Question 1

Which of the following best describes the primary function of money as a 'medium of exchange'?

Accepted Answer

Money is accepted by a wide variety of parties as payment for goods and services.

Question 2

Suppose the Federal Reserve conducts an open market purchase of $5 million in Treasury securities. What is the immediate effect on the monetary base and the money supply, assuming the money multiplier is stable?

Accepted Answer

The monetary base increases by $$5 million, and the money supply increases by more than 5 $$million.

Question 3

Which of the following is NOT a characteristic that a good must have to serve as money?

Accepted Answer

It must be difficult to transport.

Question 4

A bank receives a $2,000 deposit and loans out 80% of it. What is the amount of new loans created, and what is the immediate effect on the bank's reserves?

Accepted Answer

New loans: $$1,600; Reserves increase by 2$$,000.

Question 5

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

Accepted Answer

None; everything in M1 is also in M2.

Question 6

If you withdraw $100 in currency from your checking account, what is the effect on M1, ignoring any further actions by the bank?

Accepted Answer

M1 remains unchanged.

Question 7

Which of the following best explains why credit cards are NOT considered money?

Accepted Answer

Credit cards represent a short-term loan, not a transfer of funds.

Question 8

According to the quantity theory of money, if the money supply grows at 8% per year and real GDP grows at 3% per year, what is the predicted inflation rate?

Accepted Answer

$$8\% - 3\% = 5\%$$

Question 9

Which of the following scenarios would most likely lead to a bank panic?

Accepted Answer

Many depositors simultaneously try to withdraw their money from several banks.

Question 10

What is the main advantage of fiat money compared to commodity money?

Accepted Answer

Fiat money allows central banks more flexibility in creating money.

Question 11

Which of the following best describes the process of securitization?

Accepted Answer

Banks transform loans or other financial assets into securities that can be traded.

Question 12

If the money multiplier is defined as $$\frac{M}{B}$$, where $$M is $$the money supply and $$B is $$the monetary base, what happens to the money multiplier if households decide to hold more currency relative to deposits?

Accepted Answer

The money multiplier increases.

Question 13

Which of the following is a potential problem with government deposit insurance (such as FDIC coverage)?

Accepted Answer

It can encourage banks to take on more risk, leading to moral hazard.

Question 14

Which of the following is an example of commodity money?

Accepted Answer

Gold coins used for transactions.

Question 15

Which of the following is a key reason why banks are able to reduce transaction costs for borrowers and lenders?

Accepted Answer

Banks use economies of scale and specialization.

Question 16

If the Federal Reserve wants to decrease the money supply, which of the following actions should it take?

Accepted Answer

Conduct an open market sale of Treasury securities.

Question 17

Which of the following is NOT included in either M1 or M2?

Accepted Answer

Bitcoins held in a digital wallet.

Question 18

During a period of hyperinflation, what typically happens to the value of money?

Accepted Answer

The value of money falls rapidly.

Question 19

Which of the following best describes the role of the Federal Reserve as a 'lender of last resort'?

Accepted Answer

It provides loans to banks facing sudden withdrawals to prevent bank runs.

Question 20

If the growth rate of the money supply is less than the growth rate of real GDP, what does the quantity theory of money predict?

Accepted Answer

There will be deflation.

Money, Banking, and the Federal Reserve System: Foundations of Macroeconomics

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