Which of the following best defines the term “money” in economic terms?

A. Any asset that can appreciate in value over time

B. Any item that is generally accepted as payment for goods and services
C. Physical currency issued by central banks
D. The total wealth owned by an individual or institution
E. Income earned over a period of time

Correct Answer: B
Explanation:
Money is defined in economics as anything that is generally accepted as payment for goods and
services or in the repayment of debts.
Why Others Are Incorrect:
• A: Describes an investment asset, not necessarily money.
• C: Too narrow; money includes digital and deposit money, not just physical currency.
• D: Refers to wealth, not specifically money.
• E: Income is a flow variable, not a stock like money.

What is meant by the “double coincidence of wants”?

A. A situation where both buyers and sellers want to exchange money
B. A situation where trade occurs only when both parties agree on prices
C. A scenario where two people each have something the other wants
D. When two currencies are pegged to each other
E. When both central banks intervene in the exchange rate market simultaneously

Correct Answer: C
Explanation:
In a barter system, trade is possible only if each party has what the other desires — the “double
coincidence of wants”.
Why Others Are Incorrect:
• A: Involves money, not barter.
• B: Applies to market pricing, not barter requirement.
• D: Related to currency systems, not barter.
• E: Concerns monetary policy, not the basic function of trade.

Which function of money helps reduce the number of prices that need to be calculated in an
economy?
A. Store of value
B. Medium of exchange
C. Unit of account
D. Measure of wealth
E. Indicator of inflation
 Correct Answer: C
Explanation:
The unit of account function allows all goods and services to be priced in a common metric, reducing
the complexity of relative pricing.
Why Others Are Incorrect:
• A: Helps preserve purchasing power but doesn’t simplify pricing.
• B: Facilitates trade, not price calculation.
• D: Not a function of money per se.
• E: Inflation is a macroeconomic outcome, not a function.
Why did gold and silver coins eventually replace earlier forms of commodity money such as
shells or grain?
A. Shells and grains were outlawed by empires
B. Metal coins could be mass-produced at lower cost
C. Metal coins were less subject to spoilage and more easily standardized
D. Grains were not accepted by religious institutions
E. Shells were only valuable in coastal communities

Correct Answer: C
Explanation:
Metals like gold and silver were durable, divisible, and could be standardized, making them ideal for
trade.
Why Others Are Incorrect:
• A: No direct evidence of bans causing the shift.
• B: Mass production came much later.
• D: Religious institutions didn’t dictate this change.
• E: While shells were region-specific, the broader reason was practicality.
What was one major consequence of the Bank Charter Act of 1844 in the UK?
A. It allowed banks to issue unlimited amounts of paper currency
B. It abolished all forms of deposit banking
C. It restricted the issuance of new banknotes to the Bank of England
D. It created the first fiat currency in history
E. It removed gold from the monetary system

Correct Answer: C
Explanation:
The 1844 Act restricted private banks from issuing their own banknotes, giving the Bank of England a
monopoly.
Why Others Are Incorrect:
• A: The Act limited, not expanded issuance.
• B: Deposit banking continued.
• D: Fiat currencies existed earlier in China.
 • E: Gold remained part of the system after the Act.
Which of the following is the best example of “fiat money”?
A. Gold coins used in the Roman Empire
B. Silver doubloons used in colonial America
C. U.S. dollar bills not backed by any physical commodity
D. Cigarettes used as currency in prison
E. Bitcoin as a decentralized digital asset

Correct Answer: C
Explanation:
Fiat money has no intrinsic value and is accepted as money because a government declares it as legal
tender.
Why Others Are Incorrect:
• A & B: These are examples of commodity money.
• D: Informal commodity money, not fiat.
• E: Not government-issued or legal tender.
Which of the following is the most liquid asset?
A. A one-year government bond
B. A savings account at a local bank
C. A painting valued at $10,000
D. A house listed for sale
E. Cash in hand

Correct Answer: E
Explanation:
Liquidity refers to how quickly an asset can be used to make purchases. Cash is the most liquid asset.
Why Others Are Incorrect:
• A & B: Less liquid; may take time to access.
• C & D: Require a buyer, thus illiquid.
Why did the early societies often use credit systems instead of barter or coins?
A. Metal coins were too expensive to produce
B. Coinage was banned by religious authorities
C. Credit systems fostered social cohesion and trust
D. Trade was minimal, so no need for any medium of exchange
E. People lacked knowledge of mathematics for coin denominations

Correct Answer: C
Explanation:
According to Graeber, early societies were built on informal credit and gift systems, which maintained
social bonds.
Why Others Are Incorrect:
• A: Not the primary reason.
• B: Historical evidence doesn’t support this.
 • D: Trade existed in non-monetary forms.
• E: Societies used tallies and memory for accounting.
Why did soldiers contribute to the rise of coin-based transactions in ancient times?
A. They carried small livestock for exchange
B. They were usually part of religious institutions
C. They required portable, universally accepted forms of value
D. They demanded payment in grain
E. They often issued promissory notes

Correct Answer: C
Explanation:
As Graeber notes, soldiers often couldn't be trusted for credit, so physical coins were necessary.
Why Others Are Incorrect:
• A, B, D & E: Historically unsupported or irrelevant in this context.
Which of the following is a primary reason for the rise of electronic payment systems?
A. Reintroduction of barter
B. Shortage of physical currency
C. Reducing transaction costs and improving speed
D. Legal requirement by the UN
E. Elimination of banking institutions

Correct Answer: C
Explanation:
Electronic systems minimize the time and cost of transactions, increasing efficiency.
Why Others Are Incorrect:
• A & B: Not causative factors.
• D: No such requirement.
• E: Banks still operate alongside digital systems.
What did the Bretton Woods system aim to achieve after WWII?
A. Create a single world government
B. Peg all currencies to the British Pound
C. Establish a fixed exchange rate system linked to the U.S. dollar and gold
D. Replace fiat money with cryptocurrency
E. Eliminate all central banks

Correct Answer: C
Explanation:
Bretton Woods pegged major currencies to the U.S. dollar, which was convertible to gold.
Why Others Are Incorrect:
• A, B, D & E: Not objectives of the system.
Why does high inflation weaken money's function as a store of value?
A. It causes currency to become more stable
B. It increases real purchasing power
C. It makes money gain value over time
D. It rapidly decreases money’s purchasing power
E. It eliminates all forms of banking

Correct Answer: D
Explanation:
Inflation erodes purchasing power, making money less reliable for saving value over time.
Why Others Are Incorrect:
• A, B & C: Opposite of what inflation does.
• E: Banking may struggle, but it doesn’t eliminate it.
Why are debit cards considered a form of electronic money (e-money)?
A. They only function when used abroad
B. They increase the physical money supply
C. They allow direct electronic transfer of funds
D. They replace income as a medium of exchange
E. They can be converted into physical gold

Correct Answer: C
Explanation:
Debit cards enable real-time transfers from your account to a merchant’s, making them a form of e-
money.
Why Others Are Incorrect:
• A & E: Not defining features.
• B: They do not increase the money supply.
• D: Confuses income with medium of exchange.
Which of the following best describes the main difference between commodity money and fiat
money?
A) Commodity money is digital, while fiat money is physical.
B) Fiat money has intrinsic value, commodity money does not.
C) Commodity money has intrinsic value, fiat money does not.
D) Fiat money is backed by gold, commodity money is not.
E) Both are issued only by central banks.

Correct Answer: C) Commodity money has intrinsic value, fiat money does not.

Explanation:

• ✔ C is correct: Commodity money (e.g., gold, silver) holds value in itself, while fiat money is
valuable only because the government declares it as legal tender (Mishkin, p. 103).

• ✘ A is incorrect: Commodity money is physical; digital money refers to electronic formats of

fiat.

• ✘ B is incorrect: This reverses the truth; fiat has no intrinsic value.

 • ✘ D is incorrect: Modern fiat money is not backed by gold; that's a characteristic of
representative money.

• ✘ E is incorrect: Commodity money historically was not issued by central banks.

How do commercial banks create money in the modern banking system?

A) By printing currency through central bank authorization.
B) By increasing interest rates.
C) By collecting taxes and redistributing them.
D) By issuing loans that generate new deposits.
E) By converting gold reserves into cash.

Correct Answer: D) By issuing loans that generate new deposits.

Explanation:

• ✔ D is correct: When banks issue loans, they credit the borrower’s account, effectively
creating new money (Jackson & Dyson, p. 2.3).

• ✘ A is incorrect: Central banks, not commercial banks, issue currency.

• ✘ B is incorrect: Interest rates affect lending behavior, but do not directly create money.

• ✘ C is incorrect: Taxation is a fiscal tool, not part of money creation.

• ✘ E is incorrect: Gold reserves are not linked to fiat money creation today.

Which of the following is a potential ethical concern in today’s money creation system?
A) Too much reliance on cryptocurrency mining.
B) Central banks create all the money without oversight.
C) The public has unlimited access to credit.
D) Commercial banks profit from debt-based money creation.
E) Governments no longer regulate money supply.

Correct Answer: D) Commercial banks profit from debt-based money creation.

Explanation:

✔ D is correct: Banks create money through credit issuance and benefit from interest, raising
questions about fairness and concentration of financial power (Jackson & Dyson, Ch. 5).

✘ A is incorrect: Cryptocurrency is decentralized and not the core of mainstream systems.

✘ B is incorrect: Central banks operate under legal mandates and oversight.

✘ C is incorrect: Access to credit is unequal and limited for many.

✘ E is incorrect: Governments and central banks still regulate monetary systems.

