Question 1

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

Accepted Answer

Source of credit

Question 2

Which characteristic is essential for a good to serve as money in a modern economy?

Accepted Answer

It must be valuable relative to its weight

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 Federal Reserve conducts an open market purchase of $5 million in Treasury securities. What is the immediate effect on the monetary base?

Accepted Answer

The monetary base increases by $5 million

Question 5

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

Accepted Answer

Small-denomination time deposits

Question 6

A bank receives a $2,000 deposit. If the required reserve ratio is 10%, what is the maximum amount the bank can lend out?

Accepted Answer

$1,800

Question 7

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 are then redeposited and lent out again

Question 8

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

Accepted Answer

5%

Question 9

Which of the following is a potential disadvantage of fiat money?

Accepted Answer

Its value depends on the confidence of the public

Question 10

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 11

Which of the following is an example of commodity money?

Accepted Answer

Gold coins

Question 12

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 13

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

Accepted Answer

They set the national interest rate

Question 14

Which of the following best describes the process of securitization?

Accepted Answer

Transforming loans into securities that can be bought and sold

Question 15

If the velocity of money ($$V) is 4$$, the money supply ($$M) is$$ $$2$$ trillion, and nominal GDP ($$P 	imes Y) is$$ $$8$$ trillion, what is the value of $$V$$ according to the quantity equation?

Accepted Answer

$$V = 4$$

Question 16

Which of the following is a likely consequence of the FDIC reimbursing all deposits, even above the insured limit, during a bank failure?

Accepted Answer

It increases the risk of moral hazard

Question 17

Which of the following is NOT considered part of the 'shadow banking system'?

Accepted Answer

Commercial banks

Question 18

If the Federal Reserve wants to decrease the money supply, which action should it take?

Accepted Answer

Sell government securities in the open market

Question 19

Which of the following statements about credit cards is correct?

Accepted Answer

Credit cards represent a short-term loan, not money

Question 20

A bank's balance sheet shows $$1,000 in deposits and 100 in $$reserves. If the bank makes a loan of $900, what is the effect on the money supply?

Accepted Answer

The money supply increases by $900

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

Study Guide - Practice Questions

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