Chapter 18 3 Often this Group Will Employees Particular Employer how Are

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 18—Understanding Money and Banking

Objective: 18.1

19. Credit card fraud costs Canadian financial institutions about $1 billion each year.

a. True

b. False

Difficulty: 2 Page-Reference: 578

Question ID: 18-2-139 Skill: Knowledge

Objective: 18.1

20. Banks are permitted to own securities dealers.

a. True

b. False

Difficulty: 2 Page-Reference: 579

Question ID: 18-2-140 Skill: Knowledge

Objective: 18.2

21. Deregulation has allowed banks to shift away from their historical role as intermediaries

between depositors and borrowers.

a. True

b. False

Difficulty: 2 Page-Reference: 580

Question ID: 18-2-141 Skill: Knowledge

Objective: 18.2

22. Retailers like Canadian Tire are not allowed to provide financial service products that

compete with those provided by banks.

a. True

b. False

Difficulty: 2 Page-Reference: 580

Question ID: 18-2-142 Skill: Knowledge

Objective: 18.2

23. As part of deregulation, chartered banks can now sell insurance in their branches.

a. True

b. False

Difficulty: 2 Page-Reference: 580

Question ID: 18-2-143 Skill: Knowledge

Objective: 18.2

24. Banks are now making a larger proportion of their profits from fees than they formerly did,

and this is blurring the traditional boundary between banks and securities firms.

a. True

b. False

Difficulty: 2 Page-Reference: 580

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 18—Understanding Money and Banking

Question ID: 18-2-144 Skill: Comprehension

Objective: 18.2

25. Foreign banks are not allowed to do business in Canada.

a. True

b. False

Difficulty: 2 Page-Reference: 581

Question ID: 18-2-145 Skill: Knowledge

Objective: 18.2

26. The Bank of Canada plays an important role in managing the money supply in Canada.

a. True

b. False

Difficulty: 1 Page-Reference: 582

Question ID: 18-2-146 Skill: Knowledge

Objective: 18.2

27. If the Bank of Canada wants to increase the money supply, it will purchase government

securities.

a. True

b. False

Difficulty: 1 Page-Reference: 582-583

Question ID: 18-2-147 Skill: Comprehension

Objective: 18.2

28. 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.

a. True

b. False

Difficulty: 1 Page-Reference: 582-583

Question ID: 18-2-148 Skill: Comprehension

Objective: 18.2

29. If the Bank of Canada wants to reduce inflation, it can sell government securities.

a. True

b. False

Difficulty: 1 Page-Reference: 582-583

Question ID: 18-2-149 Skill: Comprehension

Objective: 18.2

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 18—Understanding Money and Banking

30. If the Bank of Canada wants to stimulate business activity, it can buy government

securities.

a. True

b. False

Difficulty: 1 Page-Reference: 582-583

Question ID: 18-2-150 Skill: Comprehension

Objective: 18.2

31. 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.

a. True

b. False

Difficulty: 1 Page-Reference: 582-583

Question ID: 18-2-151 Skill: Comprehension

Objective: 18.2

32. The bank rate (also called the rediscount rate) is the rate at which chartered banks can

borrow from the Bank of Canada.

a. True

b. False

Difficulty: 1 Page-Reference: 583

Question ID: 18-2-152 Skill: Knowledge

Objective: 18.2

33. A chartered bank is a privately owned, profit-seeking business firm.

a. True

b. False

Difficulty: 1 Page-Reference: 583

Question ID: 18-2-153 Skill: Knowledge

Objective: 18.3

34. The five largest Schedule A banks account for about 90% of total bank assets in Canada.

a. True

b. False

Difficulty: 3 Page-Reference: 583

Question ID: 18-2-154 Skill: Knowledge

Objective: 18.3

35. Currency exchange, letters of credit, and banker’s acceptances all relate to a bank‘s

international services.

a. True

b. False

Difficulty: 1 Page-Reference: 585

Question ID: 18-2-155 Skill: Knowledge

Objective: 18.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 18—Understanding Money and Banking

36. A banker’s acceptance promises that the bank will pay some specified amount at a future

date.

a. True

b. False

Difficulty: 1 Page-Reference: 585

Question ID: 18-2-156 Skill: Knowledge

Objective: 18.3

37. Money that moves among consumers and businesses via digital electronic transmissions

is known as ecash.

a. True

b. False

Difficulty: 1 Page-Reference: 586

Question ID: 18-2-157 Skill: Knowledge

Objective: 18.3

38. Smart cards are credit card-sized plastic cards that can be programmed with electronic

money.