Which of the following is a core difference between centralized and decentralized finance
(DeFi)?
A) Centralized finance is anonymous, while DeFi is not.
B) DeFi relies on smart contracts; centralized finance relies on intermediaries.
C) Centralized finance is unregulated; DeFi is strictly regulated.
D) DeFi operates only in physical cash.
E) Both operate through central banks.

Correct Answer: B) DeFi relies on smart contracts; centralized finance relies on

intermediaries.
Explanation:

✔ B is correct: DeFi eliminates intermediaries like banks by using blockchain-based smart contracts
for direct peer-to-peer transactions.

✘ A is incorrect: DeFi is more transparent than centralized finance, not necessarily anonymous.

✘ C is incorrect: DeFi is largely unregulated at present.

✘ D is incorrect: DeFi operates digitally, not with physical cash.

✘ E is incorrect: DeFi is decentralized and independent of central banks.

What is the primary function of Central Bank Digital Currencies (CBDCs)?

A) To replace all cryptocurrencies.
B) To provide a decentralized form of money.
C) To offer a digital, government-issued legal tender.
D) To eliminate commercial banks.
E) To stop inflation permanently.

Correct Answer: C) To offer a digital, government-issued legal tender.

Explanation:

✔ C is correct: CBDCs are digital versions of national currencies issued and regulated by central
banks (Ryan-Collins et al., p. 67).

✘ A is incorrect: CBDCs may coexist with cryptocurrencies; they don’t aim to eliminate them.

✘ B is incorrect: CBDCs are centralized, not decentralized.

✘ D is incorrect: CBDCs may change banking structures, but not abolish commercial banks.

✘ E is incorrect: CBDCs help with monetary policy but are not guaranteed to eliminate inflation.

Why might digital or decentralized money systems promote financial inclusion?

A) They prevent governments from collecting taxes.
B) They guarantee income equality.
C) They allow individuals to access financial services without traditional banks.
D) They are all backed by gold.
E) They eliminate the need for economic regulation.
 Correct Answer: C) They allow individuals to access financial services without traditional
banks.
Explanation:

✔ C is correct: Decentralized systems (e.g. DeFi) and mobile finance platforms expand access for
people without bank accounts (Ryan-Collins et al., p. 122).

✘ A is incorrect: Tax collection is unrelated to financial inclusion.

✘ B is incorrect: These systems can reduce barriers, but don’t eliminate income inequality.

✘ D is incorrect: Digital systems are not necessarily gold-backed.

✘ E is incorrect: Financial regulation still plays a role in ensuring stability and trust.

Which of the following is NOT a reason why fiat money holds value?
A) It is declared legal tender by the government.
B) It is accepted for payment of taxes.
C) It is backed by physical commodities like gold.
D) People trust that others will accept it in exchange.
E) It is enforced through legal frameworks.

Correct Answer: C) It is backed by physical commodities like gold.

Explanation:

✔ C is correct: Fiat money is not backed by any physical commodity like gold. It derives value from
trust and legal support.

✘ A, B, D, E are all true for fiat money: Legal tender status, tax obligations, trust in acceptance, and
government enforcement uphold its value.
What was the main outcome of the 1844 Bank Charter Act in the UK?
A) It allowed banks to create money freely.
B) It banned gold as a form of money.
C) It restricted banks from issuing notes not backed by gold.
D) It introduced digital money.
E) It nationalized all banks.

Correct Answer: C) It restricted banks from issuing notes not backed by gold.

Explanation:

✔ C is correct: The Act ensured that all new banknotes had to be backed by gold reserves (Jackson &
Dyson, p. 1.2).

✘ A is incorrect: It did the opposite.

✘ B is incorrect: Gold remained a key part of the system.

✘ D is anachronistic.

✘ E: Banks were not nationalized.

What is the “money multiplier” effect?
A) The process of increasing taxes to raise revenue.
B) How central banks reduce interest rates to stimulate borrowing.
C) The ability of commercial banks to expand money supply through lending.
D) The effect of inflation on purchasing power.
E) The process of converting foreign currencies.

Correct Answer: C) The ability of commercial banks to expand money supply through
lending.
Explanation:

✔ C is correct: Through fractional reserve banking, each loan issued by banks generates new deposits,
expanding the money supply (Mishkin, p. 388).

✘ A, B, D, E describe other processes unrelated to money multiplication.

What distinguishes cryptocurrencies like Bitcoin from CBDCs?

A) Cryptocurrencies are issued by governments.
B) Cryptocurrencies are centralized and controlled.
C) CBDCs are based on blockchain, Bitcoin is not.
D) CBDCs are legal tender, cryptocurrencies are not.
E) Both are controlled by the same monetary authority.

Correct Answer: D) CBDCs are legal tender, cryptocurrencies are not.

Explanation:

✔ D is correct: CBDCs are official currencies with legal backing; cryptocurrencies are not legal
tender in most countries.

✘ A, B, E are incorrect: Cryptocurrencies are not issued or controlled by states.

✘ C is false: Bitcoin uses blockchain; many CBDCs may or may not.

Which of the following is a drawback of relying heavily on commercial banks for money
creation?
A) Increased control by democratic institutions.
B) Reduced role of interest rates in monetary policy.
C) Concentration of economic power in private hands.
D) Higher efficiency in allocating credit to public sectors.
E) Automatic stabilization of inflation.

Correct Answer: C) Concentration of economic power in private hands.

Explanation:

✔ C is correct: Banks have power to direct credit and influence economic outcomes, raising ethical
and political concerns.

✘ A, D, E are false; these outcomes are not guaranteed.

✘ B is unrelated to the creation process.

What is one function that money must fulfill to be effective in economic systems?
A) Must be digital and encrypted.
B) Must yield a high return.
C) Must store value over time.
D) Must be issued only by private institutions.
E) Must be physical.

Correct Answer: C) Must store value over time.

Explanation:

✔ C is correct: Without this function, money would be ineffective as people couldn’t save or plan.

✘ A, D, E are features, not functions.

✘ B is investment-related, not monetary function.

According to Graeber, what was the origin of money historically?

A) Always linked to gold coins.
B) Emerged from barter systems.
C) Rooted in state-issued coins only.
D) Originated from debt relationships.
E) Originated from central banking systems.

Correct Answer: D) Originated from debt relationships.

Explanation:

✔ D is correct: David Graeber argues money evolved from systems of credit and IOUs, not barter
(Graeber, 2011).

✘ A, B, C, E reflect common myths, not the anthropological evidence he presents.

Which of the following best explains the term “fiat currency”?

A) Currency pegged to a commodity like oil.
B) Currency issued by private tech companies.
C) Currency with no intrinsic value, backed by government decree.
D) A form of digital asset used in DeFi.
E) Gold-backed cryptocurrency issued by banks.

Correct Answer: C) Currency with no intrinsic value, backed by government decree.

Explanation:

✔ C is correct: Fiat money has no physical backing but is accepted because it’s declared legal tender.

✘ A, B, D, E describe unrelated financial instruments or errors.

Which of the following is true about the ethical debate on monetary policy?
A) Monetary policy never impacts social inequality.
B) Interest rates always benefit the poorest groups.
C) Money creation is a neutral and apolitical process.
D) Monetary policy can contribute to unequal wealth distribution.
E) All monetary systems are inherently fair.

Correct Answer: D) Monetary policy can contribute to unequal wealth distribution.

Explanation:

✔ D is correct: Policies like quantitative easing often disproportionately benefit asset owners,
widening inequality (Ryan-Collins, p. 122).

✘ A, B, C, E are overly simplistic or factually inaccurate.

What role do smart contracts play in decentralized finance (DeFi)?

A) They create physical tokens for banking use.
B) They replace legal enforcement with automated code.
C) They ensure central bank compliance.
D) They manage inflation targets.
E) They are used to print fiat money.

Correct Answer: B) They replace legal enforcement with automated code.

Explanation:

✔ B is correct: Smart contracts self-execute transactions based on pre-coded rules, eliminating the
need for traditional contracts.

✘ A, C, D, E are unrelated or misrepresent the nature of smart contracts.

What is the most accurate definition of money from an economist's perspective?

A) Anything that can be exchanged for goods and services occasionally
B) Any item that is considered valuable by a majority
C) Anything that is generally accepted as payment for goods, services, or debts
D) Coins and banknotes printed by the government
E) All forms of income and wealth combined
Correct Answer: C
Explanation:

C is correct because economists define money as anything generally accepted as a medium of

exchange, store of value, and unit of account.

✘A is too vague; money must be consistently accepted.

✘ B is about subjective value, not functionality in trade.

✘ D includes only physical money, missing broader financial instruments.

✘ E confuses money with wealth and income, which are separate concepts.
Why is money considered the most liquid asset?
A) It retains value better than gold
B) It is backed by physical commodities
C) It can be easily and quickly used to make transactions
D) It earns interest over time
E) It is stored in banks under strict regulations
Correct Answer: C
Explanation:

C is correct because liquidity refers to how quickly and easily an asset can be used for
transactions—money fits this perfectly.

A is incorrect; gold can retain value better, but it is not as liquid.

B only applies to commodity money, not fiat or electronic money.

D is more about investment, not liquidity.

E is unrelated to liquidity directly.

What is one major reason Bitcoin is not yet considered a stable store of value?
A) It is too widely accepted
B) Its price is too volatile
C) It is controlled by central banks
D) It can only be used offline
E) It is fully regulated by governments
Correct Answer: B
Explanation:

B is correct because Bitcoin’s extreme price fluctuations make it unreliable for storing value over
time.

A is the opposite; its acceptance is still limited.

C is false; it is decentralized.

