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Question 1. Which of the following is NOT considered a primary function of money? A) Store of value B) Medium of exchange C) Unit of account D) Source of income Answer: D Explanation: Source of income is not a primary function of money; the three primary functions are store of value, medium of exchange, and unit of account. Question 2. The "double coincidence of wants" problem is solved by money acting as a: A) Store of value B) Medium of exchange C) Unit of account D) Investment tool Answer: B Explanation: Money as a medium of exchange eliminates the double coincidence of wants required in barter systems. Question 3. Which characteristic ensures money can be carried easily? A) Durability B) Portability C) Divisibility D) Uniformity Answer: B Explanation: Portability refers to the ease with which money can be transported.
Question 4. Fiat money differs from commodity money in that it: A) Has intrinsic value B) Is backed by gold C) Has value by government decree D) Is only used in barter Answer: C Explanation: Fiat money's value comes from government decree, not intrinsic value. Question 5. Which of the following assets is the most liquid? A) Real estate B) Shares of stock C) Currency in circulation D) Gold bars Answer: C Explanation: Currency in circulation (cash) is the most liquid asset. Question 6. The main difference between M1 and M2 monetary aggregates is: A) M2 includes components not in M B) M1 includes time deposits C) M2 is more liquid than M D) M1 includes large time deposits Answer: A Explanation: M2 includes all of M1 plus savings deposits, small time deposits, and money market funds. Question 7. Traveler’s checks are included in:
B) Money provides a way to measure value C) Money is used for exchange D) Money is durable Answer: B Explanation: Unit of account means money acts as a common measure for valuing goods and services. Question 11. Which of the following is NOT considered part of M1? A) Checking accounts B) Cash in hand C) Traveler’s checks D) Savings deposits Answer: D Explanation: Savings deposits are included in M2, not M1. Question 12. Which function of money allows people to transfer purchasing power over time? A) Unit of account B) Medium of exchange C) Store of value D) Standard of deferred payment Answer: C Explanation: Store of value allows money to be saved and used in the future. Question 13. A time deposit is most likely to be found in which monetary aggregate? A) M B) M
C) M
D) None of the above Answer: C Explanation: Time deposits are included in M2. Question 14. The monetary base (M0) consists of: A) Only currency held by the public B) Currency in circulation and bank reserves C) Only bank reserves D) Only gold reserves Answer: B Explanation: The monetary base is currency in circulation plus reserves held at the central bank. Question 15. Which of the following best describes fractional reserve banking? A) Banks keep 100% of deposits on hand B) Banks lend all deposited funds C) Banks keep a fraction of deposits as reserves D) Banks create money only by printing currency Answer: C Explanation: Fractional reserve banking means banks keep a fraction of deposits as reserves and lend out the rest. Question 16. If the reserve requirement is 10%, the money multiplier is: A) 1 B) 5
C) The money supply as part of M D) None of the monetary aggregates Answer: A Explanation: Debit card transactions draw from checking accounts, which are part of M1. Question 20. Credit cards are NOT included in the money supply because: A) They are not widely accepted B) They represent access to a loan, not actual money C) They are included in M D) They are not durable Answer: B Explanation: Credit cards provide access to loans, not actual funds in checking or savings accounts. Question 21. Which of the following is NOT a characteristic of effective money? A) Scarcity B) Uniformity C) Durability D) Volatility Answer: D Explanation: Volatility is not a characteristic of money; effective money is stable. Question 22. Which monetary aggregate includes large time deposits? A) M B) M C) M
D) M
Answer: C Explanation: Large time deposits are included in M3. Question 23. Currency in circulation refers to: A) Only coins B) Money held by banks C) Physical cash held by the public D) All bank deposits Answer: C Explanation: Currency in circulation is the cash held by the public, not by banks. Question 24. Which function of money is most affected during periods of high inflation? A) Store of value B) Medium of exchange C) Unit of account D) Standard of deferred payment Answer: A Explanation: High inflation erodes the store of value function of money. Question 25. The process of banks making loans from excess reserves is known as: A) Open market operations B) Money creation C) Fractional reserve lending D) Asset reallocation
Answer: B Explanation: Transferring value across locations is a contingent (secondary) function of money. Question 29. Which of the following is a component of M1? A) Small time deposits B) Money market mutual funds C) Traveler’s checks D) Large time deposits Answer: C Explanation: Traveler’s checks are included in M1, whereas the others are not. Question 30. What happens to M1 if a consumer moves $1,000 from a checking account to a savings account? A) M1 increases B) M1 decreases C) M1 stays the same D) M1 is unaffected Answer: B Explanation: Checking accounts are part of M1; moving money to a savings account (M2) reduces M1. Question 31. The demand for money held for daily purchases is called: A) Transaction demand B) Precautionary demand C) Speculative demand D) Asset demand
