Money, Banking, and Financial Institutions — High School Economics practice questions

U.S. dollars are fiat money, which means they:

1. are backed by gold held in the U.S. Treasury
2. have value as metal
3. have value because the government says so
4. can be exchanged for silver

Answer: C — have value because the government says so

C) Correct — They are not backed by gold. A) The gold standard ended in 1971. B) Describes commodity money. D) Silver certificates ended decades ago.

The FDIC protects bank customers by:

1. insuring deposits up to $250,000
2. guaranteeing stock market returns
3. setting interest rates
4. printing new money

Answer: A — insuring deposits up to $250,000

A) Correct — Insured deposits are safe even if a bank fails. B) Stocks are not insured. C) The Federal Reserve influences rates. D) The Treasury prints currency.

Comparing the prices of two phones in dollars uses money as a:

1. medium of exchange
2. store of value
3. unit of account
4. form of barter

Answer: C — unit of account

C) Correct — Money is a common measure of value. A) Means using money to buy things. B) Means saving money for later. D) Barter does not use money.

The main problem with barter is that it requires:

1. a double coincidence of wants
2. a central bank
3. paper currency issued by a government
4. high interest rates

Answer: A — a double coincidence of wants

A) Correct — Each trader must want what the other has. B) Barter needs no bank. C) Barter uses goods, not money. D) Interest is unrelated to barter.

The central bank of the United States is the:

1. U.S. Treasury
2. FDIC
3. Securities and Exchange Commission
4. Federal Reserve

Answer: D — Federal Reserve

D) Correct — It conducts monetary policy. A) Manages government finances and debt. B) Insures bank deposits. C) Regulates securities markets.

Investments with higher expected returns usually:

1. carry less risk
2. carry more risk
3. are guaranteed by the FDIC
4. never lose value

Answer: B — carry more risk

B) Correct — Investors demand a reward for taking risk. A) Low-risk assets usually pay less. C) Investments are not insured. D) Risky assets can lose value.

If the reserve ratio is 10%, the simple money multiplier is:

1. 0.1
2. 100
3. 10
4. 1

Answer: C — 10

C) Correct — Multiplier = 1 ÷ reserve ratio = 1 ÷ 0.10. A) Is the reserve ratio itself. B) Uses 1 ÷ 0.01. D) Would mean no money creation.

The three functions of money are:

1. income, savings, and taxes
2. coins, bills, and checks
3. trading, saving, and measuring value
4. supply, demand, and price

Answer: C — trading, saving, and measuring value

C) Correct — Money is a medium of exchange, a store of value, and a unit of account. A) Are uses of money, not functions. B) Are forms of money. D) Are market concepts.

A credit union differs from a bank because it is:

1. owned by the government
2. not allowed to make loans
3. owned by its members
4. uninsured by law

Answer: C — owned by its members

C) Correct — Credit unions are nonprofit cooperatives. A) Credit unions are private. B) They make loans to members. D) Deposits are insured by the NCUA.

Unexpected inflation tends to help:

1. borrowers with fixed-rate loans
2. lenders with fixed-rate loans
3. savers with fixed interest
4. people on fixed incomes

Answer: A — borrowers with fixed-rate loans

A) Correct — They repay with dollars worth less. B) They are repaid with less valuable dollars. C) Their savings buy less. D) Their income buys less.

What is a bond?

A loan to a company or government in exchange for periodic interest and return of principal at maturity.

What is M1 vs. M2?

M1: most liquid forms of money (cash, checking). M2: M1 + savings, money market accounts, small CDs.

What is diversification?

Spreading investments across many assets to reduce risk.

What is a mutual fund?

Pool of money from many investors used to buy a diversified portfolio of stocks, bonds, or other assets.