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Eco 4223 Exam 2 Exam latest update Practice Questions (Original) EXAM | 2026–2027
Latest Update | Original Questions & Answers with Detailed Rationales | Graded A+
Section 1: The Fiat Money Model (Lecture 7)
Q1. In the model of fiat money developed in Lecture 7, the
demand for money is the demand to hold:
A. Gold coins.
B. Irredeemable paper banknotes.
C. Commodity money.
D. Interest-bearing bonds.
Correct Answer: B
Rationale: The model economy is built around irredeemable
paper banknotes issued by the central bank. Demand for money
is the demand to hold these notes .
Q2. In the fiat money model, the supply of money is simply the
total stock issued by the central bank because fiat monies:
A. Have high intrinsic value.
B. Have no non-monetary uses.
C. Are backed by gold.
D. Earn interest.
Correct Answer: B
Rationale: Because fiat money has no non-monetary uses, the
entire stock issued by the central bank constitutes the money
supply .
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Q3. Unlike the gold standard, there is _______ mechanism to
govern the supply of money in a fiat money regime.
A. An automatic
B. No automatic
C. A market-based
D. A commodity-based
Correct Answer: B
Rationale: Fiat money has no automatic anchor; how the central
bank conducts monetary policy depends on available
information and the incentives policymakers face .
Q4. The marginal cost of producing irredeemable paper
banknotes is:
A. Equal to their face value.
B. Zero.
C. High.
D. Determined by the gold market.
Correct Answer: B
Rationale: The model economy assumes the marginal cost of
irredeemable paper banknotes is zero .
Q5. The fiat money model consists of just two curves:
A. Aggregate demand and aggregate supply.
B. Demand for money and supply of money.
C. IS and LM.
D. Labor demand and labor supply.
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Correct Answer: B
Rationale: The model economy consists of a demand-for-money
curve and a supply-of-money curve .
Q6. In the model economy, irredeemable paper banknotes are
issued exclusively by:
A. Commercial banks.
B. The central bank.
C. The Treasury.
D. Private firms.
Correct Answer: B
Rationale: The model assumes the central bank is the sole issuer
of irredeemable paper banknotes .
Q7. The demand for money in the fiat money model is
described as:
A. An upward-sloping line.
B. A rectangular hyperbola.
C. A vertical line.
D. A horizontal line.
Correct Answer: B
Rationale: The demand for money is a rectangular hyperbola,
reflecting an inverse relationship between purchasing power
and the quantity of money demanded .
Q8. In the fiat money model, money is held primarily for:
A. Speculation.
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B. Transactions.
C. Precaution.
D. Investment.
Correct Answer: B
Rationale: Irredeemable paper banknotes are used for
transactions in the model economy .
Q9. The absence of an automatic mechanism in a fiat money
regime means that:
A. Inflation is impossible.
B. Monetary policy discretion matters.
C. Money supply is fixed by nature.
D. Prices are always stable.
Correct Answer: B
Rationale: Without an automatic anchor, the conduct of
monetary policy depends on policymakers’ information and
incentives .
Q10. Which assumption is not part of the fiat money model?
A. Banknotes are irredeemable.
B. The central bank issues the notes.
C. Marginal production cost is zero.
D. Banknotes earn interest.
Correct Answer: D
Rationale: Irredeemable paper banknotes do not earn interest in
the model.
Eco 4223 Exam 2 Exam latest update Practice Questions (Original) EXAM | 2026–2027
Latest Update | Original Questions & Answers with Detailed Rationales | Graded A+
Section 1: The Fiat Money Model (Lecture 7)
Q1. In the model of fiat money developed in Lecture 7, the
demand for money is the demand to hold:
A. Gold coins.
B. Irredeemable paper banknotes.
C. Commodity money.
D. Interest-bearing bonds.
Correct Answer: B
Rationale: The model economy is built around irredeemable
paper banknotes issued by the central bank. Demand for money
is the demand to hold these notes .
Q2. In the fiat money model, the supply of money is simply the
total stock issued by the central bank because fiat monies:
A. Have high intrinsic value.
B. Have no non-monetary uses.
C. Are backed by gold.
D. Earn interest.
Correct Answer: B
Rationale: Because fiat money has no non-monetary uses, the
entire stock issued by the central bank constitutes the money
supply .
, Page |2
Q3. Unlike the gold standard, there is _______ mechanism to
govern the supply of money in a fiat money regime.
A. An automatic
B. No automatic
C. A market-based
D. A commodity-based
Correct Answer: B
Rationale: Fiat money has no automatic anchor; how the central
bank conducts monetary policy depends on available
information and the incentives policymakers face .
Q4. The marginal cost of producing irredeemable paper
banknotes is:
A. Equal to their face value.
B. Zero.
C. High.
D. Determined by the gold market.
Correct Answer: B
Rationale: The model economy assumes the marginal cost of
irredeemable paper banknotes is zero .
Q5. The fiat money model consists of just two curves:
A. Aggregate demand and aggregate supply.
B. Demand for money and supply of money.
C. IS and LM.
D. Labor demand and labor supply.
, Page |3
Correct Answer: B
Rationale: The model economy consists of a demand-for-money
curve and a supply-of-money curve .
Q6. In the model economy, irredeemable paper banknotes are
issued exclusively by:
A. Commercial banks.
B. The central bank.
C. The Treasury.
D. Private firms.
Correct Answer: B
Rationale: The model assumes the central bank is the sole issuer
of irredeemable paper banknotes .
Q7. The demand for money in the fiat money model is
described as:
A. An upward-sloping line.
B. A rectangular hyperbola.
C. A vertical line.
D. A horizontal line.
Correct Answer: B
Rationale: The demand for money is a rectangular hyperbola,
reflecting an inverse relationship between purchasing power
and the quantity of money demanded .
Q8. In the fiat money model, money is held primarily for:
A. Speculation.
, Page |4
B. Transactions.
C. Precaution.
D. Investment.
Correct Answer: B
Rationale: Irredeemable paper banknotes are used for
transactions in the model economy .
Q9. The absence of an automatic mechanism in a fiat money
regime means that:
A. Inflation is impossible.
B. Monetary policy discretion matters.
C. Money supply is fixed by nature.
D. Prices are always stable.
Correct Answer: B
Rationale: Without an automatic anchor, the conduct of
monetary policy depends on policymakers’ information and
incentives .
Q10. Which assumption is not part of the fiat money model?
A. Banknotes are irredeemable.
B. The central bank issues the notes.
C. Marginal production cost is zero.
D. Banknotes earn interest.
Correct Answer: D
Rationale: Irredeemable paper banknotes do not earn interest in
the model.
