The Monetary System Quiz

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The Monetary System Quiz - Quiz


Questions and Answers
  • 1. 

    Barter

    • A.

      Is more efficient than money

    • B.

      Makes trading easier than money.

    • C.

      Allows greater specialization than money

    • D.

      None of the above is correct.

    Correct Answer
    D. None of the above is correct.
    Explanation
    The given options suggest that barter is more efficient, makes trading easier, or allows greater specialization than money. However, none of these statements are correct. In reality, money is considered more efficient than barter as it acts as a universally accepted medium of exchange. Money also simplifies trading by providing a standardized value for goods and services. Additionally, money allows for greater specialization as individuals can focus on their specific skills and trade for other goods and services using money. Therefore, the correct answer is that none of the options provided are correct.

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  • 2. 

    Which of the following best illustrates the unit of account function of money?

    • A.

      You list prices for candy sold on your Web site, sweet-treats.com, in dollars.

    • B.

      You pay for tickets to a WNBA game with dollars.

    • C.

      You keep $10 in your backpack for emergencies.

    • D.

      None of the above is correct.

    Correct Answer
    A. You list prices for candy sold on your Web site, sweet-treats.com, in dollars.
    Explanation
    The unit of account function of money refers to the ability of money to serve as a common measure or standard for expressing the value of goods and services. By listing prices for candy sold on a website in dollars, it demonstrates that dollars are being used as the unit of account to determine the value of the candy. This indicates that the website is using dollars as a common measure to compare and communicate the prices of different candies.

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  • 3. 

    U.S. currency is currently

    • A.

      Commodity money with no intrinsic value.

    • B.

      Fiat money with no intrinsic value.

    • C.

      Commodity money with intrinsic value.

    • D.

      Fiat money with intrinsic value.

    Correct Answer
    B. Fiat money with no intrinsic value.
    Explanation
    The correct answer is "fiat money with no intrinsic value." Fiat money is a type of currency that is not backed by a physical commodity, such as gold or silver, and has value only because the government declares it to be legal tender. It is not redeemable for any other commodity and therefore has no intrinsic value. This is the case with U.S. currency, which is not backed by a specific commodity but is accepted as a medium of exchange based on the trust and confidence in the government.

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  • 4. 

    Since the U.S. government has decreed that U.S. currency is legal tender,

    • A.

      People may not legally make trades with anything else.

    • B.

      People are more likely to accept the dollar as a medium of exchange.

    • C.

      The government must hold enough gold to redeem all currency.

    • D.

      All of the above are correct.

    Correct Answer
    B. People are more likely to accept the dollar as a medium of exchange.
    Explanation
    The given correct answer is "people are more likely to accept the dollar as a medium of exchange." This is because when the U.S. government declares U.S. currency as legal tender, it means that it is the officially recognized form of payment for goods and services. This legal status gives the currency credibility and trust, making people more willing to accept it in exchange for their goods or services.

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  • 5. 

    M1 includes

    • A.

      Savings deposits

    • B.

      Money market deposit accounts

    • C.

      Currency

    • D.

      All of the above are correct.

    Correct Answer
    C. Currency
    Explanation
    The correct answer is currency because M1 includes all forms of physical money, such as coins and banknotes, that are used as a medium of exchange. While savings deposits and money market deposit accounts are part of broader measures of money supply, they are not included in M1. Therefore, the correct answer is currency.

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  • 6. 

    Credit cards are

    • A.

      A method of deferring payment.

    • B.

      Used as a medium of exchange.

    • C.

      Part of the M2 money supply.

    • D.

      Equivalent to debit cards

    Correct Answer
    A. A method of deferring payment.
    Explanation
    Credit cards are a method of deferring payment because they allow individuals to make purchases and pay for them at a later date. When a credit card is used, the cardholder essentially borrows money from the credit card issuer to complete the transaction. The cardholder then has a specific period of time, usually a month, to repay the borrowed amount without incurring any interest charges. This deferral of payment allows individuals to make purchases even if they do not have the immediate funds available, providing them with flexibility and convenience.

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  • 7. 

    Which of the following might explain why the United States has so much currency per person?

    • A.

      Currency may be a preferable store of wealth for criminals.

    • B.

      U.S. citizens are holding a lot of foreign currency.

    • C.

      People use credit and debit cards more frequently.

    • D.

      All of the above help explain the abundance of currency

    Correct Answer
    A. Currency may be a preferable store of wealth for criminals.
    Explanation
    The given answer suggests that one possible explanation for the abundance of currency in the United States per person is that it may be a preferable store of wealth for criminals. This implies that criminals may choose to hold a significant amount of currency as a means to store and hide their illicit wealth.

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  • 8. 

    Which Federal Reserve Bank president is always a voting member of the FOMC?

    • A.

      Boston

    • B.

      New York

    • C.

      Chicago

    • D.

      All of the above are correct

    Correct Answer
    B. New York
    Explanation
    The correct answer is New York because the president of the Federal Reserve Bank of New York is always a voting member of the Federal Open Market Committee (FOMC). The FOMC is responsible for making key decisions regarding monetary policy in the United States, such as setting interest rates and managing the money supply. The New York Fed holds a unique position within the Federal Reserve System, as it is responsible for implementing monetary policy and conducting open market operations. Therefore, its president always has a vote on the FOMC.

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  • 9. 

    The Federal Open-market Committee is made up of

    • A.

      5 of the 12 presidents of the Federal Reserve Regional banks, and the 7 members of the Board of Governors.

    • B.

      The 12 presidents of the Federal Reserve Regional banks, and the Chair of the Board of Governors

    • C.

      The 12 presidents of the Federal Reserve Regional banks, and the 7 members of the Board of Governors.

    • D.

      7 of the 12 presidents of the Federal Reserve Regional banks, and the 5 members of the Board of Governors.

    Correct Answer
    A. 5 of the 12 presidents of the Federal Reserve Regional banks, and the 7 members of the Board of Governors.
    Explanation
    The correct answer is 5 of the 12 presidents of the Federal Reserve Regional banks, and the 7 members of the Board of Governors. This answer accurately reflects the composition of the Federal Open-market Committee, which consists of representatives from both the Federal Reserve Regional banks and the Board of Governors. The inclusion of 5 out of the 12 presidents of the Regional banks ensures regional representation, while the presence of all 7 members of the Board of Governors ensures central authority and expertise in monetary policy.

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  • 10. 

    The Fed can influence unemployment in

    • A.

      The short run, but not the long run

    • B.

      The short and long run.

    • C.

      The long run, but not the short run.

    • D.

      Neither the short nor long run.

    Correct Answer
    A. The short run, but not the long run
    Explanation
    The Fed can influence unemployment in the short run, but not the long run. This is because the Federal Reserve has the power to implement monetary policies such as adjusting interest rates and controlling the money supply, which can have an impact on employment levels in the short term. However, in the long run, factors such as technological advancements, demographic changes, and structural shifts in the economy have a greater influence on unemployment rates. Therefore, while the Fed can have a temporary effect on unemployment, its influence diminishes over time.

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  • 11. 

    On a bank’s T-account,

    • A.

      Deposits are assets, reserves are liabilities.

    • B.

      Reserves are assets, deposits are liabilities.

    • C.

      Both deposits and reserves are assets.

    • D.

      Both deposits and reserves are liabilities.

    Correct Answer
    B. Reserves are assets, deposits are liabilities.
    Explanation
    In a bank's T-account, reserves are considered assets because they represent the funds that the bank holds in order to meet its obligations to depositors. Deposits, on the other hand, are considered liabilities because they represent the bank's obligation to return the deposited funds to the account holders upon request. Therefore, reserves are assets and deposits are liabilities in a bank's T-account.

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  • 12. 

    If the reserve ratio is 5 percent and a bank receives a new deposit of $500, this bank

    • A.

      Must increase its required reserves by $500.

    • B.

      Will initially see its total reserves increase by $25.

    • C.

      Will be able to make a new loan of $475.

    • D.

      All of the above are correct.

    Correct Answer
    C. Will be able to make a new loan of $475.
    Explanation
    When the reserve ratio is 5 percent and a bank receives a new deposit of $500, it means that the bank is required to hold 5 percent of that deposit as reserves. In this case, the required reserves would be $25 (5 percent of $500). The bank can then use the remaining $475 to make a new loan. Therefore, the correct answer is that the bank will be able to make a new loan of $475.

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  • 13. 

    If the reserve requirement is 10 percent, the Last Bank of Hope

    • A.

      Is holding excess reserves of $1,000.

    • B.

      Is in a position to make a new loan of $2000.

    • C.

      Has required reserves of $2,000.

    • D.

      Has less reserves than required

    Correct Answer
    A. Is holding excess reserves of $1,000.
    Explanation
    If the reserve requirement is 10 percent, it means that banks are required to hold 10 percent of their deposits as reserves. In this case, if the Last Bank of Hope is holding excess reserves of $1,000, it means that they have more reserves than the required amount. This is because the excess reserves are the amount held by the bank above and beyond the required reserves. Therefore, the correct answer is that the Last Bank of Hope is holding excess reserves of $1,000.

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  • 14. 

    If the Last Bank of Hope is holding only the amount of reserves required, the reserve requirement is

    • A.

      100 percent.

    • B.

      80 percent.

    • C.

      20 percent

    • D.

      12.5 percent.

    Correct Answer
    C. 20 percent
    Explanation
    If the Last Bank of Hope is holding only the amount of reserves required, it means that they are maintaining the minimum amount of reserves as mandated by the reserve requirement. In this case, the correct answer would be 20 percent, as it indicates that the bank is required to hold reserves equal to 20 percent of its deposits.

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  • 15. 

    If the reserve ratio is 25 percent, the money multiplier is

    • A.

      2

    • B.

      4

    • C.

      5

    • D.

      8

    Correct Answer
    B. 4
    Explanation
    The money multiplier is determined by dividing 1 by the reserve ratio. In this case, the reserve ratio is 25 percent, which is equivalent to 0.25. Dividing 1 by 0.25 gives us a money multiplier of 4. This means that for every dollar held in reserves, the banking system can create up to 4 dollars of new money through the lending process.

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  • 16. 

    If the reserve ratio is 15 percent, an additional $2,000 of reserves will increase the money supply by

    • A.

      1,500

    • B.

      3,000

    • C.

      13,150

    • D.

      13,333

    Correct Answer
    D. 13,333
    Explanation
    The correct answer is 13,333. When the reserve ratio is 15 percent, an additional $2,000 of reserves will increase the money supply by a multiple of 1 divided by the reserve ratio. In this case, 1 divided by 0.15 (15 percent) is approximately 6.67. Multiplying $2,000 by 6.67 gives us $13,333. Therefore, an additional $2,000 of reserves will increase the money supply by $13,333.

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  • 17. 

    Which list contains only actions that decrease the money supply?

    • A.

      Lower the discount rate, make open-market purchases

    • B.

      Lower the discount rate, make open-market sales

    • C.

      Raise the discount rate, make open-market purchases

    • D.

      Raise the discount rate, make open-market sales

    Correct Answer
    D. Raise the discount rate, make open-market sales
    Explanation
    Raising the discount rate and making open-market sales are actions that decrease the money supply. When the discount rate is raised, it becomes more expensive for banks to borrow money from the central bank, which leads to a decrease in lending and ultimately reduces the money supply. Similarly, when the central bank makes open-market sales, it sells government securities to commercial banks and individuals, which removes money from circulation and decreases the money supply.

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  • 18. 

    To increase the money supply, the Fed could

    • A.

      Sell government bonds.

    • B.

      Decrease the discount rate

    • C.

      Increase the reserve requirement.

    • D.

      None of the above is correct.

    Correct Answer
    B. Decrease the discount rate
    Explanation
    Decreasing the discount rate is a method that the Federal Reserve (Fed) can use to increase the money supply. When the discount rate is lowered, it becomes cheaper for banks to borrow money from the Fed. This encourages banks to borrow more, which in turn increases the amount of money in circulation. By making borrowing more attractive, the Fed stimulates economic activity and boosts the money supply. Selling government bonds and increasing the reserve requirement, on the other hand, would have the opposite effect of reducing the money supply.

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  • 19. 

    . In a fractional reserve banking system, an increase in reserve requirements

    • A.

      Increases both the money multiplier and the money supply

    • B.

      Increases the money multiplier, but decreases the money supply.

    • C.

      Decreases both the money multiplier and the money supply

    • D.

      Decreases the money multiplier, but increases the money supply.

    Correct Answer
    C. Decreases both the money multiplier and the money supply
    Explanation
    An increase in reserve requirements in a fractional reserve banking system means that banks are required to hold a larger portion of their deposits as reserves rather than lending them out. This decrease in the amount of money available for lending reduces the money multiplier, as banks are able to create less money through the lending process. Additionally, since less money is being created through lending, the overall money supply decreases. Therefore, an increase in reserve requirements decreases both the money multiplier and the money supply.

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  • 20. 

    . When the Fed increases the discount rate, banks will borrow

    • A.

      Less, banks will lend more, and the money supply will decrease

    • B.

      Less, banks will lend less, and the money supply will decrease

    • C.

      More, banks will lend more, and the money supply will increase.

    • D.

      More, banks will lend less, and the money supply will decrease.

    Correct Answer
    B. Less, banks will lend less, and the money supply will decrease
    Explanation
    When the Fed increases the discount rate, it becomes more expensive for banks to borrow money from the central bank. As a result, banks will borrow less from the Fed. With less borrowing, banks will have less money available to lend to consumers and businesses, leading to a decrease in lending activity. This decrease in lending activity will result in a decrease in the overall money supply in the economy. Therefore, the correct answer is that banks will borrow less, banks will lend less, and the money supply will decrease.

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  • 21. 

    The interest rate the Fed charges on loans it makes to banks is called the

    • A.

      Discount rate.

    • B.

      Federal funds rate.

    • C.

      Prime rate.

    • D.

      FOMC rate.

    Correct Answer
    A. Discount rate.
    Explanation
    The correct answer is the discount rate. The discount rate refers to the interest rate at which the Federal Reserve lends money to commercial banks. This rate is used as a tool to control the money supply and influence economic activity. By adjusting the discount rate, the Fed can encourage or discourage borrowing and spending by banks, which in turn affects interest rates and overall economic conditions. The federal funds rate, prime rate, and FOMC rate are all related to interest rates, but they do not specifically refer to the interest rate charged on loans by the Fed to banks.

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  • 22. 

    During the stock market crash of October 1987, the Fed

    • A.

      Nearly created a financial panic by not acting as a lender of last resort.

    • B.

      Nearly created a financial panic by raising the discount rate.

    • C.

      Prevented a financial panic by providing liquidity to the financial system

    • D.

      Prevented a financial panic by raising reserve requirements.

    Correct Answer
    C. Prevented a financial panic by providing liquidity to the financial system
    Explanation
    During the stock market crash of October 1987, the Federal Reserve prevented a financial panic by providing liquidity to the financial system. This means that the Fed injected money into the system, ensuring that there was enough cash flow to meet the demands of the market and prevent a collapse. By doing so, they helped stabilize the financial system and prevent a widespread panic among investors and institutions.

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  • 23. 

    If the reserve ratio is 10 percent, and banks do not hold excess reserves, when the Fed purchases $10 million of government bonds, bank reserves

    • A.

      Decrease by $10 million and the money supply eventually decreases by $100 million.

    • B.

      Decrease by $10 million and the money supply eventually increases by $100 million.

    • C.

      Increase by $10 million and the money supply eventually decreases by $100 million

    • D.

      Increase by $10 million and the money supply eventually increases by $100 million.

    Correct Answer
    D. Increase by $10 million and the money supply eventually increases by $100 million.
    Explanation
    When the Fed purchases $10 million of government bonds, it increases the reserves of banks by $10 million. This increase in reserves allows banks to lend out more money, which in turn increases the money supply. The initial increase in reserves of $10 million leads to a multiple expansion of the money supply due to the reserve ratio of 10 percent. Since the reserve ratio is 10 percent, banks can lend out 90 percent of their reserves. Therefore, the increase in reserves by $10 million eventually leads to an increase in the money supply by $100 million ($10 million divided by 0.10).

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  • 24. 

    If banks choose to hold more excess reserves,

    • A.

      Required reserves in the banking system increase.

    • B.

      The money multiplier will increase.

    • C.

      The discount rate will increase

    • D.

      The money supply falls.

    Correct Answer
    D. The money supply falls.
    Explanation
    When banks choose to hold more excess reserves, it means they are keeping more money in their reserves instead of lending it out. This leads to a decrease in the amount of money available for lending and circulation in the economy. As a result, the money supply falls.

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  • 25. 

    The Fed can directly protect a bank during a bank run by

    • A.

      Increasing reserve requirements.

    • B.

      Selling government bonds to the bank.

    • C.

      Lending reserves to the bank.

    • D.

      Doing any of the above.

    Correct Answer
    C. Lending reserves to the bank.
    Explanation
    During a bank run, when depositors rush to withdraw their money, the bank may face a shortage of reserves. The Federal Reserve can directly protect the bank by lending reserves to it. This injection of liquidity helps the bank meet the demands of its depositors and prevents it from becoming insolvent. By providing the necessary funds, the Fed can stabilize the bank's operations and restore confidence in the banking system. Increasing reserve requirements or selling government bonds to the bank are not direct ways for the Fed to protect a bank during a bank run, although they may indirectly contribute to its stability.

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