Free Money and Banking Practice Questions

Sample Practice Questions

Try these 10 sample questions from the Money and Banking practice bank. Each includes the answer and explanation. Continue with the interactive practice above to review the full question set.

1. 1Which components make up the monetary base in the Federal Reserve's definition?

   1. A.Currency in circulation and depository institutions' reserve balancesCorrect answer: A
   2. B.Currency held by the public and retail money market fund shares
   3. C.Transaction deposits and small-denomination time deposits
   4. D.Retail money market fund shares and transaction deposits

   Explanation: The Federal Reserve defines the monetary base as "The sum of currency in circulation and reserve balances, or deposits held by banks and other depository institutions in their accounts at the Federal Reserve." Transaction deposits and retail fund shares are components of other money measures, not this definition.

   Reference: What is the money supply? Is it important? — Money supply measures, monetary base and M1/M2

2. 2Under the Community Reinvestment Act, who oversees nationally chartered banks?

   1. A.Federal Reserve Board
   2. B.Federal Deposit Insurance Corporation
   3. C.Office of the Comptroller of the CurrencyCorrect answer: C
   4. D.National Credit Union Administration

   Explanation: The Federal Reserve explains that "The Office of the Comptroller of the Currency (OCC) regulates banks with national charters." The other regulators cover different types of institutions in this context.

   Reference: Federal Banking Regulators for the CRA — Which Regulators Oversee the CRA, For National Banks

3. 3In the classical explanation described by the Atlanta Fed, how does high unemployment tend to be reduced?

   1. A.Wages fall, encouraging additional hiringCorrect answer: A
   2. B.Wages rise, encouraging additional hiring
   3. C.Wages remain rigid while firms raise hiring
   4. D.Wages fall, causing firms to reduce hiring

   Explanation: The Atlanta Fed describes the classical prediction: "when unemployment was high wages would adjust downward, stimulating more hiring and reducing the unemployment rate." This adjustment is a theoretical prediction, not a guarantee about every actual recession.

   Reference: The Natural Rate of Unemployment: A Historical Perspective — Economic Review, Second Quarter 1997, page 6

4. 4What problem was the Federal Reserve established in 1913 partly to address?

   1. A.Recurring bank panics and an inelastic currencyCorrect answer: A
   2. B.A currency supply that expanded too readily during panics
   3. C.A banking system free from disruptive deposit withdrawals
   4. D.A currency supply fully responsive to changing cash demand

   Explanation: Federal Reserve History states that "Banking panics—events characterized by widespread bank runs and payments suspensions and, to a degree, outright bank failures—had occurred often throughout the 19th century." It also says "The supply of notes was largely unresponsive to changes in demand". These problems motivated reform.

   Reference: Overview: The History of the Federal Reserve — How It All Began

5. 5How does the Fed describe the timing of traditional monetary policy effects on spending and inflation?

   1. A.They may take several quarters or more to take holdCorrect answer: A
   2. B.They take effect immediately without a lag
   3. C.They take effect after exactly one business day
   4. D.They take effect only when existing loans mature

   Explanation: The Fed explains that "policy actions today may take several quarters or more before their effects on spending and inflation take hold." The exact lag is not fixed for every episode.

   Reference: The Fed Explained: What the Central Bank Does — Conducting Monetary Policy, Factors Affecting the Stance, page 26

6. 6How does the BIS distinguish a foreign bank branch from a subsidiary?

   1. A.A branch is an extension of the parent bank's balance sheetCorrect answer: A
   2. B.A branch is a separately incorporated subsidiary of the parent
   3. C.A subsidiary operates without capital as part of the parent
   4. D.Both branch and subsidiary have separate capital from the parent

   Explanation: The BIS states that "branches do not have their own capital; they operate as an extension of the parent bank's balance sheet." Subsidiaries are separately incorporated.

   Reference: International finance through the lens of BIS statistics: the geography of banks' operations — The architecture of global banking, office types

7. 7In the Federal Reserve's standard definitions, which item is added to M1 to help form M2?

   1. A.Reserve balances held by depository institutions
   2. B.Retail money market mutual fund sharesCorrect answer: B
   3. C.Treasury securities held by households
   4. D.Large-denomination time deposits

   Explanation: The Federal Reserve defines M2 as "M1 plus small-denomination time deposits (those issued in amounts of less than $100,000) and retail money market mutual fund shares." Reserve balances enter the monetary base; the other choices are not among these additions.

   Reference: What is the money supply? Is it important? — Money supply measures, monetary base and M1/M2

8. 8A state bank belongs to the Federal Reserve System. Which agency supervises its CRA obligations?

   1. A.Federal Reserve BoardCorrect answer: A
   2. B.Office of the Comptroller of the Currency
   3. C.Federal Deposit Insurance Corporation
   4. D.Consumer Financial Protection Bureau

   Explanation: The Federal Reserve states that "The Federal Reserve Board (FRB) regulates state-chartered banks that ARE members of the Federal Reserve System." FDIC is identified for state nonmembers, while the OCC is identified for national banks.

   Reference: Federal Banking Regulators for the CRA — Which Regulators Oversee the CRA, For State-Chartered Banks

9. 9What short-run wage assumption helps explain persistent unemployment in the Keynesian account described by the Atlanta Fed?

   1. A.Money wages may be slow to fall when labor demand fallsCorrect answer: A
   2. B.Money wages adjust immediately after labor demand falls
   3. C.Money wages rise automatically when labor demand falls
   4. D.Money wages fall enough to clear labor markets immediately

   Explanation: The Atlanta Fed explains that "when firms’ demand for labor decreased, nominal (money) wages did not fall as fast or as far as classical theory predicted." The Keynesian account therefore allows slow wage adjustment.

   Reference: The Natural Rate of Unemployment: A Historical Perspective — Economic Review, Second Quarter 1997, page 6

10. 10Under the national banking system described in Federal Reserve History, what limited a national bank's note issuance?

    1. A.The amount of U.S. government bonds it heldCorrect answer: A
    2. B.The amount of corporate bonds it held
    3. C.The amount of customer deposits it accepted
    4. D.The amount of gold reserves held by the bank

    Explanation: Federal Reserve History explains that "The volume of notes that a national bank could issue was tied to the amount of U.S. government bonds the bank held." This was a feature of the historical national banking system.

    Reference: Overview: The History of the Federal Reserve — How It All Began