Question 1

The chair of the Board of Governors of the Fed is appointed by the president.

Accepted Answer

According to the Federal Reserve Act, the chair of the Board of Governors of the Fed is appointed by the president and confirmed by the Senate.

Question 2

The twelve district banks of the Federal Reserve System were created to decentralize power and to respond to the public's fears of the monopoly power of a single central bank such as the Bank of England or the Bank of Japan.

Accepted Answer

The creation of twelve district banks was part of the Federal Reserve Act of 1913, which aimed to decentralize power and provide regional representation in the governance of the Federal Reserve System. This was done in response to concerns about the concentration of power in a single central bank, as seen in countries like England and Japan.

Question 3

Inflation is impossible in a commodity money system.

Accepted Answer

Inflation can still occur in a commodity money system if the supply of the commodity increases faster than the growth of the economy, leading to an excess of the commodity and a decrease in its value. Additionally, changes in demand and speculation can also affect the value and lead to inflation.

Question 4

The first checks were probably notes written to a goldsmith asking him to transfer ownership of some designated amount of gold from the writer of the note to its bearer.

Accepted Answer

This is a widely accepted theory regarding the origin of checks. The first known checks were used in the ancient world by traders to pay for goods and services without the need to carry around heavy bags of gold or other precious metals.

Question 5

Under a fractional reserve banking system,banks have reserves of only a fraction of their total deposits.

Accepted Answer

This is the definition of fractional reserve banking. Banks are required to hold only a certain percentage (fraction) of their deposits as cash reserve, while the rest of the money is loaned out.

Question 6

Only Federal Reserve banks can issue paper currency in the United States,and their power to do so is virtually unlimited.

Accepted Answer

The Federal Reserve banks have the authority to issue paper currency in the United States, and there is no limit to the amount of currency they can issue. However, they do so in accordance with monetary policy and economic conditions.

Question 7

People came to accept fiat money because they believed that others would accept it as well.

Accepted Answer

The value of fiat money is derived from the faith and confidence people have in the government or institution that issued it. This confidence is maintained by the belief that others will also accept it as a form of payment.

Question 8

In general,the more money in existence,the better it functions as a store of value.

Accepted Answer

Increasing the amount of money in existence can lead to inflation, which decreases the purchasing power of money, making it a poorer store of value.

Question 9

The chair of the Board of Governors of the Fed must resign when a new president is elected.

Accepted Answer

The chair of the Board of Governors of the Fed does not have to resign when a new president is elected. Their term can last up to four years longer than a presidential term, and they can only be removed for cause by the president.

Question 10

Banks earn a profit by offering loans at higher interest rates than they pay savers.

Accepted Answer

Banks make money by charging higher interest rates on loans than they pay on savings accounts. This difference, known as the spread or margin, is where the bank's profit comes from.

Question 11

Each member of the Federal Reserve's Board of Governors is appointed for life.

Accepted Answer

Board of Governors members are appointed for a 14-year term, but can be reappointed to serve additional terms.

Question 12

One characteristic of cattle that makes them unsuitable as a medium of exchange is that they are not easily divisible.

Accepted Answer

Cattle are large animals and therefore not easily divisible into smaller units for exchange.

Question 13

The U.S.dollar is backed by gold.

Accepted Answer

The U.S. dollar has not been backed by gold since 1971 when President Nixon ended the gold standard. Currently, the value of the U.S. dollar is determined by market demand and the strength of the U.S. economy.

Question 14

The Federal Open Market Committee was established to give the Fed the power to change reserve requirements.

Accepted Answer

The Federal Open Market Committee (FOMC) was established to oversee open market operations and determine the federal funds rate, not to change reserve requirements. Reserve requirements are set by the Board of Governors, which is a separate entity within the Fed.

Question 15

The Fed can make loans to the general public at the discount rate.

Accepted Answer

The discount rate is the interest rate at which banks can borrow money directly from the Federal Reserve. Loans to the general public are not made at the discount rate.

Question 16

Money does not solve the double coincidence of wants problem unless it is generally acceptable.

Accepted Answer

The double coincidence of wants problem arises when two individuals who have different goods or services to offer want what the other has, but they cannot agree on the terms of exchange because they lack a medium of exchange. Money can solve this problem if it is generally acceptable as a medium of exchange, meaning that most people in the economy are willing to accept it in exchange for goods and services. However, if money is not generally accepted, then it cannot solve the problem.

Question 17

Many banks in the U.S.failed in the 1930s,not because they were poorly managed,but because they could not survive the panicky withdrawal of funds by their depositors.

Accepted Answer

This statement is true. In the 1930s, many banks failed due to people's fear and panicky withdrawal of their deposits, leading to a collapse of the banking system.

Question 18

The Federal Reserve provides gold in exchange for Federal Reserve notes.

Accepted Answer

The Federal Reserve does not exchange Federal Reserve notes for gold. The United States moved away from the gold standard in 1933, and Federal Reserve notes are not redeemable in gold but are legal tender backed by the government.

Question 19

The only money that can be used as a standard of value is fiat money.

Accepted Answer

While fiat money can be used as a standard of value, other forms of money such as commodity or precious metal-based money can also serve as a standard of value.

Question 20

The U.S.dollar is a good example of fiat money.

Accepted Answer

The U.S. dollar is not backed by a physical commodity, such as gold, and its value is derived from government regulation and the trust of its users, making it a fiat currency.

Quiz 13: Money and the Financial System