Principles of Money and Banking Quiz

Money does not serve as a unit of labor; its functions include medium of exchange, store of value, and unit of account.

A fiat currency, like the U.S. dollar, has no intrinsic value and relies on government decree for acceptance as legal tender.

The FDIC ensures the safety of bank deposits by providing insurance coverage up to a certain limit.

Central banks play a crucial role in conducting monetary policy, influencing interest rates and overall economic conditions.

The money supply represents the total amount of money circulating in an economy, including cash, deposits, and other liquid instruments.

M1 measures the most liquid components of the money supply, including physical currency, demand deposits, and traveler's checks.

Decreasing the reserve requirement is an expansionary monetary policy that increases the money supply.

The Federal Reserve plays various roles, including conducting monetary policy, supervising banks, and ensuring the stability of the financial system.

The discount rate set by the central bank regulates the interest rates for banks borrowing funds, influencing overall economic activity.

The federal funds rate is the interest rate at which banks lend reserves to each other overnight, influencing short-term borrowing costs.

Fractional reserve lending is the process by which banks create money through lending, exceeding the reserves they hold.

Central banks use open market operations as the primary tool to control the money supply by buying or selling securities.

Fractional reserve banking involves banks lending out a portion of the deposits they hold, keeping only a fraction in reserve.

Open market operations are conducted by central banks to regulate the money supply and influence interest rates in the economy.

Macroprudential policies, like regulating banks' capital requirements, aim to ensure the stability of the entire financial system.

Microprudential policies focus on supervising and regulating individual banks to ensure their financial health and stability.

Basel III regulations aim to enhance the resilience of the banking sector and reduce systemic risk by establishing capital and liquidity standards.