D is incorrect; it is digital and mostly online.

E is false; Bitcoin often operates outside government regulation.

What key change occurred with the establishment of the Bank of England in 1694?
A) Private banks gained power to issue their own coins
B) The UK returned to a barter system
C) Banknotes backed by government debt were introduced
D) Banks stopped issuing loans
E) All currencies were backed by gold permanently
Correct Answer: C
Explanation:
 C is correct because the Bank of England issued banknotes that were backed by government
bonds, laying the foundation for modern central banking.

A is false; private banks lost that privilege over time.

B is historically incorrect—barter was already obsolete.

D contradicts banking evolution—loans increased.

E is incorrect; the gold standard began later and ended in 1931.

Which of the following statements about fiat money is true?

A) It must be backed by gold or silver
B) It gains value from the government’s authority and legal status
C) It can only be used in electronic payments
D) It has more intrinsic value than commodity money
E) It is issued by private citizens
Correct Answer: B
Explanation:

B is correct because fiat money is not backed by physical commodities but by trust in the issuing
government.

A describes commodity money, not fiat.

C is too narrow—fiat money includes cash and paper notes.

D is incorrect—fiat money has no intrinsic value.

E is false—only governments issue fiat currency.

According to historical and anthropological research, what preceded the use of physical money?
A) Banking systems
B) Barter systems with official trade centers
C) Credit and mutual obligation systems
D) Coins minted by private companies
E) A global reserve currency
Correct Answer: C
Explanation:

C is correct because anthropologists like David Graeber argue that early economies were based on
credit systems and social obligations before coins or barter.

A developed later.

B overemphasizes formal structures that didn’t exist.

D happened after government minting became common.

E is a modern concept, irrelevant to early money.

What distinguishes M1 from M2 in the money supply measurement?
A) M1 includes only cash held by central banks
B) M2 excludes any form of deposits
C) M1 includes highly liquid assets; M2 includes M1 plus less liquid forms
D) M2 includes cryptocurrency holdings
E) M1 is no longer used by modern central banks
Correct Answer: C
Explanation:

C is correct because M1 includes cash and checking accounts, while M2 includes M1 plus
savings, time deposits, and mutual funds.

A is inaccurate—central bank reserves are not the focus here.

B is wrong—M2 includes deposits.

D is incorrect; crypto is not officially counted in M1 or M2.

E is false; both M1 and M2 are used by central banks.

Why was the gold standard eventually abandoned by most countries, including the UK?
A) It was too stable to allow inflation
B) It supported unlimited government spending
C) It restricted monetary policy flexibility during economic crises
D) It led to hyperinflation and currency collapse
E) It made currency too easy to counterfeit
Correct Answer: C
Explanation:

C is correct because the gold standard limited central banks’ ability to expand the money supply
during recessions, reducing flexibility.

A sounds positive but doesn’t explain its abandonment.

B is incorrect; the gold standard prevented excessive spending.

D is misleading; gold standard typically prevented hyperinflation.

E is unrelated; gold-based currency was hard to counterfeit.

Which of the following best reflects the role of banks in the modern economy?
A) Banks simply store and transfer customers’ money
B) Banks act as intermediaries without creating money
C) Banks create money through deposit and lending processes
D) Banks operate only with physical cash and coins
E) Banks only follow central bank orders without autonomy
Correct Answer: C
Explanation:

C is correct—modern banks create money by issuing loans, which increases the money supply.
 A is too narrow—banks do more than safekeeping.

B ignores their money-creating function.

D is outdated—most money is digital.

E is partially true, but banks have lending autonomy.

Which of the following is not a function of money?

A) Medium of exchange
B) Store of value
C) Unit of account
D) Source of income
E) Means of deferred payment
Correct Answer: D
Explanation:

D is correct—money itself does not generate income; it can be part of wealth but not a productive
source.

A, B, and C are core functions.

E is also a recognized function in extended frameworks.

Why is fiat money considered riskier than commodity money during times of crisis?
A) It can be stored for long periods
B) It cannot be divided
C) It depends on government stability and trust
D) It is used mostly in rural areas
E) It is easier to exchange internationally
Correct Answer: C
Explanation:

C is correct because fiat money lacks intrinsic value and relies on public trust in government; in
crises, that trust may erode.

A applies to both types, not a disadvantage.

B is incorrect—fiat money is divisible.

D is unrelated.

E is incorrect—fiat money may face restrictions across borders.

What distinguishes digital money (e-money) from traditional banknotes?

A) Digital money has intrinsic value
B) It is backed by precious metals
C) It exists only in electronic form and is used in virtual transactions
D) It cannot be tracked
E) It is issued directly by international organizations
Correct Answer: C
Explanation:

C is correct—digital money includes balances stored electronically and used in online or card-
based transactions.

A is false—digital money has no intrinsic value.

B is a characteristic of commodity money.

D is incorrect—digital money is often more traceable.

E is misleading; e-money is issued by banks and fintechs, not international bodies.

Which form of money has the highest liquidity?

A) Gold
B) Real estate
C) Demand deposits (checking accounts)
D) Time deposits
E) Mutual fund shares
Correct Answer: C
Explanation:

C is correct because demand deposits are readily accessible for payments and transactions.

A and B are valuable but not liquid.

D often has withdrawal penalties.

E takes time to convert to cash.

What is a key criticism of the classical view that money is a “veil”?

A) It ignores the physical features of coins
B) It underestimates the role of money in shaping real economic outcomes
C) It overvalues digital currency
D) It assumes barter is more efficient
E) It sees inflation as a positive effect
Correct Answer: B
Explanation:

B is correct—critics argue that money does more than reflect value; it influences investment,
demand, and distribution.

A is irrelevant to economic theory.

C is a modern topic unrelated to classical theory.

D is false; classical economists saw barter as inefficient.

E misrepresents classical views on inflation.

What feature made precious metals particularly useful as early forms of money?
A) Their digital compatibility
B) Their perishability
C) Their divisibility and durability
D) Their association with royalty
E) Their randomness in value
Correct Answer: C
Explanation:

C is correct—metals like gold and silver are durable, divisible, and portable, making them ideal
for trade.

A is irrelevant historically.

B is a disadvantage, not a feature.

D is symbolic but not functional.

E makes metals unsuitable as money.

What was one of the major consequences of Britain’s return to the gold standard in 1925?
A) Rapid economic growth
B) Enhanced export competitiveness
C) Overvaluation of the currency and a deep recession
D) Successful inflation control
E) Increase in gold production
Correct Answer: C
Explanation:

C is correct—Returning to the pre-war gold rate overvalued the pound, reduced exports, and
contributed to economic depression.

A is incorrect—growth slowed dramatically.

B is the opposite; overvaluation hurt exports.

D was not achieved without severe economic cost.

E is irrelevant to Britain’s monetary policy.

Which of the following is NOT a typical concern associated with a fully cashless society?
A) Increased cybersecurity risks
B) Loss of transaction anonymity
C) Limited access for some populations
D) Greater control of inflation
E) Dependence on digital infrastructure
Correct Answer: D
Explanation:

D is correct—Controlling inflation is a monetary policy issue, not directly tied to cash usage.
 A, B, C, and E are all valid concerns about going fully cashless.

Why do central banks use different measures like M1 and M2?

A) To track stock market fluctuations
B) To assess levels of international trade
C) To understand liquidity and guide monetary policy
D) To record tax revenues
E) To differentiate between private and public sector earnings
Correct Answer: C
Explanation:

C is correct—M1 and M2 give insights into how much money is readily available versus tied up
in savings, helping with policy decisions.

A, B, D, and E relate to other economic indicators, not money supply.

What is the primary reason early anthropologists argue money developed from credit systems?
A) People were unfamiliar with gold and silver
B) Barter systems were too advanced
C) Historical records show debt ledgers long before coins
D) Governments banned physical currency
E) Ancient societies had stable paper money
Correct Answer: C
Explanation:

C is correct—Ledgers recording debts existed in Mesopotamia before the emergence of coins,

supporting the credit-first theory.

A is speculative and not central.

B is historically inaccurate.

D is anachronistic.

E is false—paper money came much later.

What advantage do cryptocurrencies offer over traditional banking systems?

A) Complete price stability
B) Centralized control
C) Lower transaction fees and decentralized operations
D) Guaranteed legal protection for all users
E) Physical backing by precious metals
Correct Answer: C
Explanation:

C is correct—Cryptocurrencies often have lower fees and operate without central authority.

A is false—crypto prices are highly volatile.

B is the opposite of crypto's core feature.

 D depends on national regulations.

E is incorrect—cryptos are not backed by physical assets.

Which of the following correctly describes the impact of electronic payments on modern
economies?
A) Increased use of gold and silver
B) Reduced speed of transactions
C) Enhanced efficiency and reduced reliance on cash
D) Elimination of all fraud
E) Banning of paper currency globally
Correct Answer: C
Explanation:

C is correct—Electronic payments streamline commerce and reduce the need for physical cash.

A is outdated.

B is the opposite of what's observed.

D is unrealistic—fraud still exists.

E is incorrect—paper currency still circulates.

Which of the following would NOT be considered part of the M1 money supply?
A) Currency in circulation
B) Traveler’s checks
C) Demand deposits
D) Time deposits
E) Checking accounts
Correct Answer: D
Explanation:

D is correct—Time deposits are less liquid and fall under M2, not M1.

A, B, C, and E are all components of M1.

What was a major cause of the collapse of the Bretton Woods system?
A) Increased reliance on barter
B) Return to the gold standard
C) The U.S. ending gold convertibility of the dollar
D) European countries banning U.S. dollars
E) Overuse of traveler’s checks
Correct Answer: C
Explanation:

C is correct—In 1971, the U.S. suspended the dollar's gold convertibility, which ended the
Bretton Woods fixed exchange rate system.

