1 | Page
FINC 409 Chapter 2 Questions and Answers
The two basic components of the U.S. money supply (M1) are
physical money and demand deposits.
Ans: True
Representative full-bodied money consists of paper money fully
backed by a precious metal.
Ans: True
Fiat money must be backed by a specific amount of gold or silver.
Ans: False
A bimetallic standard is a monetary standard based only on gold
Ans: False
Demand deposits are issued by commercial banks and savings
banks.
Ans: True
Our monetary standard today is the paper dollar, issued by the
Federal Reserve, and can be exchanged for gold or silver.
Ans: False
Almost all of the paper money in use in the United States today is
fiat money.
Ans: True
No other asset is as liquid as money.
Ans: True
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, 2 | Page
Fiat money is legal tender proclaimed to be money by law.
Ans: True
Physical money includes coin and currency.
Ans: True
"Continentals" were denominated in dollars and were backed by
gold.
Ans: False
The use of "continentals" led to a long period of distrust of paper
money.
Ans: True
The faster the velocity of money, the greater an economy's GDP.
Ans: True
Fiat money is a form of credit money.
Ans: True
A major objective of the Fed is to regulate and control the supply
of money and the availability of credit.
Ans: Ture
Even though credit card balances and limits are not included in
any definition of money supply, these balances and limits can
affect the rate of turnover of money supply and contribute to
money supply expansion.
Ans: True
According to the Bretton Woods agreement, one ounce of gold is
set equal to US $35, and each participating country pegs its
currency to gold or the U.S. dollar.
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, 3 | Page
Ans: True
Inflation leads to an increase in the purchasing power of money.
Ans: False
The U.S. dollar was defined in terms of gold until the 1980s.
Ans: False
The bimetallic standard was difficult to maintain because the
market ratio between silver and gold changed constantly.
Ans: True
Inflation reflects a rise in prices not offset by increases in quality.
Ans: True
Inflation reflects a rise in prices whether or not that rise in prices
is offset by an increase in quality.
Ans: False
A central bank defines and regulates the amount of the money
supply in the financial system.
Ans: True
The faster the rate of circulation of the money supply, the greater
the output of goods and services in an economy.
Ans: True
Primitive economies have little occasion to exchange goods or
services.
Ans: True
The monetary system is responsible for carrying out the financial
functions of creating and transferring money.
© 2025 All rights reserved
FINC 409 Chapter 2 Questions and Answers
The two basic components of the U.S. money supply (M1) are
physical money and demand deposits.
Ans: True
Representative full-bodied money consists of paper money fully
backed by a precious metal.
Ans: True
Fiat money must be backed by a specific amount of gold or silver.
Ans: False
A bimetallic standard is a monetary standard based only on gold
Ans: False
Demand deposits are issued by commercial banks and savings
banks.
Ans: True
Our monetary standard today is the paper dollar, issued by the
Federal Reserve, and can be exchanged for gold or silver.
Ans: False
Almost all of the paper money in use in the United States today is
fiat money.
Ans: True
No other asset is as liquid as money.
Ans: True
© 2025 All rights reserved
, 2 | Page
Fiat money is legal tender proclaimed to be money by law.
Ans: True
Physical money includes coin and currency.
Ans: True
"Continentals" were denominated in dollars and were backed by
gold.
Ans: False
The use of "continentals" led to a long period of distrust of paper
money.
Ans: True
The faster the velocity of money, the greater an economy's GDP.
Ans: True
Fiat money is a form of credit money.
Ans: True
A major objective of the Fed is to regulate and control the supply
of money and the availability of credit.
Ans: Ture
Even though credit card balances and limits are not included in
any definition of money supply, these balances and limits can
affect the rate of turnover of money supply and contribute to
money supply expansion.
Ans: True
According to the Bretton Woods agreement, one ounce of gold is
set equal to US $35, and each participating country pegs its
currency to gold or the U.S. dollar.
© 2025 All rights reserved
, 3 | Page
Ans: True
Inflation leads to an increase in the purchasing power of money.
Ans: False
The U.S. dollar was defined in terms of gold until the 1980s.
Ans: False
The bimetallic standard was difficult to maintain because the
market ratio between silver and gold changed constantly.
Ans: True
Inflation reflects a rise in prices not offset by increases in quality.
Ans: True
Inflation reflects a rise in prices whether or not that rise in prices
is offset by an increase in quality.
Ans: False
A central bank defines and regulates the amount of the money
supply in the financial system.
Ans: True
The faster the rate of circulation of the money supply, the greater
the output of goods and services in an economy.
Ans: True
Primitive economies have little occasion to exchange goods or
services.
Ans: True
The monetary system is responsible for carrying out the financial
functions of creating and transferring money.
© 2025 All rights reserved
