Question 1

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

Accepted Answer

Source of production

Question 2

Suppose the Federal Reserve conducts an open market purchase of $10 million in Treasury bills. What is the immediate effect on the reserves of the banking system?

Accepted Answer

Reserves increase by $10 million

Question 3

Which of the following best describes 'fiat money'?

Accepted Answer

Money that is authorized by a government and not exchangeable for a commodity

Question 4

If the required reserve ratio is 10\% and a bank receives a new deposit of $1,000, what is the maximum amount the bank can lend out?

Accepted Answer

$900

Question 5

Which of the following is included in the M1 measure of the money supply?

Accepted Answer

Currency in circulation

Question 6

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?

Accepted Answer

$$8\% - 3\% = 5\%$$

Question 7

Which of the following is a characteristic of commodity money?

Accepted Answer

It has value independent of its use as money

Question 8

A bank run occurs when:

Accepted Answer

Many depositors try to withdraw their money simultaneously

Question 9

If you withdraw $100 in currency from your checking account, what is the effect on M1?

Accepted Answer

M1 does not change

Question 10

Which of the following is NOT a requirement for something to serve as an effective medium of exchange?

Accepted Answer

It must be edible

Question 11

If the money multiplier is 5 and the monetary base increases by $200 million, by how much will the money supply increase?

Accepted Answer

$1 billion

Question 12

Which of the following is a potential problem with fiat money?

Accepted Answer

It is only valuable as long as people have confidence in it

Question 13

What is the main reason banks are able to create money in a fractional reserve banking system?

Accepted Answer

They lend out a portion of deposits, creating new deposits

Question 14

Which of the following is an example of moral hazard in banking?

Accepted Answer

Banks taking on more risk because they expect to be bailed out

Question 15

During a period of hyperinflation, what is most likely happening to the money supply?

Accepted Answer

The money supply is growing much faster than real GDP

Question 16

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

Accepted Answer

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

Question 17

If a bank receives a $2,000 deposit and lends out 80\% of it, what is the immediate effect on the bank's balance sheet?

Accepted Answer

Reserves increase by $$2,000; Loans increase by 1$$,600; Deposits increase by $$2,000 and 1$$,600

Question 18

Which of the following best explains why banks are important for reducing transaction costs in the economy?

Accepted Answer

Banks specialize in evaluating borrowers and processing loans efficiently

Question 19

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

Accepted Answer

To insure deposits in banks up to a certain limit

Question 20

According to the study materials, which of the following is a likely consequence if people lose confidence in fiat money?

Accepted Answer

Fiat money will cease to be useful as a medium of exchange

Money, Banking, and the Financial System: Principles of Macroeconomics Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards