Question 1

Which of the following best describes the primary function of money as a 'medium of exchange'?

Accepted Answer

Money is acceptable to a wide variety of parties as a form of payment for goods and services.

Question 2

Suppose a bank receives a $5,000 deposit and operates under a 10% reserve requirement. What is the maximum amount the bank can lend out?

Accepted Answer

$4,500

Question 3

Which of the following is NOT a characteristic required for a good to serve as money?

Accepted Answer

It must be edible.

Question 4

If you withdraw $100 in currency from your checking account, what is the effect on M1, assuming no other actions are taken?

Accepted Answer

M1 does not change.

Question 5

Which of the following is counted in M1?

Accepted Answer

Funds in your checking account

Question 6

What is the main risk associated with fiat money?

Accepted Answer

Its value depends on the confidence of households and firms.

Question 7

Which of the following best explains why banks are important to the economy?

Accepted Answer

Banks reduce transaction costs and information problems in lending.

Question 8

A bank run occurs when:

Accepted Answer

Many depositors simultaneously try to withdraw their money due to loss of confidence.

Question 9

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

Accepted Answer

Buying Treasury securities in open market operations

Question 10

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 11

Which formula represents the money multiplier?

Accepted Answer

$$\frac{M}{B}$$

Question 12

If the Federal Reserve wants to decrease the money supply, which of the following should it do?

Accepted Answer

Sell Treasury securities in open market operations

Question 13

Which of the following is an example of commodity money?

Accepted Answer

Gold coins

Question 14

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 15

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

Accepted Answer

Commercial banks

Question 16

If a bank makes a loan by crediting a borrower's checking account, what is the immediate effect on the money supply?

Accepted Answer

The money supply increases by the amount of the loan.

Question 17

Which of the following is true about credit cards?

Accepted Answer

Credit cards are a way to obtain a short-term loan, not money itself.

Question 18

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.

Question 19

Which of the following best describes the role of the Federal Reserve as a 'lender of last resort'?

Accepted Answer

It makes loans to banks to help them pay off depositors during a bank panic.

Question 20

According to the quantity theory of money, what is the formula for the inflation rate?

Accepted Answer

$$	ext{Inflation Rate} = 	ext{Growth Rate of the Money Supply} - 	ext{Growth Rate of Real Output}$$

Money, Banking, and the Federal Reserve System: Foundations of Macroeconomics

Study Guide - Practice Questions