A, B, D, and E are unrelated or incorrect.

Which is a disadvantage of using money purely as a store of value during inflationary periods?
A) It increases in purchasing power
B) It can no longer be used to trade
C) Its real value decreases over time
D) It becomes less divisible
E) It is backed by too many goods
Correct Answer: C
Explanation:

C is correct—Inflation erodes purchasing power, making money less effective at storing value.

A is false—purchasing power declines.

B is incorrect—it’s still usable.

D is unrelated to inflation.

E is a meaningless statement.

What is the primary criticism of the barter-origin theory presented by anthropologists like
David Graeber?
A) It ignores the role of coinage.
B) It assumes that early humans were financially literate.
C) There is little to no historical evidence of pure barter economies.
D) It overemphasizes state control.
E) It fails to include the industrial revolution's effects.

Correct Answer: C) There is little to no historical evidence of pure barter economies.

Explanation: Anthropologists argue that no evidence supports the idea of a large-scale barter
economy preceding money. Instead, early societies operated on credit and social obligations.
A) Incorrect – Coinage criticism is separate from the barter-origin issue.
B) Incorrect – Financial literacy is not the main issue discussed.
D) Incorrect – The criticism is directed more at the myth of market-driven barter.
E) Incorrect – The industrial revolution is irrelevant to the origins of money.
How did the collapse of the Bretton Woods system affect global currencies?
A) All currencies became backed by silver.
B) Most currencies were pegged to the British pound.
C) Major currencies began to float freely against each other.
D) Gold was reintroduced as a global standard.
E) Countries stopped trading oil in US dollars.

Correct Answer: C) Major currencies began to float freely against each other.

Explanation: After the US suspended dollar-gold convertibility in 1971, the fixed exchange rate
system collapsed. This led to the current floating exchange rate regime.
• A) Incorrect – Silver did not become the standard.
 • B) Incorrect – The pound was not the global benchmark.
• D) Incorrect – Gold lost its central role.
• E) Incorrect – Oil continued to be priced in US dollars.
What does the modern money creation process primarily rely on?
A) Minting physical currency by the central bank
B) Taxation by government agencies
C) Loans issued by commercial banks
D) Exporting gold reserves
E) Treasury bills issued by the government

Correct Answer: C) Loans issued by commercial banks

Explanation: In today’s system, the majority of money is created through bank lending. When banks
issue loans, they create new deposits — which function as money.
A) Incorrect – Physical cash is a small fraction of the money supply.
B) Incorrect – Taxation recycles money, but doesn't create it.
D) Incorrect – Gold is no longer used to back currencies.
E) Incorrect – Treasury bills are debt instruments, not a direct source of money creation.
According to the historical account, which came first in the development of money?
A) Barter
B) Coins
C) Virtual credit systems
D) Government taxation
E) Precious metal standardization

Correct Answer: C) Virtual credit systems

Explanation: Historical and anthropological research shows that informal credit systems based on
trust and obligation existed before coins or barter systems.
A) Incorrect – Barter was not the origin; it was rare and situational.
B) Incorrect – Coins came much later.
D) Incorrect – Taxation required a pre-existing money system.
E) Incorrect – Standardization came after the use of metals as money.
What was the purpose of the Bretton Woods agreement after World War II?
A) To replace all national currencies with a global one
B) To peg currencies to the British pound
C) To create fixed exchange rates against the US dollar
D) To promote free-floating markets
E) To establish cryptocurrencies

Correct Answer: C) To create fixed exchange rates against the US dollar

Explanation: The Bretton Woods system tied all national currencies to the US dollar, which in turn
was backed by gold. This aimed to bring global financial stability.
A) Incorrect – It did not create a single global currency.
B) Incorrect – The US dollar, not the pound, was the anchor.
D) Incorrect – Floating rates came after Bretton Woods collapsed.
E) Incorrect – Cryptocurrencies did not exist then.
What was the main reason governments began minting coins instead of using raw metal as
money?
A) To honor military victories
B) To increase trade with Asia
C) To standardize weight and purity of currency
D) To promote barter systems
E) To control inflation

Correct Answer: C) To standardize weight and purity of currency

Explanation: Raw metal had to be weighed and tested for purity in each transaction. Governments
began minting coins to ensure consistency and trust in the currency system.
A) Incorrect – Commemorative purposes came later, not as the origin.
B) Incorrect – Asian trade was unrelated to initial minting.
D) Incorrect – Coins replaced barter, not promoted it.
E) Incorrect – Coin minting predated modern inflation concerns.
What historical event ultimately led to the collapse of the Bretton Woods system?
A) The end of the Napoleonic Wars
B) The introduction of the euro
C) The U.S. suspending dollar-gold convertibility in 1971
D) The Russian financial crisis
E) The repeal of the Glass-Steagall Act

Correct Answer: C) The U.S. suspending dollar-gold convertibility in 1971

Explanation: When the U.S. stopped redeeming dollars for gold, the fixed exchange rate system fell
apart, leading to floating currency regimes.
A) Incorrect – That was long before Bretton Woods.
B) Incorrect – The euro came decades later.
D) Incorrect – Not relevant to this system.
E) Incorrect – That occurred in 1999 and related to U.S. banking regulations.
What is the primary function of financial markets in an economy?
A) To regulate interest rates set by the central bank
B) To create fiscal policies for governments
C) To facilitate the transfer of funds from savers to borrowers
D) To print and distribute physical currency
E) To provide subsidies for private firms

Correct Answer: C

Explanation: Financial markets play a vital role in reallocating capital from those who have excess
funds (savers) to those who need them (borrowers), increasing economic efficiency and promoting
investment.

Why Others Are Incorrect:

A: Interest rates are influenced, not directly set, by markets—central banks manage them.
B: Fiscal policies are created by governments, not financial markets.
D: Currency printing is a central bank function.
E: Subsidies are governmental decisions, unrelated to market functions.
Which of the following best describes "indirect finance"?
A) Borrowers sell securities directly to investors.
B) The government lends money through fiscal stimulus.
C) A bank collects funds from savers and loans them to borrowers.
D) Investors buy stocks on the primary market.
E) The central bank intervenes in foreign exchange markets.

Correct Answer: C

Explanation: Indirect finance involves financial intermediaries (e.g., banks) that collect savings and
allocate them to borrowers, reducing transaction costs and risk.

Why Others Are Incorrect:

A: Describes direct finance.

B: Refers to fiscal policy, not finance mechanisms.
D: This occurs in the primary market but is a direct method.
E: This refers to monetary policy operations, not financing routes.
What type of risk does adverse selection refer to in financial markets?
A) Risk after a loan is made
B) Risk of borrowers misusing funds
C) Risk due to asymmetric information before a transaction
D) Risk of interest rate fluctuations
E) Risk of a bank run

Correct Answer: C

Explanation: Adverse selection is a situation where lenders can’t distinguish good from bad
borrowers before lending, potentially leading to poor lending decisions.
 Why Others Are Incorrect:

A & B: Describe moral hazard, which occurs after the transaction.

D: Interest rate risk is unrelated to borrower type.
E: Bank runs relate to liquidity, not selection of borrowers.
Which of the following is a capital market instrument?
A) Treasury bill
B) Commercial paper
C) Repurchase agreement
D) Corporate bond
E) Federal funds loan

Correct Answer: D

Explanation: Corporate bonds are long-term debt instruments traded in capital markets. They have
maturities longer than one year.

Why Others Are Incorrect:

A, B, C, E: These are short-term instruments (less than one year maturity) and belong to the money
market.
Question: Why do financial intermediaries exist, according to Mishkin's analysis?
A) To eliminate monetary policy
B) To provide legal support in lending
C) To reduce transaction costs and mitigate information problems
D) To regulate capital controls
E) To replace government fiscal activities

Correct Answer: C

Explanation: Intermediaries reduce transaction and information costs (asymmetric information,

moral hazard, adverse selection), making lending more efficient.

Why Others Are Incorrect:

A: Monetary policy is handled by central banks.

B: Legal support is not their primary function.
D: Capital controls are managed by governments.
E: Fiscal activities are beyond their scope.
What is the function of secondary financial markets?
A) Issuing new securities to raise capital
B) Allowing trading of previously issued securities
C) Creating new financial institutions
D) Preventing inflation
E) Allocating fiscal spending

Correct Answer: B
Explanation: Secondary markets enable the trading of existing securities, improving liquidity and
price discovery.

Why Others Are Incorrect:

A: Describes the primary market.

C: Financial institutions are formed through regulation.
D & E: Not directly related to market structure.
Which of the following institutions is considered a contractual savings institution?
A) Mutual fund
B) Central bank
C) Commercial bank
D) Life insurance company
E) Investment bank

Correct Answer: D

Explanation: Life insurance companies collect premiums periodically and invest them in long-term
instruments, fitting the definition.

Why Others Are Incorrect:

A: Mutual funds are investment intermediaries.

B: Central bank is a regulator, not intermediary.
C: Commercial banks are depository institutions.
E: Investment banks underwrite securities, not contractually manage savings.
What distinguishes Eurobonds from traditional bonds?
A) They are issued only in euros
B) They are always issued in the U.S.
C) They are sold outside the country of the currency in which they’re denominated
D) They are backed by the European Central Bank
E) They are exempt from taxation

Correct Answer: C

Explanation: Eurobonds are issued in a different country than the currency they are denominated in
(e.g., USD bond sold in London).

