Money And Banking Practice Quiz
Do you feel confident to give the practice test a try? The format of the test will be nice and familiar for most as it will be multiple-choice with only one correct answer. When you write your answer make sure to tap (or hover over) the question to give you the answer and an explanation.
All test questions are in a multiple-choice format, with one correct answer and three incorrect options. The following are samples of the types of questions that may appear on the exam.
WarningPlease do keep in mind that we can’t guarantee the accuracy of this quiz, so we do recommend you also run through a full-length practice exam. We’ll recommend some good options in the resources section at the bottom of this page.
Question 1: Which of the following is NOT a function of money?
a) a medium of exchange – people use it to pay for goods and services;
b) a unit of account – to compare prices and value of goods and services;
c) a replacement for the barter system;
d) a standard of deferred payment – a current debt can be paid off at a future date or over time.
Although today’s money did replace the barter system, this is not one of its functions. A fourth function of money missing from the list is “a store of value” – money will keep its current value (more or less) for a future date. The other three functions of money are:
• a medium of exchange – people use it to pay for goods and services;
• a unit of account – to compare prices and value of goods and services;
• a standard of deferred payment – money can be used to pay off a current debt at a future date or over time.
Question 2: An important piece of legislation in 1999 deregulated the commercial banking sector, allowing them to engage in investment banking and insurance activities. This law was:
a) the Monetary Control Act
b) the Glass-Steagall Act
c) the Gramm-Leach-Bliley Act
d) the Federal Deposit Insurance Act
Glass-Steagall had been promulgated in the early 1930s to separate commercial and investment banking. The Monetary Control Act (or to give it its full name the Depository Institutions Deregulation and Monetary Control Act of 1980 required the Reserve Banks to standardise their practice with regard to the pricing of financial services to depository institutions (banks). There is no “Federal Deposit Insurance Act”, but there is a Federal Deposit Insurance Corporation (FDIC) which is there to regulate banks’ lending practices, to make sure that banks do not take excessive risks, and to provide insurance coverage for defaulting bank’s investor deposits.
Question 3: Which of the following functions do commercial banks NOT perform?
a) Become members of the Federal Reserve System;
b) Facilitate the flow of funds between lenders and borrowers;
c) Efficient allocation of funds;
d) Assistance in price discovery.
Commercial banks and other depository institutions are not required to be a member of the FRS, although they do have to abide by its rules and regulations. They do, of course, channel funds between lenders and borrowers by taking deposits for safe-keeping, and lending these funds (at an agreed interest rate) to people and businesses in the form of bank loans. They ensure that funds are efficiently allocated by assessing the credit-worthiness of loan applicants, and setting down conditions for the use and repayment of loans. And they ensure through their competitive pricing policies that funds are distributed equitably (price discovery).
Question 4: The Federal Reserve System is primarily responsible for (select the best answer):
a) Formulating monetary and fiscal policy;
b) Providing financial services to the banks;
c) Formulating fiscal policy and determining the Federal budget;
d) Formulating monetary policy and regulating the banks.
The third function is providing financial services to the banks, so answer (b) is correct but not the best answer. Fiscal policy (taxes and government spending programmes) and the national budget is the responsibility of government, so answers (a) and (c) are incorrect.
Question 5: The Fed controls the money supply in circulation mainly through:
a) the seven-member Board of Governors based in Washington DC;
b) the Federal Open Market Committee (FOMC);
c) the 12 Federal Reserve Banks spread regionally throughout the US;
d) The three statutory advisory councils.
The FOMC comprises the Board of Governors, and the Presidents of five of the Federal Reserve Banks meeting eight times a year in Washington to discuss the US economic outlook and monetary policy. The Committee buys and sells government Treasury Bills which has the effect of injecting money into or withdrawing money from the economy, i.e. changing the money supply.
Answer (a) and some of (c) make up the FOMC, but do not directly influence the money supply on their own. The Statutory Advisory Councils (Federal Advisory Council, Community / Consumer Advisory Council, Thrift Institutions Advisory Council, and Model Validation Council) meet 2-4 times a year to advise the Fed Board of Governors on current economic issues.
