For a barter trade to happen, each person must desire exactly what the other person is offering. What is this requirement called?
A double coincidence of wants
✓
A unit of account
An asset-liability time mismatch
A standard of deferred payment
Correct Answer
A double coincidence of wants
A double coincidence of wants means each party has what the other wants, which barter requires and which is hard to arrange in an economy with many goods and jobs. A unit of account is a function of money, a common measure of value. An asset-liability time mismatch is a banking problem in which deposits can leave faster than loans are repaid. A standard of deferred payment is the use of money for purchases paid for later.
Category: Functions of Money
Question 2
A student sells her old bike for $80 and that same afternoon uses the cash to buy textbooks. Which function of money does this show most directly?
Store of value
Medium of exchange
✓
Unit of account
Standard of deferred payment
Correct Answer
Medium of exchange
Money acts as a medium of exchange when it is accepted in payment for one thing and then used to buy something else, which avoids the need for barter. Store of value describes holding money to spend later, which is not the point of a same-day purchase. Unit of account describes comparing prices in a common measure. Standard of deferred payment describes buying now and paying later.
Category: Functions of Money
Question 3
A worker deposits part of each paycheck in a savings account so she can spend it a year from now. Which function of money does this show?
Unit of account
Medium of exchange
Store of value
✓
Standard of deferred payment
Correct Answer
Store of value
Money is a store of value when it keeps its worth over time so it can be spent later, as the saved paychecks are. Unit of account describes using money to compare values. Medium of exchange describes using money to complete a purchase. Standard of deferred payment describes buying something now and paying for it in the future.
Category: Functions of Money
Question 4
A shopper sees a shirt priced at $30 and a jacket priced at $60 and quickly sees that the jacket costs twice as much. Which function of money makes this comparison easy?
Medium of exchange
Store of value
Standard of deferred payment
Unit of account
✓
Correct Answer
Unit of account
Money is a unit of account because prices stated in the same measure let people compare the value of different goods at a glance. Medium of exchange describes actually paying for goods. Store of value describes keeping money to spend later. Standard of deferred payment describes making a purchase now that is paid for later.
Category: Functions of Money
Question 5
Which of these is an example of commodity money?
Gold coins used in trade
✓
A Federal Reserve note
A debit card payment
A checking account balance
Correct Answer
Gold coins used in trade
Commodity money has value apart from its use as money, and gold is valued for jewelry and industrial uses. A Federal Reserve note is fiat money with no value of its own beyond what it can buy. A debit card payment moves a checkable deposit and is not a physical commodity. A checking account balance is a bank deposit, not an item with separate uses.
Category: Forms of Money
Question 6
Money that has no intrinsic value and is accepted because the government declares it legal tender is called
Commodity money
Fiat money
✓
Commodity-backed currency
Near money
Correct Answer
Fiat money
Fiat money gets its value from government decree and public trust, not from any physical commodity. Commodity money has value from uses other than as money, such as gold or silver. Commodity-backed currency is paper that can be redeemed for a commodity held at a bank. Near money refers to assets such as time deposits that are not as liquid as cash.
Category: Forms of Money
Question 7
Paper bills that a holder could exchange at a bank for a fixed amount of silver are an example of
Fiat money
Barter
Commodity-backed currency
✓
Bank credit
Correct Answer
Commodity-backed currency
Commodity-backed currency is paper money whose value rests on a commodity, such as silver or gold, that the holder can redeem it for. Fiat money is not redeemable for any commodity. Barter is direct trade of goods without money. Bank credit is lending by banks, not a form of redeemable paper money.
Category: Forms of Money
Question 8
Which of these is included in M1?
Certificates of deposit
Money market funds
Small time deposits
Checkable deposits
✓
Correct Answer
Checkable deposits
M1 is the narrow measure of money; it includes currency in circulation and checkable deposits, which can be spent right away, and under current definitions savings deposits as well. Certificates of deposit are counted in M2 because they are tied up for a set period. Money market funds are also part of M2 but not M1. Small time deposits are another M2 component that is less liquid than M1.
Category: Measuring Money
Question 9
Which asset is counted in M2 but not in M1?
Money market funds
✓
Currency in circulation
Checkable deposits
Traveler's checks
Correct Answer
Money market funds
Money market funds are part of the broader M2 measure because they are less easy to spend than cash or checking balances. Currency in circulation is part of M1, and therefore of M2 as well. Checkable deposits are part of M1. Traveler's checks have also been counted in M1.
Category: Measuring Money
Question 10
Why is a credit card not counted as part of the money supply?
It cannot be used to pay for goods
Using it creates a loan that must be repaid
✓
Too few sellers accept it
Its balance is counted in M2 instead
Correct Answer
Using it creates a loan that must be repaid
When you use a credit card, the card company pays the seller and you owe the company that amount, so the card creates a short-term loan rather than being money itself. It cannot be used to pay for goods is wrong because credit cards are widely used for purchases. Too few sellers accept it is wrong because credit cards are widely accepted. Its balance is counted in M2 instead is wrong because credit card balances are not part of M1 or M2.
Category: Measuring Money
Question 11
When a buyer pays with a debit card, what is the money that actually changes hands?
The plastic card itself
A loan from the card issuer
The checkable deposit in the buyer's account
✓
A paper check written later
Correct Answer
The checkable deposit in the buyer's account
A debit card is an instruction to move funds from the buyer's checking account to the seller, so the money is the checkable deposit. The plastic card itself is only a tool for giving that instruction. A loan from the card issuer describes a credit card, not a debit card. A paper check written later is not involved; the transfer comes from the account directly.
