Question 1

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

Accepted Answer

Source of credit

Question 2

Suppose a country experiences a rapid increase in the money supply while real output remains constant. According to the quantity theory of money, what is the likely outcome?

Accepted Answer

Inflation

Question 3

Which of the following best describes fiat money?

Accepted Answer

Money that has value only because a government decrees it as legal tender

Question 4

A bank receives a $1,000 deposit. If the required reserve ratio is 10%, how much can the bank lend out?

Accepted Answer

$900

Question 5

Which of the following is included in M2 but NOT in M1?

Accepted Answer

Small-denomination time deposits

Question 6

Why do banks play a critical role in the economy?

Accepted Answer

They create money through lending and reduce transaction and information costs

Question 7

Which of the following is a characteristic that a good must have to serve as money?

Accepted Answer

It must be valuable relative to its weight

Question 8

If the velocity of money ($$V) is $$constant, the money supply ($$M) $$grows at 5% per year, and real output ($$Y) $$grows at 2% per year, what is the predicted inflation rate according to the quantity theory of money?

Accepted Answer

3%

Question 9

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

Accepted Answer

Bank managers taking excessive risks because they expect government bailouts

Question 10

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

Accepted Answer

To conduct open market operations and manage the money supply

Question 11

Which of the following best explains why credit cards are NOT considered money?

Accepted Answer

They represent a short-term loan, not a final payment

Question 12

During a bank panic, what role does the central bank play to stabilize the financial system?

Accepted Answer

It acts as a lender of last resort to provide liquidity to banks

Question 13

Which of the following scenarios would most likely lead to hyperinflation?

Accepted Answer

A central bank rapidly increases the money supply to finance government spending

Question 14

If a bank has $1,000 in deposits and the reserve requirement is 0%, how much must the bank keep in reserves?

Accepted Answer

$0

Question 15

Which of the following is a key reason why the money multiplier has become unstable since 2007?

Accepted Answer

Banks and households changed the amount of reserves and currency they hold relative to deposits

Question 16

A country’s central bank buys government bonds in the open market. What is the likely short-term effect on the money supply?

Accepted Answer

The money supply increases

Question 17

Which of the following is an example of a 'shadow banking' institution?

Accepted Answer

A money market mutual fund

Question 18

If the money supply ($$M) is$$ $$20$$ trillion, real GDP ($$Y) is$$ $$25$$ trillion, and the price level ($$P) is$$ $$1.2$$, what is the velocity of money ($$V$$)?

$$M 	imes V = P 	imes Y$$

Accepted Answer

$$V = 1.5$$

Question 19

Which of the following best describes the process of securitization?

Accepted Answer

Loans are transformed into securities that can be traded in financial markets

Question 20

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

Accepted Answer

Its value depends on public confidence and can collapse if trust is lost

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

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