Chapter 19 Money and Banking

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking
Multiple Choice Questions |!|EM45001|!| Which of the following statements about a barter economy is CORRECT? A. B. C. D. People cannot store wealth. It is difficult to find a common measure of value. It is easy to reach an agreement upon exchange ratios. It is easy to reach double coincidence of wants.
## B In a barter economy, one good has many different exchange ratios, as the value of a good is expressed in terms of another good that we trade and there are many goods that can be exchanged for one good. There is a lack of a common measure of value. ##
|!|EM45002|!| Which of the following is/are the characteristic(s) of a barter economy? (1) There are many kinds of money. (2) There is a common measure of value. (3) It is not difficult to reach double coincidence of wants.
A. B. C. D.
(1) only (3) only (2) and (3) only None of the above.
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## D (1) is incorrect. Money is anything that is generally acceptable as a medium of exchange. In a barter economy, people exchange goods directly for other goods and there is no generally accepted medium of exchange. Money does not exist. (2) is incorrect. In a barter economy, one good has many different exchange ratios as the value of a good is expressed in terms of another good that we trade and there are many goods that can be exchanged for one good. There is a lack of a common measure of value. (3) is incorrect. It is difficult to reach double coincidence of wants without incurring high search costs. ##
|!|EM45003|!| Which of the following factors can account for the difficulty of making transactions in a barter economy? (1) Some goods are indivisible. (2) Some goods are not durable. (3) Some goods are homogeneous.
A. B. C. D.
(1) only (1) and (2) only (2) and (3) only (1), (2) and (3)
## B (3) is incorrect. If goods are homogeneous, it is easier to specify the exchange ratios of goods in transactions. ##
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|!|EM45004|!| Which of the following is NOT a function of money? A. B. C. D. a store of value a standard of deferred payment a measure of wealth a medium of exchange
## C Money has four functions, namely medium of exchange, store of value, unit of account and standard of deferred payment. A measure of wealth is not a function of money. ##
|!|EM45005|!| To say that money serves as a unit of account means that A. B. C. D. money is the unit used in recording transactions in accounting. money can store value. money can be used in buying and selling goods. prices of goods and services are expressed in terms of money.
## D ##
|!|EM45006|!| Chickens CANNOT be regarded as good money because (1) supply of chickens is limited. (2) chickens are not durable as they will die. (3) chickens are homogeneous.
A. B. C. D.
(1) only (2) only (2) and (3) only (1), (2) and (3)
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## B (1) is incorrect. To maintain the value of money, good money should be limited in supply. However, the supply of chickens always varies, which makes the value of chickens unstable. (3) is incorrect. Chickens are not homogeneous in nature. ##
|!|EM45007|!| When a barter economy changes to an economy where money is issued, (1) people can store wealth easier. (2) the problem of double coincidence of wants can be solved. (3) the cost of transactions significantly increases.
A. B. C. D.
## B (1) is correct. In a barter economy, people have to store their goods for future exchange. If there is money, people can store up the purchasing power for future spending on goods and services in the form of money. (2) is correct. Goods can be exchanged for money and the money can be exchanged for other goods. Buying and selling can be separated. Therefore, the problem of double coincidence of wants can be solved. (3) is incorrect. With money, the cost of transactions decreases drastically. ##
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|!|EM45008|!| Cows are not a standard of deferred payment because A. B. C. D. cows are not easily divisible. payment in the future in general is not denominated in cows. cows are not generally accepted as a means of payment. cows are limited in supply.
## B ##
|!|EM45009|!| A farm owner agrees to pay Sam a chicken after Sam works in a farmland for a day. In this case, chickens perform the function of money as A. B. C. D. a store of value. a standard of deferred payment. a medium of exchange. a unit of account.
## B In this case, future payment is expressed in terms of chicken. ##
|!|EM45010|!| Commodity money A. B. C. D. has a large supply. has intrinsic value. can be converted into the corresponding amount of gold or sliver on demand. may exist in a barter economy.
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## B Commodity money is a kind of money that has intrinsic value. It can serve purposes other than a medium of exchange. ##
|!|EM45011|!| Which of the following statements about money is CORRECT? A. B. C. D. Fiat money may have some intrinsic value. Fiat money is not backed by gold or silver Convertible money includes gold and silver. Convertible money is a generally acceptable medium of exchange nowadays.
## B Through the declaration of the government, fiat money is authorised as legal tender. It cannot be converted into gold or silver on demand. ##
|!|EM45012|!| Silver is an example of ___________ hundreds of years ago, while a ten-dollar note issued by the Hong Kong Monetary Authority is an example of ___________ nowadays. A. B. C. D. commodity money fiat money convertible money legal tender commodity money convertible money convertible money fiat money
## A ##
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|!|EM45013|!| Which of the following types of deposits has a fixed maturity period as well as a transferable ownership? A. B. C. D. demand deposit savings deposit time deposit negotiable certificate of deposit (NCD)
## D Among the four options, only negotiable certificate of deposit and time deposits have a fixed maturity period, but the latter is not transferable. ##
|!|EM45014|!| Which of the following statements is CORRECT? A. B. C. A savings deposit has a fixed maturity period. The interest rate on a time deposit is usually higher than that on a savings deposit. With Easy Pay System (EPS), money in a time deposit account can be used to settle payments. D. Negotiable certificate of deposit usually does not bear interest.
