Chapter 14
Practice Quiz
Money and the Federal Reserve System
1. Which of the following is a problem with barter?
a. Individuals will not exchange goods.
b. Individuals’ wants must coincide in order for there to be exchange.
c. Goods can be exchanged, but services cannot.
d. None of the above is a problem.
ANS:
b. Finding coincidence of wants complicates and therefore decreases market transactions.
2. Which of the following is not a characteristic of money?
a. It provides a way to measure the relative value of goods and services.
b. It is always backed by something of high intrinsic value such as gold or silver.
c. It is generally acceptable as a medium of exchange.
d. It allows for saving and borrowing.
ANS:
b. Gold or silver backing for U.S. paper money was removed in 1934.
3. Which of the following is not a store of value?
a. Dollar
b. Money market mutual fund share
c. Checking account balance
d. Credit card
ANS:
d. Credit cards are a prearranged short-term loan which can be canceled by the credit card
company.
4. The easier it is to convert an asset directly into goods and services without loss, the
a. less secure it is.
b. more secure it is.
c. more liquid it is.
d. less liquid it is.
ANS:
c. Money is the most liquid form of wealth because it can be spent directly in the
marketplace.
5. M1 refers to
a. the most narrowly defined money supply.
b. currency held by the public plus checking account balances.
c. the smallest dollar amount of the money supply definitions.
d. all of the above.
ANS:
d. M1 is the narrowest definition of the money supply.
6. The M1 definition of the money supply consists of
a. coins and currency in circulation.
b. coins and currency in circulation, and checkable deposits.
c. Federal Reserve notes, gold certificates, and checkable deposits.
d. Federal Reserve notes and bank loans.
ANS:
b. Answers a. is incomplete and c. and d. are not answers because gold certificates and
bank loans are not included in M1.
7. Which of the following items is not included when computing M1?
a. Coins in circulation
b. Currency in circulation
c. Savings accounts
d. Checking account entries
ANS:
c. Savings accounts are included in M2.
8. Which of the following is part of the M2 definition of the money supply, but not part
of M1?
a. Checkable deposits.
b. Currency held in banks.
c. Currency in circulation.
d. Money market mutual fund shares.
ANS:
d. Note that M1 is part of M2.
9. Which of the following is not part of M1?
a. Checking accounts
b. Coins
c. Credit cards
d. Paper currency
ANS:
c. Credit cards are not considered money. They fail to meet the store of value
characteristic.
10. Which definition of the money supply includes credit cards, or “plastic money”?
a. M1
b. M2
c. Both (a) and (b)
d. Neither (a) nor (b)
ANS:
d. Credit cards are not money because they fail to serve as a store of value.
11. Which of these institutions has the responsibility for controlling the money supply?
a. Commercial banks
b. Congress
c. U.S. Treasury Department
d. Federal Reserve System
ANS:
d. The Federal Reserve System is our central bank.
12. Which of the following is not one of the functions of the Federal Reserve?
a. Clearing checks
b. Printing currency
c. Supervising and regulating banks
d. Controlling the money supply
ANS:
b. The U.S. Treasury prints our currency.
13. Which of the following is in charge of the buying and selling of government
securities by the Fed?
a. the President.
b. Federal Open Market Committee (FOMC).
c. Congress.
d. None of the above.
ANS:
b. Selling U.S. securities (Treasury bills, notes, and bonds) is one of the major tools for
controlling the money supply.
14. The major protection against sudden mass attempts to withdraw cash from banks is
the
a. Federal Reserve.
b. Consumer Protection Act.
c. deposit insurance provided by the FDIC.
d. gold and silver backing the dollar.
ANS:
c. The FDIC is a government agency established by Congress in 1933 to insure
commercial bank deposits up to $100,000 per bank account.
15. Which of the following is not part of the Federal Reserve System?
a. Council of Economic Advisers
b. Board of Governors
c. Federal Open Market Committee
d. 12 Federal Reserve District banks
e. Federal Advisory Council
ANS:
a. The Council of Economic Advisers is a part of the Executive Office of the President,
and it consists of a group of economists who advise the White House on economic policy.