Question

1. Identify an asset that is the most liquid and an asset that is the least liquid from the following list of assets. Assets: a house (real estate); cash; a one-carat diamond; a savings account; 100 shares of Google; a Harley Davidson motorcycle; a checking account; your old leather jacket.

A. most liquid is cash; least liquid is 100 shares of Google

B. most liquid is cash; least liquid is a house

C. most liquid is a savings account; least liquid is a one-carat diamond

D. most liquid is a checking account; least liquid is a savings account

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2. If the reserve requirement is 30% and a bank has a total of $1 million in deposits then how much are they required to have on hand?

A. 3,000

B. 30,000

C. 300,000

D. 3,000,000

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In 2012, the Chinese central bank cut its reserve requirement by 0.5 percentage points to help boost liquidity. It cut reserve requirements for village banks in 2014. As a result:

A. China's money multiplier increased

B. China's money multiplier initially decreased then increased

C. China's money multiplier decreased

D. China's money multiplier initially increased then decreased

Answer 1

QUESTION 1

Liquidity refers to the idea about how easily an an asset an be converted into cash. As everything is valued in terms of money, if you want to have the value in your hands, you must convert it into money.

A cash in hand is perhaps the most liquid asset you can have. This is because it is just plain cash, and that's the ultimate form of money. Other assets has to be converted into money to realize its value.

The other assets have to be converted to money, and this can take time. You might not get enough people who are interested to buy your goods, or maybe there isn't enough demand for them at all.

The most illiquid asset is perhaps house, because real estate can take a lot of time to be sold off. There are lots of legal formalities that you have to undergo and the process takes a lot of time.

So, the correct answer is B.

QUESTION 2

If the reserve requirement is 30%, it means that the banks are legally bound to keep a reserve which is 30% of their entire deposits. The bank has a total of $1 million in deposits. Hence, it has to keep a reserve of 30% of $1 million and can give the rest of the money as loans to others.

30% of $1 million = $300,000

Hence, the bank is required to keep a reserve of $300,000

So the correct answer is C

QUESTION 3

If the reserve requirements are cut, it means that the bank are now required to keep lesser amount as reserves than what they were required to keep before.

Hence, in other words, they are now able to lend out more amount to people as loans. As the money available for loans increased, China's money multiplier increased. It's only through lending that the money multiplier can work. Increased lending would enable the money multiplier to increase.

So correct answer is A.