## B Option A is incorrect. A savings deposit does not have a fixed maturity period. Option C is incorrect. Only money in a savings account can be used to settle payments with EPS. Option D is incorrect. Negotiable certificate of deposit bears interest and the interest rate can be floating or fixed. ##
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|!|EM45015|!| Which of the following is/are the characteristic(s) of a time deposit? (1) Money can be drawn from a time deposit account by writing cheques. (2) It usually has a higher interest rate than a savings deposit. (3) It has a fixed maturity period.
A. B. C. D.
## C A time deposit refers to the money deposited in a fixed deposit account. It has a fixed maturity period. The interest rate on it is higher than that on a savings deposit. (1) is incorrect. Money can be drawn from a current account by writing cheques, but not from a time deposit account. ##
|!|EM45016|!| A savings deposit is better than a time deposit in serving the function of money as a __________ because the former __________. A. B. C. D. store of value does not have a fixed maturity period store of value enjoys a higher interest rate medium of exchange can be used to settle payments with Easy Pay System (EPS) medium of exchange has a more stable value
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## C A savings deposit refers to the money deposited in a savings account. With EPS, money in a savings account can be used to settle payments. A time deposit refers to the money deposited into a fixed deposit account. Money in a time deposit cannot be used to settle payments with EPS. Therefore, a savings deposit is better than a time deposit in serving the function of money as a medium of exchange, as EPS is generally acceptable as a medium of exchange. ##
|!|EM45017|!| Electronic money refers to A. B. C. D. using electricity as money in transactions. a kind of money which can be used as a form of payment in an electronic system. money used to pay electricity bills. money used to make online payments.
## B According to the definition, electronic money is a kind of digital cash that can be used as a form of payment in an electronic system. One example is the Octopus card. ##
|!|EM45018|!| It is more common to use credit cards instead of cash to make payments of large value because credit cards are more A. B. C. D. portable. limited in supply. durable. stable in value.
## A ##
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|!|EM45019|!| Which of the following can explain why Hong Kong dollars are not regarded as money in Japan? A. B. C. D. Hong Kong dollars are less valuable in Japan. Hong Kong dollars are not issued by the Bank of Japan. The exchange rate of Hong Kong dollars to Japanese Yen often fluctuates. None of the above.
## D Money is anything that is generally acceptable as a medium of exchange. Hong Kong dollars are not regarded as money in Japan because not many Japanese accept Hong Kong dollars for payments, i.e., it is not generally accepted as a medium of exchange in Japan. ##
|!|EM45020|!| John says, I have a PARKnSHOPs $100 cash coupon. I can use it to make payment when buying things in PARKnSHOP. The cash coupon A. B. C. D. is money as it is a medium of exchange. is money as it is a store of value. is not money as we can only use it in the PARKnSHOP but not the other shops. is not money as it is not legal tender.
## C Money is anything that is generally acceptable as a medium of exchange. The PARKnSHOPs cash coupon can only be used in PARKnSHOP. It is not generally acceptable as a medium of exchange and so it is not money. ##
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|!|EM45021|!| Which of the following is NOT a quality of good money? A. B. C. D. easy to carry has intrinsic value divisible is not worn out easily
## B ##
|!|EM45022|!| Which of the following statements is/are CORRECT? (1) Good money should be homogeneous so that people can easily recognise it. (2) All kinds of deposits are good money as they bear interest. (3) Diamonds are durable and limited in supply, so it is good money.
A. B. C. D.
## B (1) is correct. Good money should be homogeneous. Money of the same face value should have uniform physical characteristics so that people can easily recognise it. (3) is correct. As being durable and limited in supply are the qualities of good money, diamonds are good money in the sense of these two aspects. (2) is incorrect. Interest-bearing is not a factor to determine what good money is. Besides, a demand deposit usually does not bear interest. ##
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|!|EM45023|!| In Hong Kong, using Octopus cards for payments is becoming more popular. Possible reason(s) include(s): (1) Octopus cards are stable in value. (2) Octopus cards are easy to carry. (3) more and more shops accept Octopus cards as a medium of exchange.
A. B. C. D.
## C ##
|!|EM45024|!| Which of the following is the quality/are the qualities of good money that stamps fulfil? (1) divisible (2) limited in supply (3) generally acceptable as a means of payment
A. B. C. D.
(1) only (3) only (1) and (2) only (2) and (3) only
## C ##
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|!|EM45025|!| Water is a better form of money than silver because water is (1) limited in supply. (2) easier to carry. (3) a necessity.
A. B. C. D.
(1) and (2) only (2) and (3) only (1), (2) and (3) None of the above.
## D (1) is incorrect. The supply of silver is relatively more limited. (2) is incorrect. Compared to silver, water is relatively heavy and bulky, thus it is not easy to carry. (3) is incorrect. Whether the good is a necessity or not is irrelevant in determining whether it is good money. ##
|!|EM45026|!| Money A. B. C. D. can be stones, as long as stones are generally acceptable as a medium of exchange. can be carried around easily. is the banknotes and coins that are declared by the government. exists in a one-man economy.
