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 authorized by a central bank that is not backed by a physical commodity

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

Why are credit cards NOT considered part of the money supply?

Accepted Answer

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

Question 7

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

Accepted Answer

$1,800

Question 8

Which of the following best explains why banks are able to create money?

Accepted Answer

Banks lend out a portion of deposits, creating new checking account balances

Question 9

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

Accepted Answer

To insure bank deposits up to a certain limit

Question 10

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

Accepted Answer

5%

Question 11

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

Accepted Answer

Its value depends on the confidence of the public

Question 12

What is the main reason the Federal Reserve acts as a lender of last resort?

Accepted Answer

To prevent bank runs and panics

Question 13

Which of the following best describes the process of securitization?

Accepted Answer

Banks convert loans into securities that can be sold to investors

Question 14

If the velocity of money is not constant, what implication does this have for the quantity theory of money?

Accepted Answer

Short-run predictions about inflation may be inaccurate

Question 15

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

Accepted Answer

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

Question 16

During a period of hyperinflation, what typically happens to the value of money?

Accepted Answer

It decreases rapidly

Question 17

Which of the following is a key difference between commercial banks and shadow banks?

Accepted Answer

Shadow banks are less regulated and do not have FDIC insurance

Question 18

If households decide to hold more currency and less in deposits, what happens to the money multiplier?

Accepted Answer

It decreases

Question 19

Which of the following actions by the Fed would most likely decrease the money supply?

Accepted Answer

Conducting an open market sale of Treasury securities

Question 20

Suppose the Fed wants to increase the money supply but the money multiplier is unstable. What policy tool is it most likely to use?

Accepted Answer

Open market operations

Banks, Money, and the Federal Reserve System: Study Notes

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