First Term Mock Uniform Test (2006-2007) Question Book

Secondary 5 – Economics Page 1 of 4

FIRST TERM MOCK UNIFORM TEST (2006-2007)

SECONDARY 5
ECONOMICS
QUESTION BOOK
8.30 am – 9.15 am (45 minutes)
INSTRUCTIONS
(1) This paper consists of two sections, A and B. Attempt all questions.
(2) Write all your answers in the Answer Book provided.
(3) Section A contains 10 questions and carries 10 marks in total. Choose the best answer for each
question; choosing more than one answer will result in no marks for that question.
(4) Section B contains 2 questions and carries 30 marks in total – 28 marks for content and 2 marks for
effective communication.
(5) Supplementary answer sheets will be supplied on request. Hand in the answer sheet(s) on which your
name, class and class number should be written, together with the Answer Book in the end of the test.
* * * * * * * * * *
Section A Multiple-Choice Questions (10 marks)
1. Exchange with the use of money differs from barter exchange in that the former
(1) has a price for each good but the latter has not.
(2) does not require the double coincidence of wants but the latter does.
(3) eliminates the inconvenience in storing wealth but the latter does not.
A. (1) only
B. (2) only
C. (1) and (2) only
D. (1), (2) and (3)

2. Which of the following about Octopus Cards are correct?

(1) When Octopus Cards are used in transactions, payments are directly debited to them.
(2) The use of Octopus Cards results in a decrease in the volume of the legal tender in circulation.
(3) Octopus Cards are regarded as electronic money.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

3. 999 gold is a better form of money than grains of wheat since the latter
(1) are less homogeneous.
(2) are divisible less easily.
(3) wear out slower.
A. (1) only
B. (2) only
C. (1) and (2) only
D. (1), (2) and (3)

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First Term Mock Uniform Test (2006-2007) Question Book
Secondary 5 – Economics Page 2 of 4

4. Ms Lee withdraws $600 000 from her savings deposit with a commercial bank and then deposits $500 000
with a restricted licence bank. The remaining $100 000 is kept at home. The immediate effect is that
A. M1 will increase by $100 000, whereas M2 will remain unchanged.
B. M1 will increase by $100 000, whereas M2 will decrease by $500 000.
C. M1 will remain unchanged, whereas M2 will decrease by $500 000.
D. neither M1 nor M2 will change.

5. Mr Lo plans to deposit $500 000 for three and a half months. Which of the following institutions can accept
his deposit?
(1) banks with a paid-up capital of $25 million
(2) licensed banks
(3) restricted licence banks
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

6. Which of the following kinds of assets has the highest liquidity?

A. cash in hand
B. negotiable certificates of deposit
C. demand deposits
D. savings deposits

7. Which of the following are functions of the Hong Kong Monetary Authority?
(1) to act as the lender of last resort
(2) to supervise all deposit-taking institutions
(3) to manage foreign exchange reserves
(4) to issue all legal tender
A. (2) and (3) only
B. (1), (2) and (3) only
C. (1), (3) and (4) only
D. (1), (2), (3) and (4)

8. During the period around Lunar New Year every year, many people in Hong Kong withdraw cash for their
deposit accounts with banks. Thus the amount of cash held by the public increases.
Which of the following is a definite consequence of the above situation?
A. The value of the maximum banking multiplier of the banking system of Hong Kong decreases.
B. The amount of bank loans made to the public decreases.
C. The money supply of Hong Kong decreases.
D. The maximum possible amount of deposits of the banking system of Hong Kong decreases.

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First Term Mock Uniform Test (2006-2007) Question Book
Secondary 5 – Economics Page 3 of 4

9. Refer to the following balance sheet of a banking system which has an excess reserve of $200 mn.
Assets ($mn) Liabilities ($mn)
Reserves 500 Deposits 1 200
Loans 700
Which of the following statements concerning the above banking system are correct?
(1) An increase by 1 in the maximum banking multiplier will result in an increase in the excess reserve.
(2) When $250 mn is injected into the banking system, the maximum increase in the amount of bank
deposits will be $1000 mn.
(3) The amount of reserves will decrease if all banks loan out their excess reserves.
(4) The maximum possible increase in loans will be the same as the maximum possible increase in
deposits.
A. (1) and (4) only
B. (1), (2) and (3) only
C. (2), (3) and (4) only
D. (1), (2), (3) and (4)

10. Refer to the following balance sheet of a banking system. Suppose the required reserve ratio is 25%.
Assets ($) Liabilities ($)
Reserves 300 Deposits 1 000
Loans 700
Suppose the government increases the required reserve ratio to 40%. Which of the following statements
about the above banking system is correct?
A. The amount of excess reserves will increase to $400.
B. The amount of deposits will remain unchanged.
C. The maximum amount of loans will be $600.
D. The maximum amount of deposits will be $750.

Section B Structured Questions (30 marks)

1. The “individual travel scheme” implemented by the HKSAR Government has successfully brought many
tourists from Mainland China to Hong Kong recently. The use of Renminbi (RMB) in Hong Kong is
growing popular. In some shops, the prices of goods and services are expressed in RMB, and tourists can
pay cash in RMB for their purchases.

(a) Name TWO functions of money performed by RMB as illustrated in the above situation. (2 marks)

(b) Explain with TWO reasons why RMB is preferred to diamonds in transaction or debt settlement.
(4 marks)

(c) In Hong Kong, Mr Ng withdrew RMB 300 thousand yuan from his savings account in Bank A. He
then deposited 50% of the amount with a deposit-taking company and remitted through a bank another
20% of this amount overseas. The rest of the money is eventually put in his safety box in Bank B.
(i) Suppose the exchange rate between RMB and U.S. dollars is at RMB 8 yuan to US$1. Express
RMB 300 thousand yuan in terms of Hong Kong dollars. Show your workings. (2 marks)
(ii) What is the immediate effect of the above transactions on the money supply M3 in Hong Kong in
terms of Hong Kong dollars? Explain your answer. (3 marks)
(iii) With reference to the situation above, explain briefly whether Bank A and Bank B are a merchant
bank and a commercial bank respectively. (4 marks)

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First Term Mock Uniform Test (2006-2007) Question Book
Secondary 5 – Economics Page 4 of 4

2. The balance sheet of the banking system of an economy in which no excess reserves are held by any banks
and $50 million cash is held by the public in hand is shown below.

Assets ($mn) Liabilities ($mn)

Cash reserves 200 Deposits 1 000
Loans 800

(a) Suppose $500 million is borrowed overseas and deposited into the banks. It was then found that he
maximum amount of bank deposits that could be created may be larger than the actual amount of bank
deposits thus created in the economy. Using the process of deposit creation with ONE possible
factor that leads to the difference, explain the phenomenon above. (6 marks)

(b) Suppose the public withdraws $10 million cash from the banks.
(i) Assuming that the public does not use any of the cash in hand to repay bank loans when the banks
call back the loans as a result of the withdrawals, calculate the maximum possible amount of the
total deposits of the banking system (3 marks)
(ii) Assuming that the public makes use of the $50 million cash in hand to repay the bank loans when
the banks call back the loans due to the withdrawals, calculate with explanation the least
numerical change in the money supply. (4 marks)

THIS IS THE LAST PAGE OF THE QUESTION BOOK.

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