## A Money is anything that is generally acceptable as a medium of exchange. If stones are generally acceptable as a medium of exchange, stones can be regarded as money. ##
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|!|EM45027|!| What will happen if the supply of money increases sharply? A. B. C. D. The value of money will increase. The demand for money will increase. The cost of production will decrease. The purchasing power of money will decrease.
## D If the supply of money increases sharply, its value will fall drastically and the purchasing power of money will decrease. ##
|!|EM45028|!| Which of the following can maintain the value of money? A. B. C. D. limiting the supply of money increasing the supply of money adopting a fixed exchange rate system adopting a floating exchange rate system
## A The value of money is determined by its relative scarcity. Therefore, to keep the value of money stable, it should be limited in supply. ##
|!|EM45029|!| To be good money, money of the same face value should A. B. C. D. be stable in value. be durable. be issued by the same financial institution. have uniform physical characteristics.
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## D To be good money, money of the same face value should have uniform physical characteristics, such as appearance, size and design, so that people can easily recognise it. ##
|!|EM45030|!| Which of the following can best serve as a store of value? A. B. C. D. eggs antiques water computers
## B Antiques can usually maintain their values for years, so they can best serve as a store of value. ##
|!|EM45031|!| Suppose scientists have found a way to produce diamonds at a very low cost. Which of the following is the MOST likely to occur? A. B. C. D. Nobody wants to buy diamonds anymore. The value of diamonds falls sharply. Diamonds can still be good money. Diamonds will be widely accepted as a medium of exchange.
## B If diamonds can be produced at a very low cost, the supply of diamonds will greatly increase. Its value will fall drastically. ##
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|!|EM45032|!| Which of the following institutions does not issue currency in Hong Kong? A. B. C. D. Bank of China (Hong Kong) Limited The Hong Kong Monetary Authority The Bank of East Asia Standard Chartered Bank (Hong Kong) Limited
## C ##
|!|EM45033|!| The currency system in Hong Kong is one on a foreign exchange standard. Issuing more banknotes means A. B. C. D. the amount of US dollars in reserves will increase. the amount of US dollars in reserves will decrease. the amount of US dollars circulating in market will increase. the amount of HK dollars circulating in market will decrease.
## A Since note-issuing banks have to submit an equivalent amount of US dollars to the Hong Kong Exchange Fund before issuing banknotes, issuing more banknotes means putting more US dollars into the reserves. The amount of US dollars in reserves will increase. ##
|!|EM45034|!| Which of the following statements about the currency issuing system in Hong Kong is INCORRECT? A. B. C. Hong Kong adopts the linked exchange rate system. Issuing more banknotes means putting more US dollars in the Exchange Fund reserves. When issuing banknotes, note-issuing banks can take out an equivalent amount of US dollars from the Exchange Fund. D. The currency system in Hong Kong is one on a foreign exchange standard.
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## C When issuing banknotes, note-issuing banks have to submit an equivalent amount of US dollars to the Exchange Fund. ##
|!|EM45035|!| The roles of a central bank include (1) handing out loans to the public. (2) acting as a government adviser on important financial matters. (3) providing currency exchange services. (4) acting as the lender of last resort.
A. B. C. D.
(1) and (2) only (1) and (4) only (2) and (4) only (3) and (4) only
## C (1) and (3) are incorrect. Handing out loans to the public and providing currency exchange services are functions of a commercial bank. ##
|!|EM45036|!| The clearing house of an economy is administered by the central bank. This means that the central bank is responsible for A. B. C. D. settling the cheques and autopay transactions among commercial banks. clearing all the bad loans of commercial banks. avoiding financial crises. lending money to commercial banks when they experience financial difficulties.
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## A ##
|!|EM45037|!| In Hong Kong, the central bank function of ______________ is performed by a commercial bank. A. B. C. D. acting as the banker of the government acting as the lender of last resort monitoring the monetary sector managing the foreign exchange reserves
## A In Hong Kong, the Hongkong and Shanghai Banking Corporation Ltd. acts as a governments bank. ##
|!|EM45038|!| Which of the following are functions of a central bank? (1) to ensure the stability of the banking system (2) to fight against corruption in companies (3) to control the money supply and interest rates (4) to avoid bank runs
A. B. C. D.
(1), (2) and (3) only (1), (2) and (4) only (1), (3) and (4) only (2), (3) and (4) only
## C ##
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|!|EM45039|!| Which of the following about functions of a central bank carried out in Hong Kong is INCORRECT? A. B. C. D. The Hong Kong Monetary Authority carries out monetary policies in Hong Kong. The Hong Kong Monetary Authority acts as the lender of last resort for financial institutions. The Hong Kong Interbank Clearing Limited acts as the clearing house. The Hong Kong Association of Banks supervises banking activities.
## D The Hong Kong Monetary Authority is responsible for the supervision of banking activities according to the Banking Ordinance in Hong Kong. ##
|!|EM45040|!| Discount rate is A. B. C. D. the interest rate at which a commercial bank lends money to borrowers. the interest rate at which a person deposits money into commercial banks. the interest rate at which a commercial bank lends money to another commercial bank. the interest rate at which a central bank lends money to commercial banks.
