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 an effective medium of exchange?

Accepted Answer

It must be durable

Question 3

Which of the following best describes fiat money?

Accepted Answer

Money that has value only because the government says it does

Question 4

Suppose the required reserve ratio is 20%. If a bank receives a new deposit of $5,000, what is the maximum amount of new loans it can make?

Accepted Answer

$4,000

Question 5

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

Accepted Answer

Traveler’s checks

Question 6

Why are credit cards NOT considered part of the money supply?

Accepted Answer

They represent a short-term loan, not actual money

Question 7

If the required reserve ratio is 10%, what is the simple deposit multiplier?

Accepted Answer

$$10$$

Question 8

Which of the following actions by the Federal Reserve would increase the money supply?

Accepted Answer

Lowering the discount rate

Question 9

During the financial crisis of 2007-2009, why were shadow banking institutions more vulnerable to runs than commercial banks?

Accepted Answer

They were less regulated and more highly leveraged

Question 10

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

Accepted Answer

$$5\%$$

Question 11

Which of the following is a likely consequence of hyperinflation?

Accepted Answer

Money losing its usefulness as a medium of exchange

Question 12

Which of the following best explains why the real-world deposit multiplier is often less than the simple deposit multiplier?

Accepted Answer

Some currency is held by the public and banks may hold excess reserves

Question 13

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

Accepted Answer

Sell government securities in the open market

Question 14

Which of the following is an example of commodity money?

Accepted Answer

A gold coin

Question 15

What is the main role of the Federal Deposit Insurance Corporation (FDIC)?

Accepted Answer

To insure deposits in banks up to a certain limit

Question 16

Which of the following equations represents the quantity equation?

Accepted Answer

$$M 	imes V = P 	imes Y$$

Question 17

A bank has $10,000 in deposits and the required reserve ratio is 10%. What is the minimum amount of reserves the bank must hold?

Accepted Answer

$$1,000$$

Question 18

Which of the following is a direct result of a bank run?

Accepted Answer

Banks may be unable to meet withdrawal demands

Question 19

If the velocity of money is constant and real output is growing at 2% per year, what must be true for there to be zero inflation?

Accepted Answer

The money supply must grow at 2% per year

Question 20

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

Accepted Answer

Commercial banks are more heavily regulated and insured by the FDIC

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

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