a. True

b. False

Difficulty: 1 Page-Reference: 585

Question ID: 18-2-158 Skill: Knowledge

Objective: 18.3

39. Banks are the major source of short-term loans for business.

a. True

b. False

Difficulty: 1 Page-Reference: 583

Question ID: 18-2-159 Skill: Knowledge

Objective: 18.3

40. The prime rate of interest is the lowest rate charged to a bank‘s best customers.

a. True

b. False

Difficulty: 1 Page-Reference: 587

Question ID: 18-2-160 Skill: Knowledge

Objective: 18.3

41. Since 1991, Canadian chartered banks have had to maintain a reserve requirement with

the Bank of Canada.

a. True

b. False

Difficulty: 2 Page-Reference: 587

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 18—Understanding Money and Banking

Question ID: 18-2-161 Skill: Knowledge

Objective: 18.3

42. In the absence of a reserve requirement, banks can create essentially infinite amounts of

money.

a. True

b. False

Difficulty: 2 Page-Reference: 587-588

Question ID: 18-2-162 Skill: Knowledge

Objective: 18.3

43. A corporation selling bonds to investors appoints a trustee, usually a trust company, to

protect the bondholders’ interests. Because so many more people are now investing in stocks

and bonds, trust companies are now more important than they used to be.

a. True

b. False

Difficulty: 2 Page-Reference: 589

Question ID: 18-2-163 Skill: Comprehension

Objective: 18.3

44. Credit unions usually pay higher interest rates on GICs than banks do.

a. True

b. False

Difficulty: 2 Page-Reference: 589

Question ID: 18-2-164 Skill: Knowledge

Objective: 18.4

45. Credit unions lend money to consumers, but not to businesses.

a. True

b. False

Difficulty: 2 Page-Reference: 589

Question ID: 18-2-165 Skill: Knowledge

Objective: 18.4

46. A sales finance company finances installment purchases only for consumers, not

businesses.

a. True

b. False

Difficulty: 2 Page-Reference: 590

Question ID: 18-2-166 Skill: Knowledge

Objective: 18.4

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 18—Understanding Money and Banking

47. Venture capital firms are mainly in the business of selling bonds to retired investors.

a. True

b. False

Difficulty: 1 Page-Reference: 591

Question ID: 18-2-167 Skill: Knowledge

Objective: 18.4

48. Investment dealers are the primary distributors of new stock and bond issues.

a. True

b. False

Difficulty: 1 Page-Reference: 591

Question ID: 18-2-168 Skill: Knowledge

Objective: 18.4

49. The Canadian dollar has fluctuated quite a bit over the last few decades, ranging from as

low as $0.62 U.S. to as high as $1.09 U.S.

a. True

b. False

Difficulty: 1 Page-Reference: 592

Question ID: 18-2-169 Skill: Knowledge

Objective: 18.5

50. As the value of the Canadian dollar has increased, Canadian companies are finding it

more difficult to compete internationally because exported goods have become more expensive

for foreign buyers.

a. True

b. False

Difficulty: 1 Page-Reference: 592

Question ID: 18-2-170 Skill: Knowledge

Objective: 18.5

51. A country’s currency becomes overvalued when its exchange rate is higher than

warranted by its economic conditions.

a. True

b. False

Difficulty: 1 Page-Reference: 592

Question ID: 18-2-171 Skill: Knowledge

Objective: 18.5

52. Devaluing a country’s currency decreases its exchange value, and this will make it less

expensive for other countries to buy the home country’s products.

a. True

b. False

Difficulty: 1 Page-Reference: 592

Question ID: 18-2-172 Skill: Knowledge

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 18—Understanding Money and Banking

Objective: 18.5

53. 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.

a. True

b. False

Difficulty: 1 Page-Reference: 592

Question ID: 18-2-173 Skill: Comprehension

Objective: 18.5

54. The “law of one price” ensures that no country’s currency is overvalued.

a. True

b. False

Difficulty: 1 Page-Reference: 592

Question ID: 18-2-174 Skill: Comprehension

Objective: 18.5

55. The World Bank funds national improvements by making loans to build roads, schools,

power plants, and hospitals.

a. True

b. False

Difficulty: 1 Page-Reference: 594-595

Question ID: 18-2-175 Skill: Knowledge

Objective: 18.5

1. What are the four characteristics of money?

Difficulty: 2 Page-Reference: 576

Question ID: 18-3-176 Skill: Knowledge

Objective: 18.1

2. List the three functions of money.

Difficulty: 2 Page-Reference: 577

Question ID: 18-3-177 Skill: Knowledge

Objective: 18.1

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

Difficulty: 2 Page-Reference: 577

Question ID: 18-3-178 Skill: Knowledge

Objective: 18.1

4. What is a demand deposit?

Difficulty: 2 Page-Reference: 577

Question ID: 18-3-179 Skill: Knowledge

Objective: 18.1

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 18—Understanding Money and Banking