## D ##
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|!|EM45041|!| Which of the following functions of a central bank are performed by the Hong Kong Monetary Authority? (1) acting as the lender of last resort (2) managing the foreign exchange reserves (3) acting as the banker of the government (4) carrying out monetary policies
A. B. C. D.
(1) and (3) only (2) and (4) only (1), (2) and (4) only (2), (3) and (4) only
## C (3) is incorrect. The Hongkong and Shanghai Banking Corporation Ltd. acts as a governments bank in Hong Kong. ##
|!|EM45042|!| A central bank acts as the lender of last resort when commercial banks ____________. This practice aims at protecting ____________. A. B. C. D. have too many excess reserves depositors experience financial difficulties depositors want to take over other banks commercial banks help other companies underwrite new shares the economy
## B As the lender of last resort, a central bank will lend money to commercial banks when they experience financial difficulties. It prevents those commercial banks from collapsing and aims at protecting depositors and preventing widespread bank runs. ##
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|!|EM45043|!| One of the functions of a central bank is to act as the banker of the government. The main duties include (1) underwriting government bonds. (2) determining the interest rate on loans and deposits of banks. (3) managing the treasury of the government.
A. B. C. D.
(1) and (2) only (1) and (3) only (2) and (3) only (1), (2) and (3)
## B As the banker of the government, a central bank manages government accounts, underwrites government bonds and acts as government adviser on important financial matters. ##
|!|EM45044|!| Which of the following is/are issued by the Hong Kong Monetary Authority? (1) five-dollar coins (2) five-hundred-dollar notes (3) ten-dollar notes
A. B. C. D.
## B In Hong Kong, coins and ten-dollar notes are issued by the HKSAR Government through the Hong Kong Monetary Authority. ##
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|!|EM45045|!| Which of the following is/are the function(s) of a commercial bank? (1) to ensure the stability of the banking system (2) to accept various types of deposits from the public (3) to provide overseas remittance services
A. B. C. D.
## C (1) is incorrect. Ensuring the stability of the banking system is the role of a central bank. ##
|!|EM45046|!| Which of the following is NOT a function of commercial banks in Hong Kong? A. B. C. D. to provide loans to administer the payments and collection of money for the government to issue letters of credit to provide safety deposit boxes service
## B Administering the payments and collection of money for the government is the function of the Treasury, not the function of commercial banks. ##
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|!|EM45047|!| Underwriting new shares by commercial banks means A. B. C. D. lending money to the public in investing new shares. helping companies to issue shares. issuing shares in the stock market. buying up newly issued shares that are unsold.
## D ##
|!|EM45048|!| Which of the following about commercial banks in Hong Kong is INCORRECT? A. Commercial banks are financial intermediaries that accept bank deposits and lend those funds to investors or borrowers. B. C. D. All commercial banks are retail banks. Commercial banks accept various types of deposits from the public. Commercial banks issue letters of credit and discount bills of exchange.
## B There are two main types of commercial banks: retail bank and merchant bank. ##
|!|EM45049|!| Which of the following deposit-taking institutions in Hong Kong can accept savings deposits? A. B. C. D. licensed banks restricted licence banks deposit-taking companies All of the above.
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## A Only licensed banks can accept savings deposits. Restricted licence banks and deposit-taking companies can only accept time deposits and negotiable certificates of deposit (NCDs). ##
|!|EM45050|!| Read the following advertisement of a financial institution. High Interest Rates for Savings Deposits Under $500,000: 1.8% $500,000 - $999,999: 2% $1,000,000 or above: 2.25%
The above financial institution is a _____________________. A. B. C. D. licensed bank restricted licence bank deposit-taking company licensed bank, restricted licence bank or deposit-taking company
## A Only licensed banks can accept savings deposits. Restricted licence banks and deposit-taking companies can only accept time deposits and negotiable certificates of deposit (NCDs). ##
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|!|EM45051|!| Mr. Chan is deciding to deposit some of his cash into a financial institution. The following is the information he has. Saving Plan A Time deposit under $100,000 for at least 3 months: 2.25% Time deposit of $100,000 or above for at least 3 months: 2.5%
Saving Plan B Time deposit of $500,000 - $999,999 for at least 1 month: 2.75% Time deposit of $1,000,000 or above with any maturity: 3%
From the above information, we know that Saving Plan A may be offered by a ___________________ and Saving Plan B may be offered by a ___________________. A. B. C. D. licensed bank deposit-taking company restricted licence bank deposit-taking company licensed bank restricted licence bank deposit-taking company restricted licence bank
## C Licensed banks can accept any deposits of any amount and maturity. Restricted licence banks can only accept deposits of any maturity of $500,000 or above. Deposit-taking companies can only accept deposits of $100,000 or above with an original maturity of at least three months. Saving Plan A cannot be offered by a restricted licence bank or deposit-taking company. It is because both of them do not accept deposits less than $100,000. Saving Plan B can be offered by a licensed bank or restricted licence bank, but not a deposit-taking company. It is because deposit-taking companies do not accept deposits with a maturity less than three months. ##
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|!|EM45052|!| Which of the following about the banking system of Hong Kong is/are CORRECT? (1) Hong Kong adopts a Three-tier Banking System. (2) All deposit-taking institutions are supervised by the Treasury. (3) Only licensed banks accept any deposits of any amount and maturity.
