Money Functions and Supply Quiz

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Questions and Answers

If you are estimating your total expenses for school next semester, you are using money primarily as?

A medium of exchange

A unit of account (correct)

An economic investment

A store of value

If you write a check on a bank to purchase a used Honda Civic, you are using money primarily as?

A unit of account

An economic investment

A medium of exchange (correct)

A store of value

When economists say that money serves as a unit of account, they mean that it is?

A monetary unit for measuring and comparing the relative values of goods (correct)

A way to keep wealth in a readily spendable form for future use

A means of payment

Declared as legal tender by the government

In the United States, the money supply (M1) includes?

Coins, paper currency, and checkable deposits Signup and view all the answers

Checkable deposits are classified as money because?

They can be readily used in purchasing goods and paying debts Signup and view all the answers

In defining money as M1, economists exclude time deposits because?

They are not directly or immediately a medium of exchange Signup and view all the answers

Currency in circulation is part of?

Both M1 and M2 Signup and view all the answers

Money market deposit accounts are included in?

M2 only Signup and view all the answers

Assuming no other changes, if checkable deposits decrease by $40 billion and balances in money market mutual funds increase by $40 billion, then?

M1 money supply will decline and the M2 money supply will remain unchanged Signup and view all the answers

Michelle transfers $4,000 from her savings account to her checking account. What effect is this change likely to have on M1 and M2?

M1 increases and M2 stays the same Signup and view all the answers

The money supply is backed?

By the government's ability to control the supply of money and therefore to keep its value relatively stable Signup and view all the answers

To keep high inflation from eroding the value of money, monetary authorities in the United States?

Control the supply of money in the economy Signup and view all the answers

The basic requirement for an item to function as money is that it be?

Generally accepted as a medium of exchange Signup and view all the answers

The central authority of the U.S. banking system is the?

Board of Governors of the Federal Reserve Signup and view all the answers

The Federal Reserve System was created in?

1913 Signup and view all the answers

As it relates to Federal Reserve activities, the acronym FOMC describes the?

Federal Open Market Committee Signup and view all the answers

The Federal Open Market Committee (FOMC) is made up of?

The seven members of the Board of Governors of the Federal Reserve System along with the president of the New York Federal Reserve Bank and four other Federal Reserve Bank presidents on a rotating basis Signup and view all the answers

Which one of the following is true about the U.S. Federal Reserve System?

There are 12 regional Federal Reserve Banks Signup and view all the answers

To say that the Federal Reserve Banks are quasi-public banks means that?

They are privately owned but managed in the public interest Signup and view all the answers

The Federal Reserve Banks are owned by the?

Member banks Signup and view all the answers

Which of the following is not true about the Federal Reserve Banks?

They compete with commercial banks in their basic functions Signup and view all the answers

The Federal Open Market Committee (FOMC)?

Sets policy on the sale and purchase of government bonds by the Fed Signup and view all the answers

The group that sets the Federal Reserve System's policy on buying and selling government securities (bills, notes, and bonds) is the?

Federal Open Market Committee (FOMC) Signup and view all the answers

An important routine function of the Federal Reserve Bank is to?

Provide facilities by which commercial banks and thrift institutions may collect checks Signup and view all the answers

Which of the following statements best describes the 12 Federal Reserve Banks?

They are privately owned and publicly controlled central banks whose basic goal is to control the money supply and interest rates in promoting the general economic welfare Signup and view all the answers

Study Notes

Money Functions

Money is used primarily as a unit of account for estimating total expenses and for measuring and comparing values of goods.
As a medium of exchange, money facilitates transactions, such as writing a check to purchase a car.

Money Supply Definitions

In the U.S., M1 consists of coins, paper currency, and checkable deposits, while M2 includes M1 plus money market deposit accounts.
Checkable deposits are considered money because they can be immediately used for purchases, reflecting their liquidity.

Changes in Money Supply

A decrease in checkable deposits coupled with an increase in money market mutual funds results in a decline in M1 while M2 remains unchanged.
Transferring funds from savings to checking accounts increases M1 without affecting M2.

Control of Money Supply

The money supply's value is primarily backed by the government's ability to control it, ensuring economic stability.
To prevent high inflation, U.S. monetary authorities control the money supply actively.

Characteristics of Money

An item must be generally accepted as a medium of exchange to function effectively as money.
Legal tender status helps ensure money's acceptance in transactions.

Federal Reserve System

The central authority of the U.S. banking system is the Board of Governors of the Federal Reserve.
Created in 1913, the Federal Reserve System includes 12 regional banks and governs monetary policy to stabilize the economy.

Federal Open Market Committee (FOMC)

The FOMC plays a crucial role in setting policies regarding government bond sales and purchases, consisting of Board members and other Federal Reserve Bank presidents.
The FOMC's actions influence the money supply and financial markets, contributing to economic stability.

Federal Reserve Banks' Structure

Federal Reserve Banks are privately owned but serve the public interest, owned by member banks rather than the government.
They do not compete directly with commercial banks in their standard functions and are controlled by federally mandated regulations.

Key Functions of Federal Reserve

An essential function of the Federal Reserve includes facilitating check collection for commercial banks and thrift institutions.
The FOMC is responsible for guiding the buying and selling of government securities, impacting monetary policy and financial markets.

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Description

Testing your understanding of the functions and definitions of money supply, including M1 and M2. This quiz covers how transactions are facilitated through money and the implications of changes in the money supply. Delve into the role of monetary authorities in controlling inflation and ensuring economic stability.