Q: A bank has $1,000 in new deposits and a required reserve ratio of 10%. What is the maximum amount the bank can lend out from this deposit?

$$1,000 \times (1 - 0.10) = 900$

Question 1

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

Accepted Answer

It requires that both parties in a transaction want exactly what the other has to offer at the same time.

Question 2

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

Accepted Answer

Source of production

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 funds, which are deposited at 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 is no such asset; all components of M1 are also included in M2.

Question 5

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 6

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

Accepted Answer

It is not backed by a physical commodity but is accepted by government decree.

Question 7

A bank has $1,000 in new deposits and a required reserve ratio of 10%. What is the maximum amount the bank can lend out from this deposit?

Accepted Answer

$$1,000 	imes (1 - 0.10) = 900$

Question 8

Which of the following best explains why banks are able to create money in a fractional reserve banking system?

Accepted Answer

Banks lend out a portion of deposits, which creates new deposits in the banking system.

Question 9

During a bank panic, what is the primary role of the central bank as 'lender of last resort'?

Accepted Answer

To provide loans to banks facing sudden withdrawals to prevent bank runs from spreading.

Question 10

Which of the following is a likely consequence of moral hazard in the banking system?

Accepted Answer

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

Question 11

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 open market operations.

Question 12

Which of the following is NOT a reason why banks are important to the economy?

Accepted Answer

They provide investment advice to households.

Question 13

Suppose the required reserve ratio is 20%. What is the simple deposit multiplier?

Accepted Answer

$$\frac{1}{0.20} = 5$$

Question 14

Which of the following is an example of commodity money?

Accepted Answer

Gold coins used as currency

Question 15

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

Accepted Answer

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

Question 16

If a country experiences hyperinflation, which of the following is most likely true?

Accepted Answer

The central bank is increasing the money supply much faster than real GDP is growing.

Question 17

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 18

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

Accepted Answer

Households and firms may change the amount of currency they choose to hold relative to deposits.

Question 19

Which of the following is a key difference between the traditional banking system and the 'shadow banking system'?

Accepted Answer

Shadow banking firms are less regulated and rely more on borrowing than traditional banks.

Question 20

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 reserves?

Accepted Answer

Reserves in the banking system increase by $10 million.

Money, Banking, and the Money Supply: Principles of Macroeconomics

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