Question 1

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

Accepted Answer

Source of economic growth

Question 2

A society using animal skins as money is relying on which type of money?

Accepted Answer

Commodity money

Question 3

Which characteristic is essential for a good to serve as an acceptable medium of exchange?

Accepted Answer

It must be acceptable to most people.

Question 4

Why is fiat money considered more flexible for central banks compared to commodity money?

Accepted Answer

Fiat money does not require the central bank to exchange it for a commodity, allowing easier expansion of the money supply.

Question 5

Which of the following is included in the M1 measure of the money supply in the United States?

Accepted Answer

Currency in circulation and checking account deposits

Question 6

Suppose the Federal Reserve conducts an open market purchase of $10 million in Treasury securities. What is the immediate effect on the banking system?

Accepted Answer

Bank reserves increase by $10 million

Question 7

In a fractional reserve banking system, what happens when a bank receives a $1,000 deposit and keeps 10% as reserves?

Accepted Answer

The bank keeps $$100 as reserves and lends out 900$$, creating new money.

Question 8

Which equation represents the quantity theory of money?

Accepted Answer

$$M 	imes V = P 	imes Y$$

Question 9

If the money supply grows at 8% per year and real output grows at 3% per year, what is the predicted inflation rate according to the quantity theory of money?

Accepted Answer

5%

Question 10

During a bank panic, what role does the Federal Reserve play to stabilize the financial system?

Accepted Answer

It acts as a lender of last resort, providing loans to banks to pay depositors.

Question 11

Which of the following best describes moral hazard in the banking system?

Accepted Answer

Banks may take excessive risks, expecting government protection if they fail.

Question 12

Which financial institution is part of the 'shadow banking system'?

Accepted Answer

Investment bank

Question 13

What is the main difference between M1 and M2 in the U.S. money supply?

Accepted Answer

M2 includes M1 plus small-denomination time deposits and money market fund shares.

Question 14

Which of the following is NOT considered money according to economists?

Accepted Answer

Debit card

Question 15

A country experiences hyperinflation. According to the quantity theory of money, what is the most likely cause?

Accepted Answer

The central bank increases the money supply much faster than real GDP growth.

Question 16

Which of the following is a real-world example of commodity money?

Accepted Answer

Gold coins

Question 17

What is the main reason banks are able to create money in a fractional reserve banking system?

Accepted Answer

Banks keep less than 100% of deposits as reserves and lend out the rest.

Question 18

Which of the following best explains why U.S. currency holdings are unusually high by world standards?

Accepted Answer

People in other countries use U.S. dollars due to low confidence in their local currency or to facilitate underground economies.

Question 19

If the velocity of money is constant, which formula can be used to calculate the inflation rate?

Accepted Answer

$$	ext{Inflation rate} = 	ext{Growth rate of the money supply} - 	ext{Growth rate of real output}$$

Question 20

Which of the following is a key reason why banks are important for reducing information problems in lending?

Accepted Answer

Banks use relationship banking and statistical analysis to assess credit risk.

Banks, Money, and the Federal Reserve System: Study Notes

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