Question 6: Which of the following statements is true?
a) Keynesian economic theory adopts a laissez-faire approach to economic activity;
b) Classical economic theory supports government interference in the market;
c) Keynes believed that controlling the money supply was more important than reducing unemployment;
d) Monetarists believe that government fiscal and monetary policy is the solution to correcting economic downturns.
Keynes believed that since markets are by their nature imperfect, government had an important role to play, through its access to fiscal and monetary measures, in controlling the money supply and thus also inflation and unemployment.
The classical theorists wanted the market to be left alone for market forces to correct any imbalances in the economy, which they believed would be the case in the long term.
Question 7: An increase in the overall level of prices:
a) Causes the value of the dollar to rise;
b) Makes US products more competitive in international markets;
c) Can be controlled by injecting more money into the economy;
d) Is a characteristic of inflation.
This is the simple definition of inflation. Prices rise, the purchasing power of the dollar declines, and US goods and services become less competitive in international markets. Increasing the money supply will only make the situation worse – too much money chasing too few goods.
Question 8: The Fed formulates and applies monetary policy through: (select the best answer)
a) Open market operations and discount rate;
b) Buying and selling US Treasury Bills;
c) Setting reserve requirements for the banking system;
d) Determining the Federal Fund Rate (the price of money and credit).
All of these answers have some truth in them – none are blatantly incorrect – but (a) states two of the three primary monetary policy mechanisms practiced by the Federal Banking System. Answer (b) is the same as the open market operations practiced by the FOMC; (c) is the third of the three primary functions of the Fed; and (d) is one of the outcomes of the Fed’s activities.
Question 9: The financial crisis of 2007/2008 was brought about mainly by:
a) The collapse of some of the major US investment banks;
b) The inability of some banks to fund customers’ withdrawals;
c) The collapse of the sub-prime market;
d) Banks’ issuing of mortgage-backed securities.
The cause of the crisis is complex, and due to a number of concurrent factors, but probably the main causal factor was banks’ over-reliance on issuing MBSs against poor quality sub-prime mortgages. This in turn led to (c) the collapse of that particular market, followed by the bankruptcy of some major banking and investment institutions, and their inability to meet their financial obligations to their customers.
Question 10: What was Bretton Woods and why did it collapse?
a) An early meeting of the G5 countries to agree on monetary policy, which didn’t work because it didn’t include developing countries.
b) A meeting in 1944 which pegged international currencies to the dollar; it collapsed because the US dropped the gold standard.
c) A meeting to establish the gold standard; it collapsed because the supply of gold was insufficient to provide backing for all the money in circulation.
d) A meeting between nations to agree on flexible exchange rates; it collapsed because of fears that the US budget deficit would erode the value of all currencies tied to the dollar.
The US uncoupling the dollar from gold in 1971 led to the current situation of flexible exchange rates tied to a basket of ‘reserve currencies’. The G5 countries began to include other global players in their meetings in recognition of the importance which developing economies had started to contribute to world trade, leading to the formation of today’s G20 (in addition to the United Nation’s agencies, the IMF and World Bank).
The gold standard collapsing was part of the reason for the collapse of the Bretton Woods agreement – but (c) is incorrect as stated, as is (d), although similar fears have been aired in some quarters.
More DSST Study Resources
Are you at the beginning of your study process, or just looking for a couple more practice questions to finish prepping for your exam? In either case, you can find some of my favorite resources below. Some of the links below are affiliate (Amazon for instance), which means they’ll pay us a few bucks for every purchase through the link. Feel free to use those links if you want to support the site, but you can also just Google the title or pick the book up at your local library.
Official DSST Practice Test: Ok, so the DSST website isn’t the most inviting, but it will give you the best approximation of the real exam experience. Also, the official practice test is quite affordable (currently just $5 per practice exam).
ACE THE CLEP – DSST Money and Banking: Textbooks are great as far as they go, but I’d generally recommend you opt for this exam guide instead. It tends to cut through the confusion and help you accelerate your learning process.
InstantCert Academy: Another website with a very dated design, but as ancient as it looks, this is actually an incredibly valuable resource. Basically, you get a massive set of flashcards that you can use to learn Money and Banking and to really solidify that knowledge so you’re ready for the exam.
Plenty of other resources exist – just do a quick internet search – but these are a fantastic start, and probably all you really need. I’ve personally done some exams with just InstantCert and the official practice test.