A. B. C. D.
## B (2) is incorrect. All deposit-taking institutions are supervised by the Hong Kong Monetary Authority, but not the Treasury. ##
|!|EM45053|!| Miss Lee wants to deposit $300,000 for six months. Which of the following institutions can accept her deposit? (1) licensed banks (2) restricted licence banks (3) deposit-taking companies
A. B. C. D.
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## C Licensed banks can accept any deposits of any amount and maturity. Deposit-taking companies can accept deposits of $100,000 or above with an original maturity of at least three months. Therefore, they can accept the deposit of Miss Lee. Restricted licence banks can only accept deposits of any maturity of $500,000 or above. Therefore, they cannot accept the deposit of Miss Lee. ##
|!|EM45054|!| Yvonne wants to make a time deposit of $100,000 for a month. She can consider depositing in a (1) licensed bank. (2) restricted licence bank. (3) deposit-taking company.
A. B. C. D.
(1) only (1) and (2) only (1) and (3) only (2) and (3) only
## A Licensed banks can accept any deposits of any amount and maturity. Restricted licence banks can only accept deposits of any maturity of $500,000 or above. Therefore, they cannot accept the deposit of Yvonne. Deposit-taking companies can only accept deposits of $100,000 or above with an original maturity of at least three months. Therefore, they cannot accept the deposit of Yvonne. ##
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|!|EM45055|!| Which of the following is NOT an example of licensed banks in Hong Kong? A. B. C. D. Hang Seng Bank Limited The Hongkong and Shanghai Banking Corporation Ltd. Standard Chartered Bank (Hong Kong) Limited Public Finance Limited
## D Public Finance Limited belongs to a deposit-taking company. ##
|!|EM45056|!| Which of the following has helped Hong Kong develop into an international financial centre? (1) Hong Kong has strong links with the Mainland. (2) Hong Kong has one of the best deep-water harbours in the world. (3) Hong Kong does not have foreign exchange control.
A. B. C. D.
(1) and (2) only (1) and (3) only (2) and (3) only (1), (2) and (3)
## B ##
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|!|EM45057|!| Which of the following statements about factors contributing to the development of Hong Kong as an international financial centre is INCORRECT? A. B. Hong Kong has well-developed financial infrastructure. Foreign multinationals often set up regional headquarters in China to develop their business in Hong Kong. C. D. Hong Kong has no restriction on capital flows. The regulatory framework of the financial markets in Hong Kong is up to international standards.
## B ##
|!|EM45058|!| Which of the following is NOT an effect of Hong Kong being a financial centre on Hong Kong economy? A. B. C. D. The financial market of Hong Kong becomes sensitive to external shocks. Different financial instruments are introduced in Hong Kong. There is an insignificant number of people working in the financial sector. There are more employment opportunities for overseas professionals.
## C ##
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Short Questions |!|ES45001|!| (a) Explain what a barter economy is. (2 marks)
(b) Give TWO reasons to explain why transactions of goods are very costly in a barter economy. (4 marks)
## (a) Barter economy is an economy in which people exchange goods directly for other goods. (2 marks) (b) - It is difficult to reach double coincidence of wants without incurring high search costs. Double coincidence of wants occurs when there are two parties who own and wish to sell goods that are wanted by one another. - Goods are heterogeneous and often indivisible. Therefore, it is difficult to reach an agreement on the exchange ratio. - Any reasonable answer(s) (Mark the FIRST TWO points only, 2 marks each) ##
|!|ES45002|!| Suppose Mr. Woo and Betty are living in a barter economy. Betty says, Mr. Woo, I want your cow. I would like to use two of my chickens to exchange for your cow. Mr. Woo replies, I like your chickens too, but two chickens are not enough for me! They can only exchange for 1/4 of my cow. (a) What problem is illustrated in the above conversation? Explain. (3 marks) (2 marks)
(b) State ONE other problem that can be found in a barter economy.
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## (a) The conversation illustrates the difficulty in reaching an agreement on the exchange ratio in a barter economy. (1 mark)
Since the goods they traded are heterogeneous and indivisible, they cannot compromise on an exchange ratio. (b) - difficulty in meeting double coincidence of wants - lack of a common measure of value - difficulty in storing wealth (Mark the FIRST point only, 2 marks) ## (2 marks)
|!|ES45003|!| (a) Many small groceries do not accept payments by Octopus card. Which function of money does an Octopus card fail to perform in this case? (b) Name and explain TWO other functions of money. (2 marks) (4 marks)
## (a) The Octopus card fails to perform the function of money as a medium of exchange because we cannot settle payments by Octopus card in small groceries. (b) - A unit of account: Money is used to express prices and values of goods and services. - A store of value: People can store up the purchasing power for future spending on goods and services in the form of money. - A standard of deferred payment: Future payment is expressed in terms of money. (Mark the FIRST TWO points only, 2 marks each) ## (2 marks)
|!|ES45004|!| Explain how the use of money can reduce the transaction cost of exchange as compared to the situation in a barter economy. (4 marks)
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## Money serves as a medium of exchange to facilitate transactions of goods and services. This solves the problem of double coincidence of wants. Therefore, the use of money can reduce the high search costs in a barter economy. (2 marks)
As a unit of account, money is used to express prices and values of goods and services. The problem of agreeing on an exchange ratio can be solved. Therefore, the use of money can reduce the cost on reaching an agreement on the exchange ratio in a barter economy. ## (2 marks)
|!|ES45005|!| Explain the function of money illustrated in the following cases. (a) Some book shops in England accept payment in US dollars. (2 marks)
(b) The prices of souvenirs in some shops in Japan are expressed in terms of both Japanese Yen and Euro. (c) Banks in China accept deposits in Renminbi. (2 marks) (2 marks)
## (a) Medium of exchange. People can use US dollars as a medium of exchange to buy books. (b) Unit of account. Euro is used to express prices and values of souvenirs. (c) Store of value. (1 mark) (1 mark) (1 mark) (1 mark) (1 mark)
People can store up the purchasing power for future spending on goods and services in the form of Renminbi. ## (1 mark)
|!|ES45006|!| (a) Identify the following types of money. (i) Diamonds are an example of _____________ money. (1 mark) (1 mark)
(ii) Easy Pay System (EPS) is an example of _____________ money. (iii) A ten-dollar note issued by the Hong Kong Monetary Authority is an example of _____________ money.
