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 LEAST important for a good to serve as money in a modern economy?

Accepted Answer

It must be edible

Question 3

Which of the following best describes fiat money?

Accepted Answer

Money that is authorized by a central bank and not exchangeable for a 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 M1 but NOT in M2?

Accepted Answer

Nothing; all components of M1 are also in M2

Question 6

A bank receives a $2,000 deposit. If it keeps 10% as reserves and loans out the rest, how much does it lend out?

Accepted Answer

$1,800

Question 7

Which of the following is a primary reason banks exist rather than individuals lending directly to each other?

Accepted Answer

Banks reduce information problems and transaction costs

Question 8

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

Accepted Answer

5%

Question 9

Which of the following best explains why hyperinflation occurs?

Accepted Answer

Central banks increase the money supply much faster than real GDP grows

Question 10

Which of the following is NOT a component of the shadow banking system?

Accepted Answer

Commercial banks

Question 11

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 12

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

Accepted Answer

It loses value if people lose confidence in it

Question 13

If a country’s central bank wants to decrease the money supply, which action should it take?

Accepted Answer

Sell government securities in the open market

Question 14

Which of the following is true about credit cards in the context of the money supply?

Accepted Answer

Credit cards represent a short-term loan, not money itself

Question 15

Suppose the velocity of money ($$V) is 4$$, the money supply ($$M) is$$ $$2$$ trillion, and real output ($$Y) is$$ $$8$$ trillion. What is the price level ($$P$$)? Use the quantity equation $$M 	imes V = P 	imes Y.$$

Accepted Answer

$$P = 2$$

Question 16

Which of the following best describes a bank run?

Accepted Answer

A situation where many depositors try to withdraw their money simultaneously

Question 17

What is the main role of the Federal Open Market Committee (FOMC)?

Accepted Answer

To conduct open market operations and manage the money supply

Question 18

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

Accepted Answer

Banks take on more risk because they expect to be bailed out if they fail

Question 19

If the money multiplier ($$m) is $$defined as $$m = \frac{M}{B}$$, where $$M is $$the money supply and $$B is $$the monetary base, what happens to $$m if $$banks decide to hold more reserves relative to deposits?

Accepted Answer

$$m$$ decreases

Question 20

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

Accepted Answer

Gold coins used in trade

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

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