Why Others Are Incorrect:

A: They can be in any currency.

B: They are international instruments.
D: The ECB has no role in Eurobonds.
E: Taxation depends on host country's laws.
How does financial regulation improve market efficiency?
A) By limiting investor access
B) By reducing competition
C) By eliminating monetary systems
D) By increasing transparency and reducing risk
E) By fixing interest rates for all institutions

Correct Answer: D

Explanation: Regulations enforce disclosure, reduce fraud, and mitigate systemic risk, making
markets safer and more transparent.

Why Others Are Incorrect:

A: Good regulation promotes access.

B: Limiting competition may reduce innovation.
C: Financial systems are not eliminated.
E: Interest rates are generally market-determined.
Which of the following best explains why money market instruments are considered low-risk?
A) They are issued by foreign governments.
B) They have high default probabilities.
C) They are long-term and backed by stocks.
D) They have short maturities and high liquidity.
E) They are only accessible to central banks.

Correct Answer: D

Explanation: Money market instruments have maturities of less than one year, undergo minimal price
fluctuations, and are easily traded—making them safer investments.

Why Others Are Incorrect:

A: Issuers vary, but origin isn’t the key reason.

B: These instruments typically have low default risk.
C: Long-term = capital market, not money market.
E: Retail and institutional investors can access them too.
What is the key role of the Federal Reserve in the financial system?
A) Providing consumer loans to individuals
B) Collecting taxes and managing fiscal policy
C) Regulating money supply and setting interest rates
D) Supervising international trade agreements
E) Offering stock exchange services

Correct Answer: C

Explanation: The Federal Reserve (central bank) is responsible for controlling the money supply and
interest rates to ensure economic stability.
 Why Others Are Incorrect:

A: Consumer loans are given by commercial banks.

B: Fiscal policy is managed by the Treasury/government.
D: Trade is under international/economic ministries.
E: Stock exchanges are private or regulated independently.
In which market are newly issued securities sold to initial buyers?
A) Secondary market
B) Exchange market
C) Capital market
D) Money market
E) Primary market

Correct Answer: E

Explanation: The primary market is where new securities are sold directly to investors, often with the
help of investment banks.

Why Others Are Incorrect:

A: Trades previously issued securities.

B: Describes the place, not the phase.
C & D: Refer to type of instrument, not issuance process.
What is the main benefit of diversification provided by financial intermediaries?
A) It guarantees returns.
B) It increases short-term profits.
C) It eliminates credit risk.
D) It reduces overall investment risk.
E) It concentrates investments in a single sector.

Correct Answer: D

Explanation: Diversification spreads investments across various assets, reducing exposure to any
single source of risk.

Why Others Are Incorrect:

A: No investment is risk-free.
B: Diversification is about risk reduction, not high profit.
C: Risk is reduced, not eliminated.
E: Diversification does the opposite.
Which of the following is an example of moral hazard?
A) A borrower hides bad credit history before the loan
B) An investor asks for higher returns
C) A borrower uses loaned money for risky activities after receiving it
D) A bank rejects all loan applications
E) A central bank raises interest rates to curb inflation

Correct Answer: C

Explanation: Moral hazard arises after a transaction, when a borrower takes on risky behavior not
anticipated by the lender.

Why Others Are Incorrect:

A: Describes adverse selection.

B & D & E: Not related to post-loan risk behavior.
Which financial instrument involves a short-term loan secured by Treasury securities and an
agreement to repurchase them?
A) Treasury bill
B) Certificate of deposit
C) Commercial paper
D) Repurchase agreement (repo)
E) Corporate bond

Correct Answer: D

Explanation: Repos are short-term loans where securities are sold with an agreement to buy them
back, used for liquidity.

Why Others Are Incorrect:

A: Pure debt instrument with no repurchase clause.

B: Bank-issued deposit instrument.
C: Unsecured corporate IOU.
E: Long-term instrument.
Which of the following is not a function of financial regulation?
A) Reducing information asymmetry
B) Promoting financial panics
C) Restricting risky asset holdings
D) Enforcing disclosure requirements
E) Insuring deposits

Correct Answer: B

Explanation: Financial regulation aims to prevent, not promote, financial panics.

Why Others Are Incorrect:

A, C, D, E: All are essential components of financial regulation, especially in preventing systemic

risk.
What is the major advantage of equity over debt for investors?
A) Guaranteed fixed income
B) Lower risk
C) Ownership and profit participation
D) Priority in repayment
E) Government protection

Correct Answer: C

Explanation: Equity holders gain ownership and benefit from a company’s profit through dividends
and capital appreciation.

Why Others Are Incorrect:

A: Applies to debt instruments.

B: Equity is riskier than debt.
D: Equity has lower repayment priority.
E: No guaranteed protection for equity.
Which of the following best defines "asymmetric information"?
A) All parties have equal knowledge
B) One party knows more than the other in a transaction
C) Government knows more than firms
D) Banks never know borrower details
E) Investors always make rational decisions

Correct Answer: B

Explanation: Asymmetric information occurs when one party (usually the borrower) has more
relevant information than the other (lender), causing inefficiency.

Why Others Are Incorrect:

A: That's the opposite.

C: Not a complete or correct generalization.
D: Not never—banks try to reduce info gaps.
E: Not all investors act rationally.
What is the economic justification for the existence of deposit insurance?
A) To reward risk-takers
B) To reduce banking competition
C) To protect depositors and prevent bank runs
D) To ensure higher interest rates
E) To force banks to hold more capital

Correct Answer: C

Explanation: Deposit insurance gives confidence to depositors, reducing the likelihood of panic
withdrawals and systemic collapse.
 Why Others Are Incorrect:

A: Insurance discourages reckless risk-taking.

B: Competition isn’t the target.
D: It may lower, not raise, rates.
E: Capital requirements are different policies.
Which of the following is NOT a reason why fiat money holds value?
A) It is declared legal tender by the government.
B) It is accepted for payment of taxes.
C) It is backed by physical commodities like gold.
D) People trust that others will accept it in exchange.
E) It is enforced through legal frameworks.

Correct Answer: C) It is backed by physical commodities like gold.

Explanation: ✔ C is correct: Fiat money is not backed by any physical commodity like gold. It
derives value from trust and legal support.

✘ A, B, D, E are all true for fiat money: Legal tender status, tax obligations, trust in acceptance, and
government enforcement uphold its value.
What is the “money multiplier” effect?
A) The process of increasing taxes to raise revenue.
B) How central banks reduce interest rates to stimulate borrowing.
C) The ability of commercial banks to expand money supply through lending.
D) The effect of inflation on purchasing power.
E) The process of converting foreign currencies.

Correct Answer: C) The ability of commercial banks to expand money supply through
lending.

Explanation: ✔ C is correct: Through fractional reserve banking, each loan issued by banks
generates new deposits, expanding the money supply (Mishkin, p. 388).

✘ A, B, D, E describe other processes unrelated to money multiplication.

What distinguishes cryptocurrencies like Bitcoin from CBDCs?

A) Cryptocurrencies are issued by governments.
B) Cryptocurrencies are centralized and controlled.
C) CBDCs are based on blockchain, Bitcoin is not.
D) CBDCs are legal tender, cryptocurrencies are not.
E) Both are controlled by the same monetary authority.

Correct Answer: D) CBDCs are legal tender, cryptocurrencies are not.

Explanation: ✔ D is correct: CBDCs are official currencies with legal backing; cryptocurrencies are
not legal tender in most countries.

✘ A, B, E are incorrect: Cryptocurrencies are not issued or controlled by states.

✘ C is false: Bitcoin uses blockchain; many CBDCs may or may not.

Which of the following is a drawback of relying heavily on commercial banks for money
creation?
A) Increased control by democratic institutions.
B) Reduced role of interest rates in monetary policy.
C) Concentration of economic power in private hands.
D) Higher efficiency in allocating credit to public sectors.
E) Automatic stabilization of inflation.

Correct Answer: C) Concentration of economic power in private hands.

Explanation: ✔ C is correct: Banks have power to direct credit and influence economic outcomes,
raising ethical and political concerns.

✘ A, D, E are false; these outcomes are not guaranteed.

✘ B is unrelated to the creation process.

What is one function that money must fulfill to be effective in economic systems?
A) Must be digital and encrypted.
B) Must yield a high return.
C) Must store value over time.
D) Must be issued only by private institutions.
E) Must be physical.

Correct Answer: C) Must store value over time.

Explanation: ✔ C is correct: Without this function, money would be ineffective as people couldn’t
save or plan.

✘ A, D, E are features, not functions.

✘ B is investment-related, not monetary function.

Which of the following best explains the term “fiat currency”?

A) Currency pegged to a commodity like oil.
B) Currency issued by private tech companies.
C) Currency with no intrinsic value, backed by government decree.
D) A form of digital asset used in DeFi.
E) Gold-backed cryptocurrency issued by banks.

Correct Answer: C) Currency with no intrinsic value, backed by government decree.

Explanation: ✔ C is correct: Fiat money has no physical backing but is accepted because it’s
declared legal tender.

✘ A, B, D, E describe unrelated financial instruments or errors.

Which of the following is true about the ethical debate on monetary policy?
A) Monetary policy never impacts social inequality.
B) Interest rates always benefit the poorest groups.
C) Money creation is a neutral and apolitical process.
D) Monetary policy can contribute to unequal wealth distribution.
E) All monetary systems are inherently fair.

Correct Answer: D) Monetary policy can contribute to unequal wealth distribution.

Explanation: ✔ D is correct: Policies like quantitative easing often disproportionately benefit asset
owners, widening inequality (Ryan-Collins, p. 122).