(1 mark)
(b) Many people deposit their money in savings accounts instead of holding a large amount of cash. Give ONE possible reason to explain this phenomenon. (2 marks)
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## (a) (i) commodity (1 mark) (1 mark) (1 mark)
(ii) electronic (iii) fiat (b) - Savings deposit bears interest whereas holding cash does not. - Any reasonable answer
(Mark the FIRST point only, 2 marks) ##
|!|ES45007|!| Compare a demand deposit and a time deposit in serving the function of money as (a) a medium of exchange. (2 marks) (2 marks)
(b) a store of value.
## (a) A demand deposit is better in serving the function of money as a medium of exchange. It is because people can draw money from the current account by writing cheques, while it is not possible to do so for time deposit. (2 marks)
(b) A time deposit is better in serving the function of money as a store of value. It is because a time deposit bears interest but a demand deposit does not. ## (2 marks)
|!|ES45008|!| Which is a better form of money, gold or shells? Give TWO reasons to support your answer. (5 marks)
## Gold is a better form of money. Reasons include: - Gold is more durable than shells. Gold does not wear out easily, but shells may be destroyed easily. - Gold is more homogeneous than shell. Gold of same value has similar physical characteristics. However, shells are heterogeneous and each shell may have different size and shape. - Any reasonable answer(s) (Mark the FIRST TWO points only, 2 marks each) ## (1 mark)
253
|!|ES45009|!| Do you agree with the following statements? Explain your answer. (a) Good money should have the same face value, so that people can easily recognise it. (3 marks)
(b) In Hong Kong, the Euro is not regarded as money because it is not the currency issued by the Hong Kong Monetary Authority. (3 marks)
## (a) No. (1 mark)
Good money should be divisible into different denominations without incurring a change in total value in order to facilitate transactions of small amounts. (b) No. (2 marks) (1 mark)
Money is anything that is generally acceptable as a medium of exchange. As the Euro in Hong Kong is not generally acceptable as a medium of exchange, it is not regarded as money. It is not determined by whether the Euro is issued by Hong Kong Monetary Authority or not. ## (2 marks)
|!|ES45010|!| (a) What is legal tender? (2 marks) (1 mark) (2 marks)
(b) Give ONE example of legal tender in Hong Kong. (c) Name TWO institutions that issue legal tender in Hong Kong.
## (a) Legal tender is a currency that a creditor is legally obliged to accept in settlements of payments and debts. (b) - Coins circulating in Hong Kong - Banknotes circulating in Hong Kong (Mark the FIRST point only, 1 mark) (c) - The Hong Kong Monetary Authority - The Hongkong and Shanghai Banking Corporation Limited - Standard Chartered Bank (Hong Kong) Limited - Bank of China (Hong Kong) Limited (Mark the FIRST TWO points only, 1 mark each) ## (2 marks)
254
|!|ES45011|!| (a) One of the functions of a central bank is to act as the lender of last resort. What is meant by the lender of last resort? (b) Why does an economy need the central bank to act as the lender of last resort? (2 marks) (2 marks)
## (a) As the lender of last resort, a central bank will lend money to commercial banks when they experience financial difficulties. (2 marks)
(b) Acting as the lender of last resort, a central bank can prevent commercial banks that experience financial difficulties from collapsing, thereby protecting depositors and preventing widespread bank runs. Bank runs can damage the economy. ## (2 marks)
|!|ES45012|!| (a) Explain briefly TWO functions of a central bank. (4 marks) (2 marks) (1 mark)
(b) Name TWO examples of central bank in reality. (c) Which institution carries out most functions of a central bank in Hong Kong?