Answer: A Explanation: Transaction demand refers to money held for everyday transactions. Question 32. Which monetary aggregate includes retail money market mutual funds? A) M B) M C) M D) M Answer: C Explanation: Retail money market mutual funds are included in M2. Question 33. The value of money depends on: A) Its color B) Its size C) Social consensus and legal tender status D) Its weight Answer: C Explanation: Money is valuable because people trust and accept it as legal tender. Question 34. The main objective of the central bank’s open market operations is to: A) Issue new currency designs B) Influence the money supply C) Set interest rates for loans D) Control gold reserves Answer: B
Explanation: Commodity money has value in itself (like gold or silver). Question 38. Which of the following is NOT a component of M2? A) Savings deposits B) Retail money market mutual funds C) Large time deposits D) Small time deposits Answer: C Explanation: Large time deposits are part of M3, not M2. Question 39. When a central bank lowers the reserve requirement, what is the likely effect? A) Banks lend less B) Money supply contracts C) Money supply expands D) Interest rates rise Answer: C Explanation: Lower reserve requirements allow banks to lend more, expanding the money supply. Question 40. M4 includes: A) Only M1 and M B) M3 plus all post office deposits C) Only currency in circulation D) Only time deposits Answer: B Explanation: M4 is M3 plus all post office savings (in places like India).
Question 41. The demand for money for emergencies is called: A) Precautionary demand B) Transaction demand C) Speculative demand D) Asset demand Answer: A Explanation: Precautionary demand is money held for unforeseen circumstances. Question 42. Which of the following is a store of value? A) Ice cream B) Currency C) A perishable good D) A service Answer: B Explanation: Currency can be stored and used in the future, making it a store of value. Question 43. Which of the following would not be considered part of the money supply? A) Cash in your wallet B) Money in a checking account C) A government bond D) Traveler’s checks Answer: C Explanation: Government bonds are financial assets but are not part of the money supply.
Question 47. If the central bank sells government bonds, what is the impact on the money supply? A) It increases B) It decreases C) It remains the same D) It becomes more liquid Answer: B Explanation: Selling bonds takes money out of circulation, reducing the money supply. Question 48. Which of the following is NOT a quality of money? A) Durability B) Portability C) Infiniteness D) Divisibility Answer: C Explanation: Money must have limited supply, not be infinite. Question 49. Bank reserves held at the central bank are part of: A) M B) M C) M D) M Answer: B Explanation: Bank reserves at the central bank are part of M0, not the broader measures. Question 50. The velocity of money refers to:
A) How quickly the central bank prints money B) The number of times money changes hands in a period C) The speed at which banks lend D) The rate of inflation Answer: B Explanation: Velocity of money is the rate at which money circulates in the economy. Question 51. Legal tender status means: A) Money must be accepted for all debts B) Money has intrinsic value C) Money is only valid in one country D) Money can be exchanged for gold Answer: A Explanation: Legal tender means currency must be accepted in payment of debts. Question 52. Which of the following is NOT included in the calculation of M1? A) Currency B) Demand deposits C) Money market mutual funds D) Traveler’s checks Answer: C Explanation: Money market mutual funds are included in M2, not M1. Question 53. Which of the following would be considered fiat money? A) Gold coins
C) Debit card D) Checkbook Answer: B Explanation: Gold is a commodity with intrinsic value. Question 57. Which of the following is the broadest measure of money in the U.S.? A) M B) M C) M D) M Answer: C Explanation: M3 includes M2 and additional assets like large time deposits. Question 58. If a bank has $10 million in deposits and a 10% reserve requirement, required reserves are: A) $100, B) $500, C) $1,000, D) $2,000, Answer: C Explanation: Required reserves = 10% of $10 million = $1 million. Question 59. Acceptability as a characteristic of money means: A) Money is only accepted by banks B) Money is accepted as payment by people and businesses C) Money can only be used domestically
D) Money must be gold-backed Answer: B Explanation: Acceptability means money is widely accepted in transactions. Question 60. Which of the following is NOT a function of the central bank? A) Setting reserve requirements B) Printing currency C) Regulating the stock market D) Conducting open market operations Answer: C Explanation: Central banks do not regulate stock markets; they focus on money supply and monetary policy. Question 61. Which asset is most likely to lose value quickly in an inflationary environment? A) Real estate B) Commodity money C) Currency D) Art Answer: C Explanation: Currency loses purchasing power quickly with inflation. Question 62. The largest component of M1 is usually: A) Traveler’s checks B) Demand deposits (checking) C) Currency in circulation