Category: Measuring Money
Question 12
Which of these is an asset on a bank's balance sheet?
Customers' checking deposits
The bank's net worth
Money the bank owes other banks
U.S. government bonds the bank holds
✓
Correct Answer
U.S. government bonds the bank holds
Government bonds are something of value the bank owns, so they are assets, along with loans and reserves. Customers' checking deposits are liabilities because the bank owes that money to depositors. The bank's net worth is the difference between assets and liabilities and sits on the right side of a T-account with the liabilities. Money the bank owes other banks is a liability, since it is a debt.
Category: Bank Balance Sheets
Question 13
A deposit that a saver agrees to leave in a bank for a set period in exchange for a higher interest rate is a
Certificate of deposit
✓
Demand deposit
Savings deposit
Money market fund
Correct Answer
Certificate of deposit
A certificate of deposit, or time deposit, commits the saver's money for a set term in exchange for a higher rate. A demand deposit is a checking balance that can be withdrawn at any time. A savings deposit can be withdrawn without waiting for a fixed term. A money market fund pools investors' money in safe short-term assets and has no fixed term.
Category: Measuring Money
Question 14
A bank has loans worth $60 million, government bonds worth $25 million, and reserves of $15 million. Its deposits are $90 million and it has no other liabilities. What is its net worth?
$100 million
$10 million
✓
$190 million
$15 million
Correct Answer
$10 million
Total assets are 60 + 25 + 15 = $100 million, and net worth is assets minus liabilities, so 100 - 90 = $10 million. $100 million is total assets before subtracting deposits. $190 million wrongly adds deposits to assets. $15 million is the bank's reserves, which are only one of its assets.
Category: Bank Balance Sheets
Question 15
A bank has total assets of $50 million and deposits of $46 million, its only liabilities. If $6 million of its loans default and become worthless, what is its net worth?
$4 million
$2 million
Negative $2 million
✓
Negative $6 million
Correct Answer
Negative $2 million
The defaults cut assets to 50 - 6 = $44 million while deposits stay at $46 million, so net worth is 44 - 46 = negative $2 million, which means the bank is bankrupt. $4 million is the net worth before the defaults. $2 million drops the sign of the result. Negative $6 million is just the loss itself rather than the new net worth.
Category: Bank Balance Sheets
Question 16
A bank's depositors can withdraw their money quickly, but the bank's loans are repaid over many years. What is this problem called?
Double coincidence of wants
Diversification
Securitization
Asset-liability time mismatch
✓
Correct Answer
Asset-liability time mismatch
An asset-liability time mismatch arises because a bank's liabilities can be withdrawn on short notice while its assets are repaid slowly, which can leave it paying more on deposits than it earns on older loans when rates rise. Double coincidence of wants is the barter requirement that each side wants what the other offers. Diversification is spreading loans across many borrowers to reduce risk. Securitization is bundling loans into securities that can be sold to investors.
Category: Bank Balance Sheets
Question 17
During a recession, why might banks choose to hold more reserves than they are required to?
They worry more borrowers will fail to repay
✓
The law requires extra reserves in recessions
Depositors stop withdrawing money in recessions
Holding reserves raises the money multiplier
Correct Answer
They worry more borrowers will fail to repay
Banks become more cautious in a recession because they fear that more borrowers will default, so they lend less and keep more reserves. The law requires extra reserves in recessions is wrong because the extra reserves are a choice by banks. Depositors stop withdrawing money in recessions is not why banks hold more reserves. Holding reserves raises the money multiplier is backward, because extra reserves shrink the multiplier.
Category: Money Creation
Question 18
Suppose banks must hold 20% of deposits as reserves and hold no extra reserves. What is the money multiplier?
20
5
✓
0.2
2
Correct Answer
5
The money multiplier equals 1 divided by the reserve requirement, so 1 / 0.20 = 5. 20 uses the percentage itself rather than dividing into 1. 0.2 is the reserve requirement written as a decimal. 2 does not follow from the formula; dividing 1 by 0.20 gives 5.
Category: Money Creation
Question 19
Suppose the reserve requirement is 10% and banks hold no extra reserves. A bank receives a new deposit of $1,000 and lends out its excess reserves. Using the money multiplier on those excess reserves, by how much can the banking system increase M1 through lending?
$10,000
$900
$9,000
✓
$100
Correct Answer
$9,000
The bank keeps $100 as required reserves, leaving $900 of excess reserves, and the multiplier is 1 / 0.10 = 10, so lending can add 10 x $900 = $9,000 to M1. $10,000 applies the multiplier to the whole deposit instead of to the excess reserves. $900 is only the first bank's loan. $100 is the required reserve the first bank keeps.
Category: Money Creation
Question 20
Which change would make the actual money multiplier smaller than 1 divided by the reserve requirement?
Banks lending out all their excess reserves
Borrowers depositing every loan in a bank
A cut in the reserve requirement
People holding more cash outside banks
✓
Correct Answer
People holding more cash outside banks
Cash kept at home or in safe-deposit boxes cannot be relent by banks, so each round of lending is smaller and the multiplier falls below the simple formula. Banks lending out all their excess reserves is the assumption behind the simple formula, not a reason it falls short. Borrowers depositing every loan in a bank is also part of the simple formula's assumptions. A cut in the reserve requirement would make the multiplier larger, not smaller.
Category: Money Creation