Question 1

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

Accepted Answer

Source of credit

Question 2

A society uses gold coins as money. What type of money is this, and what is a key characteristic?

Accepted Answer

Commodity money; it has value independent of its use as money

Question 3

Which of the following is a necessary characteristic for something to serve as money?

Accepted Answer

It must be divisible

Question 4

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

Accepted Answer

Fiat money does not require backing by a physical commodity

Question 5

Which of the following best describes the difference between M1 and M2 in the U.S. money supply?

Accepted Answer

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

Question 6

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

Accepted Answer

The monetary base increases by $10 million

Question 7

Which equation represents the quantity theory of money?

Accepted Answer

$$M 	imes V = P 	imes Y$$

Question 8

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 9

Which of the following is NOT included in M1?

Accepted Answer

Small-denomination time deposits

Question 10

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

Accepted Answer

They lend out a portion of deposits, creating new demand deposits

Question 11

What is a bank run, and why is it dangerous for the financial system?

Accepted Answer

A situation where many depositors simultaneously withdraw their money, risking the bank's collapse

Question 12

Which of the following is a real-world example of hyperinflation?

Accepted Answer

Zimbabwe in the 2000s

Question 13

What is the main risk associated with the FDIC insuring all deposits, even above the $250,000 limit, as in the case of Silicon Valley Bank?

Accepted Answer

Increased risk of moral hazard

Question 14

Which of the following is NOT a function of the Federal Reserve?

Accepted Answer

Insuring all bank deposits directly

Question 15

If a bank receives a $1,000 deposit and keeps 10% as reserves, how much can it lend out?

Accepted Answer

$$900$$

Question 16

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

Accepted Answer

They represent a short-term loan, not a store of value

Question 17

What is the process of transforming loans into securities that can be traded in financial markets called?

Accepted Answer

Securitization

Question 18

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 19

According to the quantity theory of money, what happens if the velocity of money is constant and the money supply grows faster than real output?

Accepted Answer

Inflation occurs

Question 20

Which of the following is a plausible consequence of a cashless society, as discussed in the context of the Covid-19 pandemic?

Accepted Answer

Greater reliance on digital payment systems

Banks, Money, and the Federal Reserve System – Chapter 14 Study Notes

Study Guide - Practice Questions

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