✘ A, B, C, E are overly simplistic or factually inaccurate.

What role do smart contracts play in decentralized finance (DeFi)?

A) They create physical tokens for banking use.
B) They replace legal enforcement with automated code.
C) They ensure central bank compliance.
D) They manage inflation targets.
E) They are used to print fiat money.

Correct Answer: B) They replace legal enforcement with automated code.

Explanation: ✔ B is correct: Smart contracts self-execute transactions based on pre-coded rules,

eliminating the need for traditional contracts.

✘ A, C, D, E are unrelated or misrepresent the nature of smart contracts.

Which of the following best defines a bond?

A. A share of ownership in a corporation
B. A financial instrument used only for short-term borrowing
C. A debt security that promises periodic payments over a specific period
D. A contract that provides insurance coverage to bondholders
E. A type of currency issued by central banks
Correct Answer: C
Explanation: C is correct because a bond is a debt security that involves periodic payments to the
bondholder until maturity.
A is incorrect because it defines a stock, not a bond.
B is misleading because bonds can be either short-term or long-term.
D is incorrect as it refers to insurance contracts, not financial instruments.
E is wrong; while central banks issue currency, it is not in the form of bonds.
What is the primary function of financial intermediaries?
A. Printing money for the economy
B. Borrowing from governments to stabilize markets
C. Facilitating direct loans from savers to businesses
D. Channeling funds from savers to borrowers
E. Determining the foreign exchange rate
Correct Answer: D
Explanation: D is correct because financial intermediaries (like banks) act as middlemen between
savers and borrowers, improving efficiency in capital allocation.
A is incorrect—only central banks can create money.
B is inaccurate- intermediaries don’t typically borrow from governments.
C is incorrect-they facilitate indirect (not direct) loans.
E is wrong-foreign exchange rates are determined in currency markets.
A rise in interest rates is likely to:
A. Increase business investments
B. Decrease household savings
C. Make borrowing cheaper
D. Reduce consumer spending on big-ticket items
E. Cause the stock market to rally
Correct Answer: D
Explanation: D is correct because higher interest rates increase borrowing costs, discouraging large
purchases like cars or homes.
A is incorrect—higher rates reduce investment.
B is wrong—higher interest rates often encourage savings.
C is the opposite—borrowing becomes more expensive.
E is incorrect- markets may fall as borrowing costs rise.
Which of the following is an example of a financial innovation?
A. Increasing the federal funds rate
B. Establishing the Federal Reserve
C. Introduction of online banking and e-finance
D. Creation of long-term treasury bonds
E. Using GDP as a measure of output
Correct Answer: C
Explanation: C is correct—online banking is a modern financial innovation driven by tech
advances.
A is a monetary policy tool, not innovation.
B is institutional creation, not product/service innovation.
D is a traditional instrument, not necessarily new.
E is an economic measurement tool, not a financial product.
According to Milton Friedman, what is the main cause of inflation?
A. High employment rates
B. Decrease in exports
C. Excessive government regulation
D. A continual increase in the money supply
E. Rising consumer demand
Correct Answer: D
Explanation: D is correct—Friedman’s famous quote: “Inflation is always and everywhere a
monetary phenomenon.”
A can increase prices short term, but not the core cause of sustained inflation.
B and C do not directly cause broad price level increases.
E can contribute, but alone it doesn’t sustain inflation without more money chasing fewer goods.
What typically happens to interest rates and output during a recession?
A. Both increase
B. Interest rates rise; output rises
C. Interest rates fall; output falls
D. Interest rates rise; output stays constant
E. Interest rates and output are unaffected
Correct Answer: C
Explanation: C is correct—in recessions, output falls and central banks often lower interest rates to
stimulate growth.
A & B are not typical recession behavior.
D is incorrect—output usually declines.
E is wrong—both are impacted significantly.
What role does the foreign exchange market play in the economy?
A. It determines the central bank interest rate
B. It provides funds to insolvent banks
C. It facilitates currency conversion for international trade
D. It controls inflation directly
E. It creates monetary policy for governments
Correct Answer: C
Explanation: C is correct—the foreign exchange market converts currencies, enabling cross-border
transactions.
A, B, D, E describe roles of central banks or governments, not FX markets.
What is the main difference between nominal and real GDP?
A. Nominal GDP adjusts for inflation; real GDP does not
B. Real GDP is based on international currency value
C. Nominal GDP includes intermediate goods
D. Real GDP is measured using constant prices
E. Real GDP includes government spending; nominal does not
Correct Answer: D
Explanation: D is correct—real GDP is inflation-adjusted using base-year prices.
A is reversed—nominal does not adjust for inflation.
B is irrelevant to GDP definition.
C is incorrect—neither includes intermediate goods.
E is wrong—both include government spending.
Which of the following would likely cause the value of a currency to appreciate?
A. Increased imports
B. High inflation in the domestic economy
C. Rising interest rates relative to other countries
D. Central bank quantitative easing
E. Large budget deficits
Correct Answer: C
Explanation: C is correct—higher interest rates attract foreign investment, increasing demand for
the currency.
A leads to depreciation due to more outflows.
B reduces currency value due to loss of purchasing power.
D typically weakens the currency.
E may weaken investor confidence.
Why are financial institutions heavily regulated?
A. To maximize their profits
B. To increase inflation
C. To prevent foreign competition
D. To ensure economic stability and prevent systemic risk
E. To simplify legal documents
Correct Answer: D
Explanation: D is correct—regulation helps maintain trust, avoid crises, and reduce risk contagion.
A is false—profit-maximization is not the regulator’s goal.
B is harmful and not regulatory aim.
C is not typically a primary motive.
E is irrelevant to core regulatory goals.
Which of the following is true about the real interest rate?
A) It increases with inflation.
B) It equals the nominal rate minus expected inflation.
C) It is set directly by the central bank.
D) It always remains positive.
E) It does not affect borrowing incentives.

Correct Answer: B

Explanation: Fisher Equation: r = i - πe.

A: Inflation reduces real rate.

C: Central banks influence nominal rates.
D: Real rate can be negative.
E: Real rate is key for economic decisions.
What is the primary role of interest rates in a market economy?
A) To regulate employment levels directly
B) To determine the exchange rate permanently
C) To influence borrowing, saving, and investment decisions
D) To set the government’s annual spending limit
E) To limit imports and promote exports
Correct Answer: C
Explanation:
• A is incorrect; interest rates influence employment indirectly.
• B exchange rates are influenced by many factors, not only interest rates.
• C is correct—interest rates are a key mechanism in influencing economic behavior.
• D relates to fiscal policy, not interest rates.
• E pertains to trade policy, not monetary policy.
Which institution is primarily responsible for setting interest rates in Turkey?
A) Ministry of Treasury and Finance
B) Turkish Grand National Assembly (TBMM)
C) Central Bank of the Republic of Turkey (CBRT)
D) Banking Regulation and Supervision Agency (BDDK)
E) Capital Markets Board (SPK)
Correct Answer: C
Explanation:
• A handles fiscal policies, not monetary.
• B is legislative, not monetary authority.
• C is correct—the CBRT sets policy interest rates like the one-week repo rate.
• D and E are regulatory agencies, not responsible for setting rates.
What does an increase in the policy interest rate generally signal in an economy like Turkey's?
A) An attempt to increase inflation
B) A strategy to cool down economic activity and reduce inflation
C) A plan to increase budget deficit
D) A method to lower the exchange rate
E) An effort to boost foreign direct investment instantly
Correct Answer: B
Explanation:
• A is incorrect—the goal is usually to reduce inflation.
• B is correct—raising rates aims to slow spending and reduce inflationary pressure.
• C is fiscal, not monetary.
• D may occur indirectly, but it's not the primary goal.
 • E is a possible effect, not a direct aim.
In monetary theory, what is the relationship expressed by the Fisher equation?
A) M × V = P × Y
B) R = r + E(i)
C) AD = AS
D) GDP = C + I + G + NX
E) i = π – r
Correct Answer: B
Explanation:
• A is the quantity theory of money.
• B is correct—Fisher equation links nominal and real interest rates with expected inflation.
• C is macroeconomic equilibrium.
• D is the expenditure approach to GDP.
• E is incorrect algebraically.
Which of the following best describes a yield curve inversion and its economic significance?
A) Short-term rates are lower than long-term rates, indicating growth.
B) Short-term and long-term rates are equal, showing monetary neutrality.
C) Long-term interest rates fall below short-term rates, often signaling recession.
D) Central banks fix long-term rates below inflation.
E) It only occurs when inflation exceeds 20%.
Correct Answer: C
Explanation:
• A is a normal curve.
• B suggests flat curve, not inversion.
• C is correct—yield curve inversion historically predicts recessions.
• D central banks usually don’t directly fix long-term rates.
• E is false—no such rule exists.
What is the main objective of inflation targeting in countries like Turkey?
A) To completely eliminate inflation
B) To maintain a steady growth in government spending
C) To anchor inflation expectations and ensure price stability
D) To increase interest rates permanently
E) To reduce the unemployment rate to zero
Correct Answer: C
Explanation:
• A is unrealistic—some inflation is healthy.
• B is unrelated.
 • C is correct—price stability is the goal, creating confidence in monetary policy.
• D is a tool, not an objective.
• E is unrealistic in practice.
In Turkey, which of the following instruments is most commonly used by the Central Bank to
implement monetary policy?
A) Public-private partnership contracts
B) One-week repo rate
C) Value-added tax (VAT) rate
D) Export subsidies
E) Loan guarantees by state banks
Correct Answer: B
Explanation:
• A, C, D, E are fiscal or structural tools.
• B is correct—this is the key policy rate used by the CBRT for liquidity operations. Repo
stands for Repurchase Agreement. The repo rate is the interest rate at which a central bank
(like the Central Bank of the Republic of Turkey, CBRT) lends money to commercial banks,
usually for a very short period, like one week.
Which scenario would likely lead the Central Bank of Turkey to raise interest rates?
A) Rapid appreciation of the Turkish lira
B) Falling inflation below target
C) High unemployment with low inflation
D) A sharp rise in inflation and a weakening currency
E) Strong global economic growth
Correct Answer: D
Explanation:
• A may lead to lower rates.
• B might justify easing.
• C would likely require stimulation.
• D is correct—high inflation and lira depreciation often require tighter policy.
• E doesn't necessitate a domestic rate hike unless inflation rises.
What happens to consumer and business behavior when interest rates are lowered in a country
like Turkey?
A) Consumers tend to save more.
B) Borrowing becomes more expensive.
C) Investment activity tends to decline.
D) Consumption and borrowing generally increase.
E) Currency value rises.
Correct Answer: D
Explanation:
• A is false—savings are less attractive with low interest.
• B is opposite—borrowing becomes cheaper.
• C is incorrect—lower rates boost investment.
• D is correct—consumption and borrowing rise.
• E is uncertain—lower rates often weaken currency.
Which of the following is the most direct consequence of a high interest rate environment in
Turkey?
A) Real estate prices increase rapidly
B) The Turkish lira depreciates sharply
C) Borrowing costs rise, reducing consumer and business spending
D) Inflation increases significantly
E) Central bank reserves automatically grow
Correct Answer: C
Explanation:
A may cool down in high-rate environments.
B is more likely with low interest rates.
C is correct—higher rates discourage borrowing and spending.
D high rates usually reduce inflation.
E depends on other factors, not a direct outcome.
Which of the following is a limitation of the gold standard as a monetary system?
A. It allows for excessive inflation during wartime
B. It gives too much power to central banks
C. It limits the flexibility of monetary policy during economic crises
D. It causes automatic exchange rate fluctuations
E. It leads to hyperinflation in fixed economies

