Use these DSST Money and Banking sample questions to review the functions of money, commercial banking, financial intermediaries, money and macroeconomic activity, the Federal Reserve System, U.S. monetary policy, and international exchange rates. The questions emphasize both definitions and application of banking and monetary concepts.
Topics Covered
- Functions of money
- Commercial-bank balance sheets
- Deposit insurance
- Bank capital and risk management
- Inflation and nominal interest rates
- Money demand
- The Federal Open Market Committee
- Expansionary monetary policy
- Money growth and inflation
- Exchange-rate effects
Sample Questions
- A. Medium of exchange
- B. Unit of account
- C. Store of value
- D. Standard of deferred payment
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A unit of account provides a common way to quote and compare prices.
Money can also serve as a medium of exchange and store of value, but those functions do not specifically describe the pricing role in the question.
- A. Bank assets decrease by $1,000, and bank liabilities increase by $1,000.
- B. Bank assets increase by $1,000, and bank liabilities increase by $1,000.
- C. Bank assets increase by $1,000, and bank liabilities decrease by $1,000.
- D. Neither assets nor liabilities change because the deposit belongs to the customer.
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The bank receives cash, which increases its assets.
The checking-account balance is an obligation the bank owes to the depositor, so deposits are liabilities of the bank.
- A. To guarantee that banks earn a profit each year
- B. To protect insured depositors against losses if an insured bank fails
- C. To prevent all changes in market interest rates
- D. To insure banks against declines in stock prices
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Federal deposit insurance protects eligible deposits at insured institutions up to applicable coverage limits.
Its purpose is depositor protection and financial stability, not guaranteeing bank profits or investment returns.
- A. Maintaining an adequate capital buffer
- B. Eliminating all customer deposits
- C. Holding only long-term loans
- D. Paying the same interest rate on every financial product
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Bank capital provides a cushion that can absorb losses before those losses threaten depositors or other creditors.
Sound bank risk management also involves liquidity management, diversification, underwriting standards, and other controls.
- A. It will fall.
- B. It will remain unchanged.
- C. It will rise.
- D. It must become zero.
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The Fisher relationship links the nominal interest rate approximately to the real interest rate plus expected inflation.
If expected inflation increases while the real rate is unchanged, lenders generally require a higher nominal rate to compensate for the expected loss of purchasing power.
- A. It tends to decrease because the opportunity cost of holding money rises.
- B. It tends to increase because money begins paying the same return as bonds.
- C. It remains fixed because interest rates do not affect money demand.
- D. It becomes equal to the monetary base.
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Holding money usually means giving up interest that could be earned on alternative assets.
When market interest rates rise, that opportunity cost increases, so people tend to hold smaller money balances, all else equal.
- A. Federal Deposit Insurance Corporation
- B. Office of the Comptroller of the Currency
- C. Federal Open Market Committee
- D. Department of the Treasury
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The Federal Open Market Committee, or FOMC, makes key monetary-policy decisions, including setting the target range for the federal funds rate.
The effective federal funds rate itself is a market rate for overnight transactions, while Federal Reserve policy tools are used to keep that rate within the target range.
- A. Reduced borrowing and lower interest-sensitive spending
- B. Higher borrowing costs and weaker aggregate demand
- C. Increased borrowing and stronger interest-sensitive spending
- D. An automatic increase in federal income-tax rates
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Lower short-term interest rates generally reduce borrowing costs and can stimulate spending on interest-sensitive goods and investment.
Monetary policy does not directly set federal income-tax rates; tax policy is part of fiscal policy.
- A. It can increase aggregate demand faster than the economy’s ability to produce goods and services.
- B. It automatically causes real output to fall to zero.
- C. It permanently fixes all interest rates.
- D. It eliminates the demand for bank credit.
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When nominal spending grows faster than the economy’s productive capacity, upward pressure on the general price level can result.
The exact effect depends on economic conditions, expectations, and the transmission of monetary policy, but excessive nominal demand is a standard source of inflation pressure.
- A. U.S. goods become cheaper for European buyers, and European goods become more expensive for U.S. buyers.
- B. U.S. goods become more expensive for European buyers, and European goods become cheaper for U.S. buyers.
- C. Both U.S. and European goods become more expensive in both markets.
- D. Exchange-rate changes have no effect on relative import and export prices.
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An appreciation means each dollar can purchase more foreign currency.
That makes foreign goods cheaper in dollar terms while making U.S. goods more expensive to buyers using the foreign currency, all else equal.
How to Use These Questions
For banking questions, identify whether an item belongs on the asset or liability side of a bank’s balance sheet and distinguish capital, liquidity, deposits, and loans. For monetary-policy questions, separate the Federal Reserve’s policy decisions from fiscal actions taken by Congress and the executive branch.
For international questions, keep the direction of the exchange-rate change clear. A stronger domestic currency generally makes foreign goods cheaper to domestic buyers and domestic goods more expensive to foreign buyers, all else equal.
These practice questions are not official DSST questions and are not endorsed by DSST or Prometric.