Q: If the reserve requirement is 10% and a bank receives a new deposit of $5,000, what is the maximum amount the bank can lend out from this deposit?

$$5,000 \times (1 - 0.10) = 4$$,500$

Question 1

Which of the following best describes the 'double coincidence of wants' problem in a barter economy?

Accepted Answer

It refers to the need for two parties to have exactly what the other wants in order to trade directly.

Question 2

Which of the following is NOT a primary function of money?

Accepted Answer

Source of credit

Question 3

Suppose you deposit $2,000 in currency into your checking account at Bank of America. If the bank loans out 80% of this deposit, what is the immediate effect on the money supply after the loan is made and the borrower spends the money, which is then deposited in another bank?

Accepted Answer

The money supply increases by $1,600.

Question 4

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

Accepted Answer

There are no assets included in M1 that are not also included in M2.

Question 5

If the Federal Reserve conducts an open market purchase of $10 million in Treasury bills, what is the immediate effect on the banking system's balance sheet?

Accepted Answer

Bank reserves increase by $10 million.

Question 6

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, assuming velocity is constant?

Accepted Answer

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

Question 7

Which of the following is a key characteristic of fiat money?

Accepted Answer

It is not backed by a commodity and is accepted because the government declares it legal tender.

Question 8

Why do banks play a critical role in the process of money creation in a fractional reserve banking system?

Accepted Answer

Because they lend out a portion of deposits, creating new demand deposits and expanding the money supply.

Question 9

Which of the following would NOT be counted in either M1 or M2 in the United States?

Accepted Answer

A balance in your mobile wallet (e.g., Apple Pay or PayPal)

Question 10

What is the main risk associated with a fractional reserve banking system?

Accepted Answer

The possibility of bank runs if many depositors try to withdraw their money at the same time.

Question 11

Which of the following best explains why the Federal Deposit Insurance Corporation (FDIC) was established?

Accepted Answer

To insure bank deposits and prevent bank panics by increasing depositor confidence.

Question 12

If the reserve requirement is 10% and a bank receives a new deposit of $5,000, what is the maximum amount the bank can lend out from this deposit?

Accepted Answer

$$5,000 	imes (1 - 0.10) = 4$$,500$

Question 13

Which of the following is an example of moral hazard in the banking system?

Accepted Answer

Banks taking on excessive risk because they expect to be bailed out by the government if they fail.

Question 14

Which of the following is a likely consequence if the public decides to hold more currency and less in checking deposits?

Accepted Answer

The money multiplier will decrease, reducing the potential for banks to create new money.

Question 15

Which of the following best describes the process of securitization?

Accepted Answer

Transforming loans or other financial assets into securities that can be sold to investors.

Question 16

According to the quantity theory of money, which equation represents the relationship between the money supply, velocity, price level, and real GDP?

Accepted Answer

$$M 	imes V = P 	imes Y$$

Question 17

During a period of hyperinflation, what is the most likely cause according to the quantity theory of money?

Accepted Answer

The money supply is growing much faster than real GDP.

Question 18

Which of the following is a key difference between commercial banks and shadow banks?

Accepted Answer

Shadow banks are less regulated and do not typically accept deposits from the public.

Question 19

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

Accepted Answer

Sell U.S. Treasury securities in the open market.

Question 20

Which of the following is a reason why the money multiplier may fluctuate over time?

Accepted Answer

Changes in the amount of currency households and firms choose to hold relative to deposits.

Money, Banking, and the Money Supply: Principles of Macroeconomics (ECON 1104)

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