Question 1

Which of the following best describes the three primary functions of money in a modern economy?

Accepted Answer

Medium of exchange, unit of account, and store of value

Question 2

Why is barter considered inefficient compared to using money as a medium of exchange?

Accepted Answer

It requires a double coincidence of wants, making transactions more difficult

Question 3

Which of the following is NOT included in the M1 measure of the money supply in the United States?

Accepted Answer

Credit card balances

Question 4

Suppose the required reserve ratio ($$rr) is 0.20. $$What is the value of the simple money multiplier ($$mm$$)?

$$mm = \frac{1}{rr}$$

Accepted Answer

$$mm = 5$$

Question 5

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

Accepted Answer

$$1,800$$

Question 6

Which of the following scenarios best illustrates the concept of moral hazard in banking?

Accepted Answer

Banks take on excessive risk because depositors are insured by the FDIC

Question 7

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

Accepted Answer

Sell government securities through open market operations

Question 8

A new $$1,000 deposit is made in a bank. If all banks hold only the required reserves and the reserve ratio is 12.5%, what is the maximum total increase in the money supply?

mm$$ = \frac{1}{0.125} = 8$

Accepted Answer

$$8,000$$

Question 9

Which of the following is a key difference between commodity-backed money and fiat money?

Accepted Answer

Commodity-backed money can be exchanged for a specific commodity, while fiat money has value only by government decree

Question 10

Which of the following is NOT a current tool of monetary policy used by the Federal Reserve?

Accepted Answer

Setting the interest rate on consumer credit cards

Question 11

If the Federal Reserve wants to increase the money supply by $$5 million and the required reserve ratio is 20%, how much in government securities should the Fed purchase?

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

$$	ext{Required purchase} = \frac{5,000,000}{5} = 1,000,000$

Accepted Answer

$$1,000,000$$

Question 12

Which of the following best explains why cryptocurrencies like Bitcoin are considered a form of money?

Accepted Answer

They can serve as a medium of exchange

Question 13

Which of the following is an example of a bank asset?

Accepted Answer

Loans made to customers

Question 14

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

Accepted Answer

To insure depositors’ funds up to a certain limit in case of bank failure

Question 15

Which of the following best describes the process of open market operations?

Accepted Answer

The Federal Reserve buys or sells government securities to influence the money supply

Question 16

If the Federal Reserve raises the interest rate paid on reserve balances (IORB), what is the likely effect on the money supply?

Accepted Answer

Banks will hold more reserves, lend less, and the money supply will grow more slowly

Question 17

Which of the following is a real-world example of commodity money?

Accepted Answer

Cigarettes used as money in prisons

Question 18

A bank’s balance sheet shows $$500 million in deposits and 60 $$million in reserves. What is the bank’s reserve ratio ($$rr$$)?

$$rr = \frac{	ext{Reserves}}{	ext{Deposits}}$$

Accepted Answer

$$0.12$$

Question 19

Which of the following best describes the role of the Federal Reserve as a central bank?

Accepted Answer

It acts as a bank for commercial banks, holding their deposits and extending loans

Question 20

Which of the following is a consequence of a bank run?

Accepted Answer

Many depositors attempt to withdraw funds at the same time, potentially causing the bank to fail

Lecture 11: Money & The Federal Reserve

Study Guide - Practice Questions

Study Guide - Flashcards