Federal Reserve and Monetary Policy Quiz

What makes a hundred dollar bill valuable?

• It is printed by the government

• It is made of rare materials

• It has a unique serial number

• It is made of special paper

Answer explanation

The correct answer is 'It is printed by the government' because the government's authority and backing give the hundred dollar bill its value.

What is fiat money?

• Money linked to gold reserves

• Money made of metal

• Money used in ancient civilizations

• Money not linked to any external resource

Answer explanation

Fiat money is not linked to any external resource, so the correct choice is 'Money not linked to any external resource'.

Who sets the monetary policy in the US?

• The Executive branch

• The Legislative branch

• The Federal Reserve System

• The Judicial branch

Answer explanation

The Federal Reserve System sets the monetary policy in the US, making it the correct choice.

What happens if the total amount of currency in circulation increases faster than the total value of goods and services in the economy?

• No impact on the economy

• Deflation

• Stable prices

• Inflation

Answer explanation

If the total amount of currency in circulation increases faster than the total value of goods and services in the economy, it leads to inflation as there is more money chasing the same amount of goods and services, causing prices to rise.

What is the purpose of currency?

• To be hoarded

• To be used as a decorative item

• To be exchanged for goods and services

• To be used as a collectible item

Answer explanation

The purpose of currency is to be exchanged for goods and services, making it the correct choice.

What is the potential consequence of too much inflation?

• Decrease in business profits

• Decrease in consumer spending

• Stimulated business

• Overconsumption

Answer explanation

Too much inflation can lead to overconsumption as people may spend more due to the decrease in the value of money.

What is the potential consequence of deflation?

• Stimulated business

• Increase in consumer spending

• More unemployment

• Increase in business profits

Answer explanation

Deflation can lead to more unemployment as businesses may cut costs and reduce workforce to cope with falling prices and demand.

What does the Federal Reserve use to determine how much currency should be in circulation?

• International trends

• Previous rates of inflation

• Unemployment rate

• Previous rates of deflation

Answer explanation

The Federal Reserve uses previous rates of inflation to determine how much currency should be in circulation.

What is the purpose of a small, consistent amount of inflation according to most economists?

• To discourage consumer spending

• To encourage consumer hoarding

• To encourage economic growth

• To discourage economic growth

Answer explanation

The purpose of a small, consistent amount of inflation according to most economists is to encourage economic growth.

What is the purpose of a central bank in a country's economy?

• To regulate the flow of currency

• To issue commemorative coins

• To set interest rates for mortgages

• To print new currency

Answer explanation

The purpose of a central bank in a country's economy is to regulate the flow of currency.