5. Identify the components of the M-2 money supply.

Difficulty: 2 Page-Reference: 578

Question ID: 18-3-180 Skill: Knowledge

Objective: 18.1

6. What are open-market operations?

Difficulty: 2 Page-Reference: 582-583

Question ID: 18-3-181 Skill: Knowledge

Objective: 18.2

7. What is a letter of credit?

Difficulty: 2 Page-Reference: 585

Question ID: 18-3-182 Skill: Knowledge

Objective: 18.3

8. What is the prime rate of interest?

Difficulty: 2 Page-Reference: 587

Question ID: 18-3-183 Skill: Knowledge

Objective: 18.3

9. How do banks create money?

Difficulty: 2 Page-Reference: 587-588

Question ID: 18-3-184 Skill: Knowledge

Objective: 18.3

10. What is a reserve requirement?

Difficulty: 2 Page-Reference: 587

Question ID: 18-3-185 Skill: Knowledge

Objective: 18.3

11. What is a smart card?

Difficulty: 2 Page-Reference: 585

Question ID: 18-3-186 Skill: Knowledge

Objective: 18.3

12. What is a debit card?

Difficulty: 2 Page-Reference: 585

Question ID: 18-3-187 Skill: Knowledge

Objective: 18.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 18—Understanding Money and Banking

13. What is ecash?

Difficulty: 2 Page-Reference: 586

Question ID: 18-3-188 Skill: Knowledge

Objective: 18.3

14. What feature of a credit union makes it different from all the other financial institutions?

Difficulty: 2 Page-Reference: 589

Question ID: 18-3-189 Skill: Comprehension

Objective: 18.4

15. How are factoring companies and financial corporations different?

Difficulty: 2 Page-Reference: 590

Question ID: 18-3-190 Skill: Comprehension

Objective: 18.4

16. What is the World Bank?

Difficulty: 2 Page-Reference: 594-595

Question ID: 18-3-191 Skill: Knowledge

Objective: 18.5

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

Difficulty: 1 Page-Reference: 576

Question ID: 18-4-192 Skill: Knowledge

Objective: 18.1

2. Explain why beef would not make an appropriate form of currency in modern society.

Difficulty: 2 Page-Reference: 576

Question ID: 18-4-193 Skill: Comprehension

Objective: 18.1

3. What three functions does money perform in our society?

Difficulty: 1 Page-Reference: 577

Question ID: 18-4-194 Skill: Knowledge

Objective: 18.1

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 18—Understanding Money and Banking

4. What is M-1 and what are the major elements that make it up?

Difficulty: 1 Page-Reference: 577

Question ID: 18-4-195 Skill: Knowledge

Objective: 18.1

5. What is included in the M-1 measurement of the money supply? In M–2?

Difficulty: 2 Page-Reference: 577-578

Question ID: 18-4-196 Skill: Knowledge

Objective: 18.1

6. What is M-2 and what are the major elements that make it up?

Difficulty: 1 Page-Reference: 578

Question ID: 18-4-197 Skill: Knowledge

Objective: 18.1

7. Identify the types of businesses that make up the Canadian financial system.

Difficulty: 2 Page-Reference: 579-592

Question ID: 18-4-198 Skill: Knowledge

Objective: 18.2

8. Describe the changes that have taken place in banking as a result of deregulation.

Difficulty: 2 Page-Reference: 580

Question ID: 18-4-199 Skill: Comprehension

Objective: 18.2

9. Describe the functions of the Bank of Canada and describe the tools it uses to control the

money supply.

Difficulty: 2 Page-Reference: 582-583

Question ID: 18-4-200 Skill: Comprehension

Objective: 18.2

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 18—Understanding Money and Banking

10. Compare and contrast the services offered by chartered banks and credit unions.

Difficulty: 2 Page-Reference: 583-589

Question ID: 18-4-201 Skill: Comprehension

Objective: 18.3

11. Briefly explain three of the methods of electronic technologies.

Difficulty: 2 Page-Reference: 585-586

Question ID: 18-4-202 Skill: Comprehension

Objective: 18.3

12. Why are banks considered to be creators of money?

Difficulty: 2 Page-Reference: 587-588

Question ID: 18-4-203 Skill: Comprehension

Objective: 18.3

13. Describe the kinds of business firms that make up “pillar #3” of the Canadian financial

system.

Difficulty: 2 Page-Reference: 590-591

Question ID: 18-4-204 Skill: Knowledge

Objective: 18.4

14. Describe the two types of financial corporations.

Difficulty: 2 Page-Reference: 590-591

Question ID: 18-4-205 Skill: Knowledge

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 18—Understanding Money and Banking

Objective: 18.4

15. 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?

Difficulty: 1 Page-Reference: 591-592

Question ID: 18-4-206 Skill: Comprehension

Objective: 18.4

16. Explain the law of one price and the term “Big Mac Currencies.”

Difficulty: 2 Page-Reference: 593

Question ID: 18-4-207 Skill: Comprehension

Objective: 18.5