1 Chapter 18 Practice Quiz Tutorial Money and The Federal Reserve ©2004 South-Western

2 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. B. Finding coincidence of wants complicates and therefore decreases market transactions.

3 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. B. Gold or silver backing for U.S. paper money was removed in 1934.

4 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. D. Credit cards are a prearranged short-term loan which can be canceled by the credit card company.

5 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. C. Money is the most liquid form of wealth because it can be spent directly in the marketplace.

6 5. M1 refers to a. the narrowly defined money supply. b. currency held by the public plus checking account balances and traveler’s checks. c. the smallest of the money-supply definitions. d. all of the above. D. M1 is the narrowest definition of the money supply.

7 6. The M1 definition of the money supply consists of a. coins and currency in circulation. b. coins and currency in circulation, checkable deposits, and traveler’s checks. c. Federal Reserve notes, gold certificates, and checkable deposits. d. Federal Reserve notes and bank loans. B. Answers a is incomplete and c and d are not answers because gold certificates and bank loans are not included in M1.

8 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. C. Savings accounts are included in M2.

9 8. Which of the following is part of the M2 definition of the money supply, but not part of M1? a. Traveler’s checks. b. Currency held in banks. c. Currency in circulation. d. Money market mutual fund shares. D. Note that M1 is part of M2.

10 9. Which of the following is not part of M1? a. Checking accounts b. Coins c. Credit cards d. Traveler’s checks e. Paper currency C. Credit cards are not considered money. They fail to meet the store of value characteristic.

Which definition of the money supply includes credit cards, or “plastic money”? a. M1 b. M2 c. M3 d. All of the above e. None of the above E. Credit cards are not money because they fail to serve as a store of value.

Which of these institutions has the responsibility to control the money supply? a. Commercial banks b. Congress c. U.S. Treasury Department d. Federal Reserve System D. The Federal Reserve System is our central bank.

Which of the following is not one of the function of the Federal Reserve? a. Clearing checks b. Printing currency c. Supervising and regulating banks d. Controlling the money supply B. The U.S. Treasury prints our currency.

Which of the following is in charge of the buying and selling of government securities by the Fed? a. president b. Federal Open Market Committee (FOMC) c. Congress d. None of the above B. Selling U.S. securities (Treasury bills, notes, and bonds) is one of the major tools for controlling the money supply.

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. C. The FDIC is a government agency established by Congress in 1933 to insure commercial bank deposits up to $100,000 per bank account.

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