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S4 Economics: Money and Banking Practice Paper 1
S4 Economics: Money and Banking Practice Paper 1
Ten items on reserve ratios, the deposit multiplier, required and excess reserves and real interest rates, each with an answer and a one-line note.
Quick answer A 20 per cent reserve ratio turns 1,000 dollars into 5,000 dollars of deposits, and 10 per cent lifts that to 10,000 dollars. A 3 per cent nominal rate against 5 per cent inflation leaves a real rate of minus 2 per cent.
01 Paper details (check answers afterwards)
| Item | Detail |
|---|---|
| Questions | 10 questions |
| Suggested time | 25 minutes |
| Difficulty mix | Foundation 4 · Intermediate 3 · Challenge 2 · Error redo 1 |
| Chapter | Chapter: S4 Economics: Money and Banking – Tutor Lesson Plan |
| Level | S4 |
02 Questions (10 items)
- FoundationThe required reserve ratio is 20 per cent and the public deposits 1,000 dollars, with no excess reserves held. What is the maximum total deposit?
- FoundationWhen the required reserve ratio is 25 per cent, what is the simple deposit multiplier?
- FoundationWhich two items make up Hong Kong M1?
- FoundationWith a 10 per cent reserve ratio, a customer deposits 2,000 dollars. How much can the bank lend out after keeping the required reserve?
- IntermediateThe reserve ratio falls from 20 per cent to 10 per cent. By how much does the maximum total deposit created from an initial 1,000 dollars rise?
- IntermediateInflation is 5 per cent and the nominal deposit rate is 3 per cent. What is the real interest rate?
- IntermediateTotal deposits are 50,000 dollars, the reserve ratio is 10 per cent and actual reserves are 6,000 dollars. What are the required and excess reserves?
- ChallengeThe reserve ratio is 12.5 per cent and the banking system can create at most 40,000 dollars of deposits. What was the initial deposit?
- ChallengeThe theoretical multiplier is five, but cash held by the public cuts the actual multiplier to four. How far below the theoretical figure is the final deposit from an initial 1,000 dollars?
- Error redoA student treats the 20 per cent reserve ratio as a multiplier of 0.2 and concludes that 1,000 dollars creates only 200 dollars of deposits. What is the correct figure?
03 Answers and one-line notes
| # | Answer | One-line note |
|---|---|---|
| 1 | $5,000 | The deposit multiplier is one divided by 0.2, which is five, so five times 1,000 is 5,000 dollars. |
| 2 | 4 | The multiplier is one divided by 0.25, which equals four. |
| 3 | Notes and coins held by the public, plus demand deposits | M1 counts money used for transactions only; savings and time deposits belong to M2. |
| 4 | $1,800 | The required reserve is 200 dollars, so 2,000 minus 200 leaves 1,800 dollars to lend. |
| 5 | From $5,000 to $10,000 | The multiplier rises from five to ten, and 1,000 times ten is 10,000 dollars. |
| 6 | -2 per cent | The real rate is roughly the nominal rate minus inflation, so 3 per cent minus 5 per cent is minus 2 per cent. |
| 7 | Required reserves $5,000; excess reserves $1,000 | Required reserves are 5,000 dollars and excess reserves are the 1,000 dollars left over. |
| 8 | $5,000 | The initial deposit is 40,000 multiplied by 0.125, which is 5,000 dollars. |
| 9 | $1,000 lower | The theoretical value is 5,000 dollars and the actual value is 4,000 dollars, a gap of 1,000 dollars. |
| 10 | $5,000 | The multiplier is the reciprocal of the reserve ratio, so one divided by 0.2 is five. |
04 What to do after marking
- After marking, redo only the wrong items and write down which step went wrong (formula, unit, or misread number).
- Repeat the same item two days later; move to the next paper only when both attempts are correct.
- Parents only need the answer and note columns; there is no need to explain every item.
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