$$\text{Inflation rate} = \text{Growth rate of the money supply} - \text{Growth rate of real output}$$

Question 1

Which of the following best describes the 'double coincidence of wants' problem in a barter economy?

Accepted Answer

It refers to the need for two parties to each want what the other has in order to make a trade.

Question 2

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

Accepted Answer

Means of production

Question 3

A good must possess certain characteristics to serve as money. Which of the following is NOT one of those characteristics?

Accepted Answer

It must be produced by the government.

Question 4

Which of the following is an example of commodity money?

Accepted Answer

Gold coins

Question 5

Fiat money differs from commodity money in that:

Accepted Answer

Fiat money has value because it is authorized by a central authority, not because of its intrinsic value.

Question 6

Which of the following would NOT be included in the M1 measure of the money supply?

Accepted Answer

Credit card balances

Question 7

Suppose you withdraw $100 in currency from your checking account. What is the effect on M1, ignoring any further bank actions?

Accepted Answer

M1 does not change

Question 8

If Bank of America receives a $2,000 deposit and loans out 80% of it, what is the initial increase in the money supply from the new loan?

Accepted Answer

$1,600

Question 9

Which of the following best explains why banks are able to create money in a fractional reserve banking system?

Accepted Answer

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

Question 10

The money multiplier is defined as:

Accepted Answer

The ratio of money supply to the monetary base

Question 11

Which of the following actions by the Federal Reserve would increase the money supply?

Accepted Answer

Buying U.S. Treasury securities in open market operations

Question 12

According to the quantity theory of money, if the money supply grows faster than real GDP, what is the expected outcome?

Accepted Answer

Inflation

Question 13

Which formula represents the inflation rate according to the quantity theory of money?

Accepted Answer

$$	ext{Inflation rate} = 	ext{Growth rate of the money supply} - 	ext{Growth rate of real output}$$

Question 14

Which of the following is a potential problem with fiat money?

Accepted Answer

Its value depends on the confidence of households and firms.

Question 15

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, providing loans to banks to pay off depositors.

Question 16

Which of the following is NOT a reason why the money multiplier may fluctuate?

Accepted Answer

Changes in the price of gold

Question 17

Which of the following is true about the FDIC?

Accepted Answer

It insures deposits in many banks up to a limit, currently $250,000.

Question 18

Which of the following is a consequence of moral hazard in the banking system?

Accepted Answer

Banks may take on excessive risk, expecting government protection if they fail.

Question 19

Which of the following is NOT considered part of the 'shadow banking system'?

Accepted Answer

Commercial banks

Question 20

Hyperinflation is most likely to occur when:

Accepted Answer

The central bank increases the money supply at a rate far in excess of real GDP growth.

Money, Banking, and the Federal Reserve System: Principles of Macroeconomics Study Notes

Study Guide - Practice Questions