Chapter 26 — Quiz

Multiple choice

Q1. The three functions of money are: a) Saving, spending, investing b) Medium of exchange, unit of account, store of value c) Liquidity, stability, growth d) Currency, credit, capital

Q2. Fiat money has value because: a) It's backed by gold b) It has intrinsic value c) It's accepted based on trust and government backing d) It's scarce

Q3. With a 10% reserve ratio, the money multiplier is: a) 0.1 b) 1 c) 10 d) 100

Q4. The Federal Reserve's dual mandate is: a) High GDP and low taxes b) Maximum employment and stable prices c) Low interest rates and a balanced budget d) High exports and low imports

Q5. A bank run is: a) When bank employees run to work b) A self-fulfilling panic where depositors withdraw en masse c) A normal banking operation d) Always caused by fraud

Q6. The Diamond-Dybvig model shows: a) Banks are always safe b) Bank runs have two equilibria — trust (good) and panic (bad) c) Deposit insurance is unnecessary d) Banks don't create money

Q7. FDIC deposit insurance: a) Guarantees all bank investments b) Guarantees deposits up to $250,000, eliminating the incentive to run c) Is funded by depositors d) Was created in 2008

Q8. The 2008 crisis was primarily a run on: a) FDIC-insured banks b) The shadow banking system (investment banks, repo markets, MBS) c) Credit unions d) The Federal Reserve

Q9. M2 includes: a) Only physical currency b) Currency + checking + savings + money market accounts c) Only gold d) Only government bonds

Q10. The moral hazard of deposit insurance is: a) Depositors save too much b) Banks take more risk because losses are backstopped by the government c) The FDIC charges too much d) Banks hold too many reserves

Short answer

SA1. Why do banks create money? Walk through the fractional reserve process.

SA2. What is the difference between M1 and M2?

SA3. Why are banks inherently fragile? (Maturity mismatch.)

SA4. How does deposit insurance solve the bank-run problem?

SA5. Why was the 2008 crisis a "modern bank run"?

True / False

TF1. The U.S. dollar is backed by gold. (True / False)

TF2. Banks hold 100% of deposits in reserve. (True / False)

TF3. Bank runs are a self-fulfilling prophecy. (True / False)

TF4. The Federal Reserve was created in 1776. (True / False)

TF5. Shadow banking entities had FDIC insurance before 2008. (True / False)

Selected answers in appendices/answers-to-selected.md.