Question 1

Which of the following is NOT one of the four primary functions of money?

Accepted Answer

Source of credit

Question 2

Suppose the Federal Reserve conducts an open market purchase of $5 million in Treasury securities. If the money multiplier is 4, by how much will the money supply potentially increase?

Accepted Answer

$20 million

Question 3

Which of the following best describes fiat money?

Accepted Answer

Money authorized by a central bank that is not exchangeable for a commodity

Question 4

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 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 actual money

Question 7

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

Accepted Answer

Its value depends on public confidence

Question 8

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 9

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 predicted inflation rate?

Accepted Answer

$$5\%$$

Question 10

Which of the following best explains why hyperinflation occurs?

Accepted Answer

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

Question 11

Which of the following is a key role of the Federal Reserve during a bank panic?

Accepted Answer

Acting as a lender of last resort

Question 12

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

Accepted Answer

To insure bank deposits up to a certain limit

Question 13

Which of the following is an example of commodity money?

Accepted Answer

Gold coins

Question 14

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

Accepted Answer

The multiplier decreases

Question 15

Which of the following is a characteristic of the 'shadow banking system'?

Accepted Answer

It relies heavily on borrowed money (leverage)

Question 16

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

Accepted Answer

An open market sale of Treasury securities

Question 17

Why might a cap on credit card interest rates make it harder for people with low credit scores to get loans?

Accepted Answer

Banks may be unwilling to lend at lower rates to riskier borrowers

Question 18

Which of the following is NOT a requirement for something to serve as money?

Accepted Answer

It must be issued by a government

Question 19

If households and firms decide to hold more currency and less in deposits, what is the likely effect on the money multiplier?

Accepted Answer

The money multiplier decreases

Question 20

According to the quantity equation $$M 	imes V = P 	imes Y$$, if $$M$$ increases by 10%, $$V is $$constant, and $$Y$$ increases by 3%, what is the approximate percentage increase in $$P$$?

Accepted Answer

$$7\%$$

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

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