Question 1

Which of the following is NOT one of the four primary functions of money?

Accepted Answer

Source of economic growth

Question 2

Which characteristic is essential for a good to serve as money in a modern economy?

Accepted Answer

It must be divisible enough for both small and large transactions

Question 3

Which of the following best describes fiat money?

Accepted Answer

Money that has value only because a government declares it so

Question 4

If the required reserve ratio is 20%, what is the money multiplier?

Accepted Answer

$$ \frac{1}{0.2} = 5 $$

Question 5

Suppose George deposits $1,000,000 into a bank with a required reserve ratio of 25%. What are the excess reserves if the bank had no prior deposits?

Accepted Answer

$$ 1,000,000 - 250,000 = 750,000 $$

Question 6

Which of the following is included in M1 but NOT in M2?

Accepted Answer

None; everything in M1 is also included in M2

Question 7

If the Federal Reserve wants to decrease the money supply, which action should it take?

Accepted Answer

Sell U.S. Treasury securities to banks

Question 8

Which equation represents the Quantity Theory of Money?

Accepted Answer

$$ MV = PY $$

Question 9

If the money supply increases from $$4,000$$ billion to $$5,000$$ billion and the velocity falls from $$2.5 to$$ $$2$$, what happens to nominal GDP?

Accepted Answer

Nominal GDP remains unchanged at $$10,000$$ billion

Question 10

Which of the following is a direct result of an increase in the demand for money due to rising incomes?

Accepted Answer

Bond prices fall and investment decreases

Question 11

What is the primary function of the Federal Reserve as the lender of last resort?

Accepted Answer

To provide loans to banks during financial crises

Question 12

If the required reserve ratio increases from 25% to 30%, what happens to the money multiplier?

Accepted Answer

$$ \frac{1}{0.3} \approx 3.33 $$

Question 13

Which of the following is NOT a primary mandate of the Federal Reserve?

Accepted Answer

Set fiscal policy for the government

Question 14

In the bond market, what is the relationship between bond prices and interest rates?

Accepted Answer

Bond prices and interest rates have an inverse relationship

Question 15

If the velocity of money increases while the money supply and real GDP remain constant, what happens to the price level according to the Quantity Theory of Money?

Accepted Answer

The price level increases

Question 16

Which of the following assets is considered most liquid?

Accepted Answer

A savings account

Question 17

What is the effect on the money supply if banks hold more reserves than required?

Accepted Answer

The money supply decreases

Question 18

During hyperinflation, what typically forces the central bank to buy government bonds?

Accepted Answer

The public refuses to buy bonds to cover government deficits

Question 19

Which formula correctly calculates excess reserves for a new deposit?

Accepted Answer

$$ 	ext{Excess Reserves} = 	ext{Deposit} - (	ext{Deposit} 	imes 	ext{Required Reserve Ratio}) $$

Question 20

If the Federal Reserve buys U.S. Treasury securities from banks, what is the immediate effect?

Accepted Answer

Banks have more reserves and can make more loans

Chapter 14: Money – Functions, Measurement, Banking, the Federal Reserve, and the Quantity Theory

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