Question 1

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

Accepted Answer

Source of government revenue

Question 2

Suppose the Federal Reserve conducts an open market purchase of $10 million in Treasury bills. If the money multiplier is 4, what is the maximum possible increase in the money supply?

Accepted Answer

$40 million

Question 3

Which of the following best describes 'fiat money'?

Accepted Answer

Money that has value because it is authorized by a government and not backed by a commodity

Question 4

A bank receives a $2,000 deposit and lends out 80% of it. What is the initial increase in the money supply from this transaction?

Accepted Answer

$1,600

Question 5

Which of the following is counted in M1?

Accepted Answer

Cash in your pocket

Question 6

According to the quantity theory of money, if the money supply grows at 6% per year and real GDP grows at 2% per year, what is the predicted inflation rate?

Accepted Answer

$$6\% - 2\% = 4\%$$

Question 7

Which of the following is a characteristic that a good must have to serve as an effective medium of exchange?

Accepted Answer

It must be divisible

Question 8

What is the main risk associated with a fractional reserve banking system?

Accepted Answer

Banks may not have enough reserves if many depositors withdraw funds simultaneously

Question 9

If a central bank increases the money supply much faster than the growth rate of real GDP, what is the likely outcome according to the quantity theory of money?

Accepted Answer

High inflation

Question 10

Which of the following is an example of commodity money?

Accepted Answer

Gold coins

Question 11

Why do banks play a critical role in reducing transactions costs in the economy?

Accepted Answer

They use economies of scale to specialize in loan evaluation and processing

Question 12

What is the effect on M1 if you withdraw $100 in cash from your checking account?

Accepted Answer

No effect; both checking deposits and currency are included in M1

Question 13

Which of the following is a plausible consequence of government deposit insurance (such as FDIC) for banks?

Accepted Answer

It can create moral hazard by encouraging risky behavior

Question 14

If the reserve requirement is eliminated, what determines the amount of reserves banks hold?

Accepted Answer

Market conditions and other banking regulations

Question 15

Which of the following is NOT included in the broader definition of the money supply (M2)?

Accepted Answer

Large-denomination time deposits

Question 16

What is the main purpose of the Federal Reserve's open market operations?

Accepted Answer

To manage the money supply and influence interest rates

Question 17

During a bank panic, what role does the central bank play as 'lender of last resort'?

Accepted Answer

It provides loans to banks to help them meet withdrawal demands

Question 18

Which of the following scenarios best illustrates the concept of 'double coincidence of wants' in a barter economy?

Accepted Answer

A farmer wants shoes and a shoemaker wants wheat, so they trade directly

Question 19

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

Question 20

Which of the following is a reason why the money multiplier may fluctuate?

Accepted Answer

Changes in the amount of currency households and firms choose to hold

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

Study Guide - Practice Questions

Study Guide - Flashcards