, to
protect the bondholders' interests.
Credit unions are cooperative savings and lending associations formed by a group with common
interests. Credit unions invest substantial amounts of money in corporate and government
securities and sell certificates of deposits to the general public.
Objective: 14.4
21) Describe the role of life insurance companies, factoring companies, venture capital firms and
pension funds in the Canadian financial system.
Answer:
- Life insurance company: a mutual or stock company that shares risk with its policyholders for
payment of premiums
- Factoring company: buys accounts receivable from a firm for less than their face value, and
then collects the face value of the receivables
- Venture capital or development firms: provides funds for new or expanding firms thought to
have significant potential
- Pension funds: accumulates money that will be paid out to plan subscribers in the future
Objective: 14.4
22) What is the difference between a sales finance company and a consumer finance company?
Answer: A sales finance company specializes in financing installment purchases made by
individuals or firms. When you buy durable goods (e.g., household appliances) from a retailer on
an installment plan with a sales finance company, the loan is made directly to you. The item
itself serves as security for the loan. A consumer finance company makes personal loans to
consumers. Often, the borrower pledges no security (collateral) for the loan. For larger loans,
collateral may be required.
Objective: 14.4
59
23) What sources of funds are available to business firms in addition to the institutions that make
up the "4 pillars" of the Canadian financial system?
Answer: One source is government granting agencies. These include agencies like the Business
Development Bank of Canada (which makes term loans to smaller firms judged to have growth
potential but which are unable to secure funds at reasonable terms from traditional sources),
provincial industrial development corporations (which provide funds to developing business
firms in the hope that they will provide jobs in the province), the Export Development
Corporation (which finances and insures export sales for Canadian companies), and the Canada
Mortgage and Housing Corporation (which provides and guarantees mortgages). International
sources of funds are also available (borrowing from other countries). Canadian provinces and
Canadian corporations both borrow extensively in foreign markets such as those in London and
New York.
Objective: 14.4
24) How do venture capital companies operate?

Answer: A venture capital firm provides funds for new or expanding firms that seem to have
significant potential. Venture capital firms obtain funds for investment from initial capital
subscriptions, from loans from other financial intermediaries, and from retained earnings.
Venture capital firms may demand an ownership stake of 50 percent or more before they will
buy into a company. Because financing new, untested businesses is risky, venture capital firms
also want to earn a higher-than-normal return on their investment.
Objective: 14.4
25) How are factoring companies and financial corporations different?

Answer: Factoring companies buy accounts receivable from a firm and pay less than the face
value of the receivables. They then collect the face value of the receivables, and the amount of
the difference is their profit. By contrast, financial corporations loan money to individuals and
companies for the purchase of durable goods.
Objective: 14.4
60
26) Summarize the fluctuations in the value of the Canadian dollar relative to the U.S. dollar
over the last few decades, and the impact these fluctuations have had on Canadian businesses.
Answer: In the 1980s and 1990s, Canadians had become accustom to a weak Canadian dollar (in
the 65-70 cent range against the U.S. dollar). The idea that the Canadian dollar would reach
parity with the American dollar was considered unreasonable. Yet on November 9, 2007, the
Canadian dollar reached US$1.09. That strength encouraged Canadians to cross the border and
purchase everything from clothing to cars. But by 2014, the dollar again weakened significantly,
and by mid-2015 had declined to just US$0.75. It still stood in that range in early 2019. These
dollar fluctuations have also had a big impact on businesses. Canadian companies are now
finding it more difficult to compete internationally since they can no longer rely on a cheap
dollar to make their products more affordable in the United States and elsewhere. But after the
initial shock companies are learning to cope.
Objective: 14.5
27) Explain the law of one price and the term "Big Mac Currencies."
Answer: The law of one price is a method of determining whether the currency in one country is
over- or undervalued in comparison to the rest of the world. It is based on the principle that
identical products should sell for the same price in all countries. For example, the price of Big
Macs should be the same in every country after currency exchange calculations are considered.
But the price is rarely the same in different countries. Rather, it is above or below what it should
be. These different values mean that, in theory, you could make a profit by buying Big Macs in a
country with an undervalued currency and selling them in another country with an overvalued
currency.
Objective: 14.5
28) How are the World Bank and the International Monetary Fund different?
Answer: The World Bank funds national improvements by making loans to build roads, schools,
and power plants. By contrast, the International Monetary Fund is a group of 189 countries that
has a broader perspective. It promotes stable exchange rates and encourages cooperation on
international monetary issues (it also provides short-term loans to member nations).
Objective: 14.5
29) Why might nations decline to accept money from the International Monetary Fund?
Answer: Such nations may not want to accept the economic changes proposed by the IMF;
further, these nations may reject the IMF's requirement that they cut back social programs to
bring inflation under control, for example. The IMF itself admitted that miscalculations were
made in handling the European debt crisis when it preached austerity above all else.
Objective: 14.5
61

Chapter 14 Money and Banking: Business Essentials, Canadian Edition, 9e (Ebert)

Caricato da

Informazioni sul documento

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Chapter 14 Money and Banking: Business Essentials, Canadian Edition, 9e (Ebert)

Caricato da

Copyright:

Formati disponibili

Business Essentials, Canadian Edition, 9e (Ebert)

Chapter 14 Money and Banking

14.1 Multiple Choice Questions

1) Which of the following is a form of money?

5) The characteristics of money are

7) Which of the following best describes the portability characteristic of money?

9) Which of the following is a consequence of the divisibility characteristic of money?

19) Which of the following influences the value of money?

22) Which of the following is not part of the M-1 supply?

23) As of April 2018, the value of M-1 was

38) Which of the following is not included in either M-1 or M-2?

44) Canadians hold a total of ________ credit cards.

47) Which of the following is correct regarding credit cards?

50) The main function of financial institutions is to

51) Deregulation of banks has caused banks to

52) The largest bank in Canada (in terms of sales revenue) is

55) Which of the following statements about chartered banks is false?

56) The principal source of short-term loans for business firms is

58) In February 2018, Canadian chartered banks had assets totalling

59) The prime rate of interest is the rate charged

67) What is a debit card?

70) Which of the following is correct with regard to Canadian banks?

78) The main purpose of the Bank of Canada is to

89) In 2017, venture capital firms in Canada raised

90) A financial corporation that specializes in financing installment purchases made by

99) Regarding the international payments process, which statement is true?

102) The determination of whether a currency is overvalued or undervalued is usually based on a

103) The law of one price says that

104) According to the Big Mac index,

110) Which of the following is a characteristic of money?

119) A loan backed by collateral is which of the following?

14.2 Critical Thinking Questions

14.3 True/False Questions

4) Money functions as a medium of exchange, a unit of account, and a store of value.

10) The divisibility characteristic of money is illustrated by a financial company's ability to

14) M-1 is a more reliable measure of money supply than M-2.

22) Banks are permitted to own securities dealers.

25) A chartered bank is a privately owned, profit seeking business firm.

32) Foreign banks are not allowed to do business in Canada.

34) Banks can sell personal insurance in their branches.

14.4 Short Answer Questions

1) What are the four characteristics of money?

2) List the three functions of money.

3) Identify the components of the M-1 money supply.

4) What are the components of the M-2 money supply?

6) List several examples of electronic funds transfer.

7) What is a letter of credit?

8) What is the prime rate of interest?

9) Why are banks considered creators of money?

10) What is a reserve requirement?

11) What is a smart card?

13) What is the Bank of Canada?

15) What do venture capital firms do?

16) What is the World Bank?

14.5 Essay Questions

1) Briefly describe the attributes an object must possess to be used as money.

8) Why are credit cards so popular?

24) How do venture capital companies operate?

25) How are factoring companies and financial corporations different?

Potrebbero piacerti anche