Correct Answer: C
Explanation:
A: Incorrect – The gold standard actually limited inflation, except when suspended.
B: Incorrect – Central banks had limited roles under this system.

C: Correct – The rigidity of the gold supply made responding to crises difficult.

D: Incorrect – The gold standard fixed exchange rates, not floating ones.
E: Incorrect – Hyperinflation is more likely in fiat systems, not under a gold standard.
What was the significance of the end of the Bretton Woods system in 1971?
A. It marked the return to a barter-based global economy
B. It established the euro as a global reserve currency
C. It ended the convertibility of the US dollar to gold
D. It abolished central banks worldwide
E. It introduced fixed exchange rates among developing countries

Correct Answer: C
Explanation:
A: Incorrect – Barter was never revived in modern monetary systems.
B: Incorrect – The euro was introduced decades later, in 1999.

C: Correct – The US unilaterally ended dollar convertibility to gold, ending Bretton Woods.

D: Incorrect – Central banks continued to function and expanded in power.

E: Incorrect – The world moved toward floating, not fixed, exchange rates.
Which of the following statements best describes the Theory of Rational Expectations?
A) People form expectations based only on past experiences
B) People use all available information to form forecasts
C) Forecast errors are always biased upward
D) Rational expectations eliminate uncertainty completely
E) People make perfect predictions about future events

Correct Answer: B) People use all available information to form forecasts

Explanation: Rational expectations involve using both past and present information efficiently.
Why Others Are Wrong:
A) This defines adaptive, not rational expectations.
C) Forecast errors are random and unbiased.
D) Rational expectations reduce errors but not uncertainty.
E) Forecasts can still be wrong; they are optimal but not perfect.
Which of the following best defines “money” in economics?
A. Any asset that appreciates in value over time
B. Any government-issued item with physical form
C. Anything generally accepted as a means of payment or settlement of debt
D. All valuable items held by an individual or institution
E. A digital code stored in online platforms

Correct Answer: C
Explanation: In economics, money is defined as anything that is generally accepted as a means of
payment for goods and services or for the repayment of debts. This includes cash, bank deposits, and
other liquid instruments.

A: This describes an investment, not money.

B: Money doesn’t need to be physical; digital forms like bank deposits and mobile payments also
count.
D: This describes wealth, not money.
E: This is too narrow and describes cryptocurrencies, which are not universally accepted as
money.
Which of the following is NOT a core function of money?
A. Medium of Exchange
B. Store of Value
C. Unit of Account
D. Source of Income
E. All of the above are core functions

Correct Answer: D
Explanation: The three core functions of money are: medium of exchange, unit of account, and store
of value. Money facilitates trade, measures value, and stores purchasing power, but it is not inherently
a source of income.

A–C: These are the correct traditional functions of money.

E: “Source of income” is not a function of money; it's an outcome of investment or labor.

What is the main difference between M1 and M2 in measuring money supply?

A. M1 includes only digital currency, M2 includes physical cash
B. M1 includes savings deposits, M2 does not
C. M1 represents more liquid assets than M2
D. M2 is a narrower definition of money than M1
E. M2 includes only government-issued bonds

Correct Answer: C
Explanation: M1 includes the most liquid forms of money (cash, checking accounts), whereas M2
includes M1 plus less liquid forms (savings, time deposits).

A: Both include physical and digital components.

B: Savings deposits are part of M2, not M1.
D: M2 is broader, not narrower.
E: Government bonds are not typically included in either M1 or M2.

What is one key reason a completely cashless society is difficult to implement?

A. Cash is more efficient than digital systems
B. Inflation cannot be controlled without cash
C. Many individuals lack access to digital financial services
D. Central banks oppose digital payments
E. Governments cannot tax digital transactions

Correct Answer: C
Explanation: A major barrier to a fully cashless society is that many people, especially in developing
regions, are unbanked or lack access to the internet or smartphones.

A: Digital payments are typically more efficient.

B: Inflation can be controlled with or without cash.
 D: Many central banks are actively exploring digital currencies.
E: Digital transactions are easier to tax and monitor.

Why do central banks monitor both M1 and M2?

A. To control cryptocurrency prices
B. To understand both short-term spending and long-term savings behavior
C. To track GDP growth directly
D. To determine government debt levels
E. To regulate stock market movements

Correct Answer: B
Explanation: M1 reflects short-term liquidity and consumer spending, while M2 includes broader
savings and investment behavior. Monitoring both gives a fuller picture of the economy.

A: Central banks don’t directly control cryptocurrencies.

C: Money supply influences GDP but is not a direct measure of it.
D: Government debt is separate from money supply.
E: Stock markets are influenced by, but not part of, money supply.

What is money primarily considered in the modern banking system?

A) A natural resource
B) A physical commodity
C) A form of debt
D) A labor contract
E) A government guarantee

Correct Answer: C
Explanation: Modern money is created mostly through bank lending, where deposits are matched by
debts—money as a form of IOU.

A & B) Physical properties are not essential today.

D) Labor contracts are economic arrangements, not money.
E) While governments back currency, money's nature is not just a guarantee.
Which of the following best describes the central role of a central bank?
A) Selling insurance policies
B) Controlling fiscal budgets
C) Regulating interest rates and ensuring monetary stability
D) Issuing company shares
E) Collecting taxes

Correct Answer: C
Explanation: Central banks use tools like open market operations and reserve requirements to
stabilize prices and manage the money supply.

A, D, E) These are done by private companies or government treasury departments.

B) Fiscal policy is under the government, not central banks.
Which financial instrument represents a debt obligation?
A) Equity shares
B) Derivatives
C) Bonds
D) Real estate
E) Currency

Correct Answer: C
Explanation: Bonds are debt securities that represent loans made by investors to borrowers.

A) Equity shares imply ownership.

B) Derivatives derive value from other assets.
D) Real estate is an asset, not a financial instrument per se.
E) Currency is a medium of exchange.
According to empirical data, what is the most common way businesses finance their operations
globally?
A) Issuing common stock
B) Borrowing directly from the public
C) Government grants
D) Indirect finance through financial intermediaries
E) Crowdfunding platforms

Correct Answer: D) Indirect finance through financial intermediaries

Explanation: Most firms rely on banks and other intermediaries, especially in developing economies.
Why Others Are Wrong:
A) Stock issuance is a small portion of external financing.
B) Direct borrowing is less common due to information costs.
C) Government grants are rare and limited.
E) Crowdfunding is not yet a major global source.
. Which of the following events challenges the strong form of the Efficient Market Hypothesis?
A) A central bank announces an interest rate hike
B) A stock bubble followed by a crash
C) A company pays dividends as expected
D) Investors following technical charts
E) A firm increasing R&D spending

Correct Answer: B) A stock bubble followed by a crash

Explanation:
Bubbles show that prices can significantly deviate from fundamental values, challenging EMH.
Why Others Are Wrong:
• A) Expected actions do not contradict EMH.
• C) Predictable behavior aligns with EMH.
 • D) EMH argues technical analysis is ineffective, but this isn’t proof against it.
• E) R&D spending is a business decision, not a test of market efficiency.
What caused the 2008 Global Financial Crisis?
A) High inflation and rising oil prices
B) Excessive subprime mortgage lending and complex financial products
C) Low levels of corporate investment
D) Weak central bank regulation of stock exchanges
E) Collapse in agricultural production