## (a) Functions of a central bank include (with explanation): - to issue currency - to act as the banker and adviser of the government - to supervise and monitor the monetary sector - to act as the lender of last resort - to administer the clearing house - to carry out monetary policies - to manage a countrys foreign exchange reserves (Mark the FIRST TWO points only, 2 marks each) (b) - Peoples Bank of China - Bank of England - Any reasonable answer(s) (Mark the FIRST TWO points only, 1 mark each) (c) ## The Hong Kong Monetary Authority. (1 mark)
255
|!|ES45013|!| (a) Which TWO functions of central bank are performed by the Hongkong and Shanghai Banking Corporation Limited in Hong Kong? (2 marks)
(b) List TWO other functions of a central bank performed by the Hong Kong Monetary Authority. (2 marks)
## (a) - to issue currency - to act as a governments bank (b) - to act as an adviser of the government on important financial and banking matters - to supervise and monitor the monetary sector - to act as the lender of last resort - to carry out monetary policies - to manage Hong Kongs foreign exchange reserves (Mark the FIRST TWO points only, 1 mark each) ## (1 mark) (1 mark)
|!|ES45014|!| (a) Some commercial banks help listed companies issue shares and underwrite the new shares. What is meant by underwriting new shares? (b) State TWO other functions of a commercial bank. (2 marks) (2 marks)
## (a) Underwriting new shares means buying up the unsold new shares issued by the listed companies. (2 marks) (b) Other functions of a commercial bank include: - accepting various types of deposits from the public - providing loans - issuing letters of credit and discounting bills of exchange - Any reasonable answer(s) (Mark the FIRST TWO points only, 1 mark each) ##
256
|!|ES45015|!| In Hong Kong, there are three commercial banks responsible for issuing currency. (a) Name the three commercial banks which issue currency in Hong Kong. (3 marks)
(b) The currency system in Hong Kong is one on a foreign exchange standard. What does this mean? (3 marks)
## (a) - The Hongkong and Shanghai Banking Corporation Limited - Standard Chartered Bank (Hong Kong) Limited - Bank of China (Hong Kong) Limited (1 mark) (1 mark) (1 mark)
(b) Since note-issuing banks have to submit an equivalent amount of US dollars to the Exchange Fund before issuing banknotes, issuing more banknotes means putting more US dollars into the reserves. Therefore, the currency system in Hong Kong is one on a foreign exchange standard. (3 marks) ##
|!|ES45016|!| (a) Which three types of deposit-taking institutions are included in the Three-tier Banking System in Hong Kong? (3 marks)
(b) Mr. Wong wants to deposit $500,000 for a month. Explain which type(s) of deposit-taking institution can accept his deposit. (4 marks)
## (a) - licensed banks - restricted licence banks - deposit-taking companies (b) Mr. Wong can deposit the money either into licensed banks or restricted licence banks. Licensed banks can accept deposits of any amount and maturity. (1 mark) (1 mark) (1 mark) (1 mark) (1 mark)
Restricted licence banks can accept time deposits of any maturity of $500,000 or above. (1 mark) Deposit-taking companies cannot accept deposits with an original maturity of less than 3 months, so they cannot accept Mr. Wongs deposit. ## (1 mark)
257
|!|ES45017|!| Deposit-taking institution A and deposit-taking institution B are two different types of deposit-taking institutions. Miss Lam wants to deposit $500,000 in a savings account, while Miss Ho wants to deposit $300,000 in a time deposit account for 3 months. (a) If Miss Lam can only deposit into deposit-taking institution A, what type of deposit-taking institution is it? Explain. (3 marks)
(b) If both Miss Lam and Miss Ho cannot deposit into deposit-taking institution B, what type of deposit-taking institution is it? Explain. (3 marks)
## (a) Deposit-taking institution A is a licensed bank. (1 mark)
Among the three types of deposit-taking institution, only licensed banks can accept savings deposits. (b) Deposit-taking institution B is a restricted licence bank. (2 marks) (1 mark)
A restricted licence bank only accepts time deposits and negotiable certificates of deposits, so it cannot accept the deposit of Miss Lam. (1 mark)
A restricted licence bank only accepts deposits of $500,000 or above, so it cannot accept the deposit of $300,000 from Miss Ho. ## (1 mark)
|!|ES45018|!| (a) Briefly explain TWO factors that contribute to the successful development of Hong Kong as an international financial centre. (b) Briefly explain TWO effects of being a financial centre on the Hong Kong economy. (4 marks) (4 marks)
258
## (a) Factors that contribute to the successful development of Hong Kong as an international financial centre include (with explanation): - favourable geographical position - absence of restriction on capital flows - strong links with the Mainland - well-developed financial infrastructure - effective and transparent legal framework - highly-educated workforce - Any reasonable answer(s) (Mark the FIRST TWO points only, 2 marks each) (b) Effects of being a financial centre on Hong Kong economy include (with explanation): - fostering the economic development of Hong Kong - providing employment opportunities - enhancing the efficiency of the financial markets - providing investment opportunities - sensitive to external shocks - Any reasonable answer(s) (Mark the FIRST TWO points only, 2 marks each) ##
259
Long Questions |!|EL45001|!| During times of political instability, people prefer receiving gold than banknotes in transactions. The demand for gold increases drastically. (a) State TWO reasons that explain why gold may be a better form of money than banknotes during times of political instability. (b) List TWO functions of money that gold can perform during that time. (c) How would the price of gold change? Explain with the aid of a diagram. (4 marks) (4 marks) (3 marks)
## (a) - During times of political instability, people may lose confidence on legal tender. The value of banknotes may fall drastically. The value of gold will be more stable than that of banknotes. - Gold is more generally accepted as a means of payment and debt settlement than banknotes. - Gold is more durable than banknotes because gold wont wear out easily. - Any reasonable answer(s) (Mark the FIRST TWO points only, 2 marks each) (b) - As people prefer receiving gold in transactions, gold can perform the function of money as a medium of exchange. - Gold can serve as a store of value. People can store up the purchasing power for future spending on goods and services in the form of gold. - Gold may serve as a standard of deferred payment. Future payment may be expressed in terms of gold. (Mark the FIRST TWO points only, 2 marks each) (c) Given the supply curve, when the demand for gold increases, the price of gold will increase. (1 mark)
Unit price S
P1
P0 D0 0
D1
Quantity
(2 marks) ##
260
|!|EL45002|!| Nowadays, many restaurants like to issue free cash coupons through the Internet in order to attract people. (a) Explain whether these free cash coupons are (i) free goods. (3 marks) (3 marks)
(ii) money.
