What makes a currency fiat money?

It has value because a government declares it so and people accept it

It is backed by a fixed weight of gold

It may only be issued by private banks

It exists only in electronic form

The Bretton Woods agreement of 1944 created what?

A system of fixed exchange rates anchored to the US dollar

A worldwide ban on capital controls

A common external tariff for member states

What is the International Monetary Fund's main role?

Lending to countries facing balance of payments crises

Setting interest rates for its member states

Issuing a single global currency for trade

Regulating commercial banks around the world

During the German hyperinflation of 1923, what happened to wages?

They were spent within hours of being paid, because prices rose so fast

They were paid in foreign currency by law

They were frozen at pre-war levels

They were replaced entirely by food rations

What does legal tender mean?

Money that must be accepted in settlement of a debt

Money issued only by a central bank

Any money that shops are willing to accept

Currency approved for exchange abroad

A central bank acting as lender of last resort does what?

Provides funds to solvent banks that cannot borrow anywhere else

Guarantees every household deposit in the country

Buys shares in failing companies

What is a floating exchange rate?

One set by supply and demand in the currency markets

One fixed against a weight of gold

One adjusted once a year by the government

One that applies only to tourist transactions

Fractional reserve banking means that banks do what?

Lend out most of the deposits they hold, keeping only a fraction available

Hold every deposit in full until it is withdrawn

Lend only money put in by their own shareholders

Divide each deposit between two separate accounts

What does seigniorage refer to?

The profit a government makes from issuing money

A tax on purchases of foreign currency

The fee charged for exchanging coins

The interest paid on government bonds

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Economics & Money Medium ⚡ 10 Questions ⏱️ ~7 Mins +100 XP

Money and How It Moves

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Money is an agreement that works until it does not. These questions cover the arrangements that hold it together.

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Questions

~7m

Duration

Medium

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+100

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About this topic

Money solves a problem that sounds trivial and is not. Under barter, a trade requires each side to want exactly what the other is offering at the same moment — the double coincidence of wants. Money splits that single exchange into two, and in doing so it also becomes a way of storing value and a common yardstick for comparing prices. What backs it has changed repeatedly. Currencies were tied to metal, then to a dollar tied to gold under the Bretton Woods system, and since the early 1970s to nothing at all except confidence and restraint. Around that sit institutions built mostly in response to failures: the lender of last resort after nineteenth-century bank panics, the International Monetary Fund after the 1930s, deposit insurance after runs. This quiz is about that machinery rather than about prices or growth.

Questions & answers

Money and How It Moves: all 10 questions and answers

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1The phrase "double coincidence of wants" describes a problem with what?
- A Foreign exchange
- B Barter Correct
- C Credit
- D Taxation
Answer: B. Barter

Why: Each side has to want what the other is offering, at the same moment, in the right quantity. Money removes the requirement by splitting one trade into two separate ones.
2What makes a currency fiat money?
- A It has value because a government declares it so and people accept it Correct
- B It is backed by a fixed weight of gold
- C It may only be issued by private banks
- D It exists only in electronic form
Answer: A. It has value because a government declares it so and people accept it

Why: Nothing physical stands behind it, so its value rests on confidence and on restraint in issuing it. Most of the world moved fully onto fiat currencies during the 1970s.
3The Bretton Woods agreement of 1944 created what?
- A A single European currency
- B A worldwide ban on capital controls
- C A common external tariff for member states
- D A system of fixed exchange rates anchored to the US dollar Correct
Answer: D. A system of fixed exchange rates anchored to the US dollar

Why: The International Monetary Fund and the World Bank were founded alongside it. The system ended in 1971 when the dollar's convertibility into gold was suspended.
4What is the International Monetary Fund's main role?
- A Issuing a single global currency for trade
- B Regulating commercial banks around the world
- C Lending to countries facing balance of payments crises Correct
- D Setting interest rates for its member states
Answer: C. Lending to countries facing balance of payments crises

Why: Its loans usually carry conditions on economic policy, which is the most contested part of its work. The World Bank, by contrast, lends for long-term development projects.
5During the German hyperinflation of 1923, what happened to wages?
- A They were replaced entirely by food rations
- B They were spent within hours of being paid, because prices rose so fast Correct
- C They were paid in foreign currency by law
- D They were frozen at pre-war levels
Answer: B. They were spent within hours of being paid, because prices rose so fast

Why: Workers were often paid twice a day and families queued to spend the money immediately. A new currency, the Rentenmark, brought the episode to an end within months.
6What does legal tender mean?
- A Money that must be accepted in settlement of a debt Correct
- B Money issued only by a central bank
- C Any money that shops are willing to accept
- D Currency approved for exchange abroad
Answer: A. Money that must be accepted in settlement of a debt

Why: It is narrower than most people assume, since a shop can usually refuse a payment before any debt exists by simply declining the sale. The precise rules differ from country to country.
7A central bank acting as lender of last resort does what?
- A Guarantees every household deposit in the country
- B Buys shares in failing companies
- C Lends directly to households
- D Provides funds to solvent banks that cannot borrow anywhere else Correct
Answer: D. Provides funds to solvent banks that cannot borrow anywhere else

Why: Walter Bagehot's rule was to lend freely, at a penalty rate, against good collateral. The purpose is to stop a shortage of ready cash turning into a collapse.
8What is a floating exchange rate?
- A One adjusted once a year by the government
- B One that applies only to tourist transactions
- C One set by supply and demand in the currency markets Correct
- D One fixed against a weight of gold
Answer: C. One set by supply and demand in the currency markets

Why: A pegged rate is instead held at a chosen level through intervention. Most large economies have floated their currencies since the early 1970s.
9Fractional reserve banking means that banks do what?
- A Divide each deposit between two separate accounts
- B Lend out most of the deposits they hold, keeping only a fraction available Correct
- C Hold every deposit in full until it is withdrawn
- D Lend only money put in by their own shareholders
Answer: B. Lend out most of the deposits they hold, keeping only a fraction available

Why: The practice is what creates most of the money actually circulating in an economy. It also leaves a bank exposed if a large number of depositors ask for their money at once.
10What does seigniorage refer to?
- A The profit a government makes from issuing money Correct
- B A tax on purchases of foreign currency
- C The fee charged for exchanging coins
- D The interest paid on government bonds
Answer: A. The profit a government makes from issuing money

Why: It is the difference between the face value of money and what it costs to produce. A banknote costing a few pence to print is the clearest illustration of it.

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