Correct Answer: B)
Explanation: The crisis was largely caused by banks issuing risky mortgage loans, packaging them
into mortgage-backed securities, and underestimating the associated risk.
• A) Incorrect – These were contributing but not primary causes.
• C) Incorrect – Investment was not the key issue.
• D) Incorrect – Stock exchange regulation was not central to the crisis.
• E) Incorrect – Agricultural issues were unrelated.
How does monetary policy affect stock prices?
A) Higher interest rates make stocks more attractive
B) Lower interest rates increase borrowing costs
C) Higher interest rates reduce company profits, lowering stock prices
D) Stock prices move independently of interest rates
E) Bond yields fall when rates rise, increasing stock prices

Correct Answer: C)
Explanation: When interest rates rise, borrowing becomes more expensive, reducing corporate
profits and making stocks less attractive to investors.
• A) Incorrect – Higher interest rates often divert investment away from stocks.
• B) Incorrect – Lower rates reduce borrowing costs.
• D) Incorrect – Monetary policy strongly affects stock markets.
• E) Incorrect – Bond yields rise, not fall, when interest rates rise.
Which of the following is NOT a role of financial institutions?
A) Risk management
B) Monetary policy implementation
C) Capital allocation
D) Direct control of stock prices
E) Liquidity provision

Correct Answer: D)
Explanation: Financial institutions do not control stock prices directly; they provide support,
infrastructure, and services to markets.
• A, B, C, E are all valid roles (banks, insurance, central banks, etc.)
What is quantitative easing (QE)?
A) Raising interest rates to reduce inflation
B) A method of direct fiscal stimulus
C) Central bank purchases of assets to inject liquidity
D) A policy of tax reduction
E) Limiting money supply to reduce spending
Correct Answer: C
Explanation: QE involves central banks buying assets like bonds to increase money supply and lower
long-term interest rates.
What is a key characteristic of a financial bubble?
A) Decline in asset prices below intrinsic value
B) Asset prices driven above their fundamental value
C) Sudden loss of confidence in government bonds
D) Increased foreign currency reserves
E) Decline in the money supply
Correct Answer: B
Explanation: Bubbles occur when prices exceed fundamental value, often due to speculation.
Which of the following best describes a 'bank run'?
A) Rapid rise in interest rates
B) Government takeover of a failing bank
C) Depositors withdrawing funds fearing insolvency
D) Banks reducing their reserves
E) Issuance of new loans to raise capital
Correct Answer: C
Explanation: A bank run happens when many depositors withdraw money fearing the bank's
collapse.
Which institution plays a global role in promoting financial stability?
A) World Health Organization
B) United Nations Development Programme
C) Financial Stability Board (FSB)
D) Amnesty International
E) UNESCO
Correct Answer: C
Explanation: The FSB promotes global financial stability and regulatory coordination.
How does deflation affect the real value of debt?
A) It reduces the real burden of debt
B) It has no impact
C) It increases the real burden of debt
D) It causes nominal interest rates to rise
E) It cancels out debt in real terms
Correct Answer: C
Explanation: As prices fall, the real value of fixed debt increases, making repayment harder for
borrowers.
What best describes a ‘shadow banking system’?
A) Central banks operating under cover
B) Informal financial networks in rural areas
C) Non-bank financial intermediaries operating outside traditional regulations
D) Corrupt banking operations in offshore markets
E) Government-run investment banks
Correct Answer: C
Explanation: Shadow banks include hedge funds, money market funds, etc., operating with less
oversight but engaging in credit intermediation.
What is the fiscal multiplier effect?
A) The ratio of tax to spending
B) The change in inflation due to fiscal tightening
C) The effect of government spending on total economic output
D) The central bank's balance sheet growth
E) The impact of interest rate changes on income distribution
Correct Answer: C
Explanation: The fiscal multiplier quantifies how much GDP increases for each unit of government
spending.
Why did central banks adopt Quantitative Easing after the 2008 crisis?
A) To increase income inequality
B) Because interest rates were already near zero
C) To fund military spending
D) To reduce inflation
E) To print money uncontrollably
Correct Answer: B
Explanation: With policy rates near zero, central banks turned to QE to stimulate the economy via
long-term asset purchases.
What role can central bank digital currencies (CBDCs) play in future financial stability?
A) Replace all fiat currencies with Bitcoin
B) Eliminate the need for banking systems
C) Enhance payment efficiency and reduce dependence on private cryptocurrencies
D) Allow shadow banks to issue their own coins
E) Trigger hyperinflation
Correct Answer: C
Explanation: CBDCs aim to offer safe, efficient digital money alternatives under central bank
control.
What is the primary function of a central bank in a modern economy?
A) To offer consumer banking services
B) To supervise retail sales
C) To ensure price stability and regulate money supply
D) To set taxes and government spending policies
E) To manage stock exchanges
Correct Answer: C
Explanation:

• C is correct because central banks are responsible for maintaining price stability,
controlling inflation, and managing the monetary system.

• A is incorrect because consumer banking is the role of commercial banks.

• B and E are not core functions of central banks.

• D relates to fiscal policy, which is managed by the government, not the central bank.

Which of the following best describes the Taylor Rule?

A) A rule for government budgeting
B) A guideline for currency exchange rates
C) A monetary policy rule that adjusts interest rates based on inflation and output gaps
D) A fiscal policy mechanism to control unemployment
E) A debt sustainability condition used by the IMF
Correct Answer: C
Explanation:

• C is correct; the Taylor Rule provides a formula for setting interest rates based on
inflation deviations and economic output.

• A and D refer to fiscal policy.

• B is not related to the Taylor Rule.

• E is a term used in international finance, not monetary policy.

Which of the following monetary policy tools involves buying and selling government securities
to influence liquidity in the banking system?
A) Discount rate
B) Required reserve ratio
C) Forward guidance
D) Open market operations
E) Quantitative tightening
Correct Answer: D
Explanation:

• D is correct; open market operations involve central banks buying/selling government

bonds to control money supply and short-term interest rates.

• A is about interest charged on borrowing from the central bank.

 • B determines how much reserves banks must hold.

• C is a communication tool, not a direct action.

• E refers to the reduction of central bank assets, which is broader than standard open
market operations.
What does the following equation represent in monetary policy?

A) Quantity theory of money

B) Taylor rule
C) Phillips curve with expected inflation
D) Investment-savings identity
E) IS-LM equilibrium condition
Correct Answer: C
Explanation:

• C is correct; this is the expectations-augmented Phillips curve showing the inverse

relationship between inflation and unemployment.

• A relates to money supply and velocity.

• B includes interest rate and inflation targets.

D and E are from different macroeconomic models.

Which of the following best explains why central bank independence is important?
A) It helps in setting higher taxes efficiently
B) It ensures the central bank follows government orders precisely
C) It reduces inflation bias by insulating policy from short-term political pressures
D) It guarantees increased government borrowing
E) It allows the central bank to control fiscal policy
Correct Answer: C
Explanation:

• C is correct because independence protects the central bank from political interference,
which can lead to time-inconsistent and inflationary policies.

• A, B, D, and E either relate to fiscal policy or misstate the central bank's function.

Which of the following is not considered a transmission channel of monetary policy?

A) Interest rate channel
B) Credit channel
C) Wealth effect
D) Taxation channel
E) Exchange rate channel
Correct Answer: D
Explanation:

• D is correct because taxation is a fiscal policy tool, not a monetary transmission channel.
 • A, B, C, and E are all valid transmission mechanisms through which monetary policy
impacts the real economy.
What is one major challenge faced by central banks in emerging market economies?
A) Excess capital inflows from domestic investors
B) Stable political conditions
C) Weak financial systems and currency mismatch
D) Overly advanced monetary tools
E) Fully anchored inflation expectations
Correct Answer: C
Explanation:

• C is correct; EM central banks often deal with weak institutions, underdeveloped markets,
and liabilities in foreign currency.

• A is misleading; sudden stops and outflows are more common.

• B, D, and E do not typically apply to EMEs.

What does the following identity represent in terms of the money supply?

A) Government spending identity

B) Exchange rate equation
C) Fiscal multiplier formula
D) Money supply formula (multiplier × base)
E) Inflation forecasting model
Correct Answer: D
Explanation:

• D is correct; this equation shows how the money supply (M) is determined by the money
multiplier (m) and the monetary base (B).

• A, B, C, and E are unrelated.

Which of the following best describes Quantitative Easing (QE)?

A) Raising taxes to reduce inflation
B) Increasing reserve requirements to slow lending
C) Large-scale asset purchases by the central bank to lower long-term interest rates
D) Fixing the exchange rate to the US dollar
E) Publishing inflation forecasts for credibility
Correct Answer: C
Explanation:

• C is correct; QE involves buying long-term securities to inject liquidity and stimulate the
economy.

• A is a fiscal tool.

• B is a contractionary tool.
 • D refers to exchange rate policy.

• E is part of forward guidance, not QE.

What is a key disadvantage of monetary targeting as a policy strategy?

A) It provides too much transparency
B) Money demand and velocity can be unstable
C) It requires international cooperation
D) It causes permanent output gaps
E) It is illegal under international law
Correct Answer: B
Explanation:

• B is correct; the main issue with monetary targeting is the instability of the link between
money supply and inflation/output.

• A is incorrect—transparency is generally positive.

• C, D, and E are not relevant drawbacks of this strategy.

What is one of the primary purposes of a central bank’s inflation report?

A) To announce tax reforms
B) To sell bonds to the public
C) To explain monetary policy decisions and manage public expectations
D) To publish the country’s annual budget
E) To issue unemployment insurance
Correct Answer: C
Explanation:

• C is correct; inflation reports enhance transparency and help guide public/investor

expectations.

• A, B, D, and E are unrelated to the function of inflation reports.