(b) Besides issuing cash coupons, some restaurants also work with commercial banks to issue credit cards with the logo of the restaurants. Identify TWO functions of money that these credit cards fail to perform. (4 marks)
## (a) (i) The free cash coupons are not free goods. (1 mark)
Free goods refer to those goods that people do not prefer more of as the quantity available is sufficient to satisfy all human wants. (1 mark)
Producing these free cash coupons involves costs. They are economic goods but not free goods. (ii) The free cash coupons are not money. Money is anything that is generally acceptable as a medium of exchange. As the cash coupons can only be used in specific restaurants, they are not generally acceptable as a medium of exchange. Therefore, they are not money. (1 mark) (1 mark) (1 mark) (1 mark)
(b) - The credit cards cannot perform the function of medium of exchange as not all the shops accept payments by the credit cards. - The credit cards cannot perform the function of unit of account as they are not used to express the prices and values of goods and services. - The credit cards cannot perform the function of store of value as people cannot store up the purchasing power in the form of the credit cards. - The credit cards cannot perform the function of standard of deferred payment as future payment is not expressed in terms of the credit cards. (Mark the FIRST TWO points only, 2 marks each) ##
221
|!|EL45003|!| The following are the saving plan advertisements offered by two different types of financial institutions. Institution A Interest Rates for Savings Deposits Under $500,000 with any maturity: 2% $500,000 or above with any maturity: 2.15% Institution B Interest Rates for Time Deposits $100,000 - $199,999 for at least 3 months: 2.25% $200,000 or above for at least 3 months: 2.5%
(a)
Identify the type(s) of deposit-taking institution of institution A and institution B. Explain your answer. (4 marks)
(b) Suppose Mr. Cheung wants to deposit $500,000 for two months. Which of the above institutions can accept his deposit? (c) (2 marks)
Besides accepting deposits, briefly explain TWO other functions provided by Institution A. (4 marks)
## (a) Institution A is a licensed bank. Only licensed banks can accept savings deposits. Institution B is a deposit-taking company. (1 mark) (1 mark) (1 mark)
Deposit-taking companies can accept deposits of $100,000 or above with an original maturity of at least three months. As restricted licence banks cannot accept deposits less than $500,000 and institution A is a licensed bank, so institution B must be a deposit-taking company. (b) Institution A. (1 mark) (1 mark)
Licensed banks can accept any deposits of any amount and maturity and deposit-taking companies cannot accept deposits with an original maturity less than three months. Therefore, only institution A can accept his deposit. (c) - providing loans to households and firms - issuing letters of credit and discounting bills of exchange - underwriting new shares - Any reasonable answer(s) (Mark the FIRST TWO points only, 2 marks each) ## (1 mark)
222
|!|EL45004|!| In Hong Kong, there is no central bank. The Hong Kong Monetary Authority (HKMA) carries out most functions of a central bank in Hong Kong. However, some functions of a central bank are performed by other institutions. (a) Identify and explain TWO functions of a central bank that are not performed by the HKMA. (4 marks) (b) The HKMA is one of the regulatory bodies regulating the financial sector in Hong Kong. Name TWO other regulatory bodies. (c) (2 marks)
The regulatory bodies mentioned in (b) are crucial in forming an effective and transparent legal framework in Hong Kong. Discuss TWO other factors that contribute to Hong Kongs development as a financial centre. (4 marks)
## (a) - Issuing currency: Coins and ten-dollar notes are issued by the HKSAR Government through the HKMA. Banknotes of other face values are issued by the three note-issuing banks. (2 marks)
- Acting as the banker of the government: The Hongkong and Shanghai Banking Corporation Ltd. acts as a governments bank. The Treasury is responsible for the payments and collection of money for the government. (b) - Hong Kong Exchanges and Clearing Limited - Securities and Futures Commission - Any reasonable answer(s) (Mark the FIRST TWO points only, 1 mark each) (c) Factors that contribute to Hong Kongs development as a financial centre include (with explanation): - favourable geographical position - absence of restriction on capital flows - strong links with the Mainland - well-developed financial infrastructure - highly-educated workforce - Any reasonable answer(s) (Mark the FIRST TWO points only, 2 marks each) ## (2 marks)
223

Chapter 19 Money and Banking

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Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

## B In this case, future payment is expressed in terms of chicken. ##

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

## D Public Finance Limited belongs to a deposit-taking company. ##

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking

Aristo Educational Press Ltd.

Economics Inquiry for HKDSE Macroeconomics 1 Chapter 19 Money and Banking