Question 1

Which of the following best describes the four key functions of money?

Accepted Answer

Medium of exchange, unit of account, store of value, standard of deferred payment

Question 2

Suppose the money supply ($$M) in an $$economy is $$2$$ trillion dollars, and the monetary base ($$B) is$$ $$500$$ billion dollars. What is the value of the money multiplier?

Accepted Answer

$$\4$

Question 3

Which of the following is NOT included in the M1 measure of the money supply in the United States?

Accepted Answer

Small-denomination time deposits

Question 4

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

Accepted Answer

$$\9$$,000$

Question 5

Which of the following scenarios best illustrates the concept of asymmetric information in banking?

Accepted Answer

A borrower knows more about their ability to repay a loan than the bank does.

Question 6

If the Federal Reserve wants to increase the money supply, which of the following actions is it most likely to take?

Accepted Answer

Buy Treasury securities in open market operations

Question 7

During a period, the money supply grows by $$8\%$$, velocity is constant, and real GDP grows by $$3\%. $$According to the quantity theory of money, what is the inflation rate?

Accepted Answer

$$5\%$$

Question 8

Which of the following is an example of commodity money?

Accepted Answer

Gold coins

Question 9

A bank run can lead to a bank panic if:

Accepted Answer

Many banks experience runs at the same time

Question 10

Which of the following best explains why the Federal Reserve shifted its focus from controlling the money supply to targeting interest rates after 2008?

Accepted Answer

The money multiplier became unstable and less predictable

Question 11

Suppose the Federal Reserve pays a higher interest rate on reserve balances (IORB). What is the most likely effect on bank lending and the money supply?

Accepted Answer

Banks will lend less, reducing the money supply

Question 12

Which of the following is a key difference between the traditional banking system and the 'shadow banking system'?

Accepted Answer

Shadow banks are not regulated by government agencies and are more highly leveraged

Question 13

If the velocity of money ($$V) is$$ $$5$$, the money supply ($$M) is$$ $$\1$ trillion, and real output (Y$) is $$\$$2$$ trillion, what is the price level ($$P$$)? Use the quantity equation $$M 	imes V = P 	imes Y.$$

Accepted Answer

$$2.5$$

Question 14

Which of the following best describes seigniorage?

Accepted Answer

The profit the government makes from issuing fiat money, equal to the difference between the face value and production cost

Question 15

A country experiences hyperinflation. According to the quantity theory of money, which of the following is the most likely cause?

Accepted Answer

The money supply is growing much faster than real GDP

Question 16

Which of the following is a liability for a commercial bank?

Accepted Answer

Deposits from customers

Question 17

If a country eliminates its lowest-denomination coin, which of the following is a potential economic concern discussed in the study materials?

Accepted Answer

Consumers may face a 'rounding tax' if prices are rounded up

Question 18

Which of the following best explains why banks are able to reduce transaction costs and information problems in lending?

Accepted Answer

Banks achieve economies of scale and specialize in assessing credit risk

Question 19

Suppose the money supply ($$M) $$grows by $$20\%$$, velocity ($$V) $$grows by $$5\%$$, and real GDP ($$Y) $$grows by $$1\%. $$According to the quantity theory of money, what is the inflation rate?

Accepted Answer

$$24\%$$

Question 20

Which of the following is a reason why credit cards are NOT included in the money supply?

Accepted Answer

They represent loans, not assets used for payment

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

Study Guide - Practice Questions

Study Guide - Flashcards