Free DSST Money and Banking Practice Test (2026)

Question 1

If the Federal Reserve raises US interest rates while foreign interest rates stay the same, what tends to happen to the dollar and to US exports?

Accepted Answer

The dollar appreciates, which makes US exports more expensive for foreign buyers.

Answer

The dollar depreciates, which makes US exports cheaper for foreign buyers.

Answer

The dollar appreciates, which makes imported goods more expensive for Americans.

Answer

The dollar does not change, because exchange rates are set by treaty.

Question 2

Assume the velocity of money is constant. If the money supply grows by 7% a year and real output grows by 3% a year, what does the quantity theory of money predict for inflation?

Accepted Answer

About 4% a year

Answer

About 7% a year

Answer

About 10% a year

Answer

About 3% a year

Question 3

Which statement best compares the lags of monetary and fiscal policy?

Accepted Answer

Monetary policy usually has a shorter inside lag than fiscal policy, though its effects still take months.

Answer

Monetary policy has the longer inside lag, because Congress must vote to approve each interest-rate change.

Answer

Fiscal policy has no outside lag, because government spending affects output immediately.

Answer

Both have negligible lags, so either can offset shocks within weeks.

Question 4

Which event most directly led Congress to create the Federal Reserve System in 1913?

Accepted Answer

The Panic of 1907

Answer

The bank runs of the Great Depression

Answer

The collapse of the Bretton Woods system

Answer

The savings and loan crisis

Question 5

The Fed buys $10 billion of Treasury bills in the open market. What is the immediate effect on the banking system?

Accepted Answer

Bank reserves rise by $10 billion.

Answer

Bank reserves fall by $10 billion.

Answer

The Treasury's cash balance rises by $10 billion.

Answer

The money supply falls because banks give up securities.

Question 6

Under its ample-reserves framework, which tool does the Federal Reserve rely on most directly to keep the federal funds rate inside its target range?

Accepted Answer

Setting the interest rate it pays on banks' reserve balances

Answer

Changing banks' reserve requirements every few weeks

Answer

Setting the prime rate that banks charge their best customers

Answer

Making small daily open market operations to keep reserves scarce

Question 7

Besides the seven members of the Board of Governors, who holds a permanent vote on the Federal Open Market Committee (FOMC)?

Accepted Answer

The president of the Federal Reserve Bank of New York

Answer

The Secretary of the Treasury

Answer

The chair of the FDIC

Answer

The president of the Federal Reserve Bank of San Francisco

Question 8

A depositor has $180,000 in a savings account and $120,000 in a certificate of deposit, both in her name alone at the same FDIC-insured bank, and no other accounts there. Under the standard FDIC coverage limit, how much of her $300,000 is insured?

Accepted Answer

$250,000

Answer

$300,000

Answer

$180,000

Answer

$500,000

Question 9

In a hypothetical system with a 20% required reserve ratio, no excess reserves and no cash withdrawals, the banking system gains $1,000 of new reserves. What is the maximum increase in checkable deposits?

Accepted Answer

$5,000

Answer

$1,000

Answer

$200

Answer

$20,000

Question 10

After cutting its federal funds target to near zero in December 2008, the Fed bought large amounts of long-term Treasury bonds and mortgage-backed securities to push down long-term interest rates. What is this policy called?

Accepted Answer

Quantitative easing

Answer

Sterilized intervention

Answer

Moral suasion

Answer

Fiscal consolidation

Question 11

A country cannot pay for its imports or service its foreign debt and needs a short-term loan that comes with policy conditions. Which institution's main role is to provide this kind of balance-of-payments lending?

Accepted Answer

The International Monetary Fund

Answer

The World Trade Organization

Answer

The Bank for International Settlements

Answer

The Federal Deposit Insurance Corporation

Question 12

In Keynes's liquidity preference theory, why does the quantity of money people want to hold fall when interest rates rise?

Accepted Answer

The opportunity cost of holding money instead of interest-bearing bonds rises.

Answer

Prices fall, so people need less money for purchases.

Answer

Banks ration credit, so less money is available to hold.

Answer

Velocity is fixed by payment habits, so money demand depends only on income.

Question 13

How long is a full term for a member of the Federal Reserve Board of Governors?

Accepted Answer

14 years, on a staggered schedule

Answer

4 years, matching the President's term

Answer

Life tenure, like federal judges

Answer

10 years, renewable once

Question 14

A grocery store lists every item's price in dollars, so a shopper can see at a glance that a melon costs three times as much as a loaf of bread. Which function of money does this show?

Accepted Answer

Unit of account

Answer

Medium of exchange

Answer

Store of value

Answer

Standard of deferred payment

Question 15

A lender wants to earn a real return of 3% on a one-year loan and expects inflation of 4% over the year. Using the Fisher equation, about what nominal interest rate should the lender charge?

Accepted Answer

7%

Answer

1%

Answer

3%

Answer

12%

Question 16

A savings institution funds 30-year fixed-rate mortgages mainly with short-term deposits. What happens to its profits if market interest rates rise sharply and stay high?

Accepted Answer

They fall, because deposit costs rise while income on the old fixed-rate loans stays put.

Answer

They rise, because the income on its existing mortgages adjusts upward at once to market rates.

Answer

They rise, because borrowers pay off their low-rate mortgages faster.

Answer

They are unaffected, because the deposits are federally insured.

Question 17

A financially sound bank faces a sudden run, and the Federal Reserve lends it funds through the discount window against good collateral. In this role the Fed is acting as:

Accepted Answer

the lender of last resort

Answer

the fiscal agent of the Treasury

Answer

the bank's deposit insurer

Answer

a market maker for corporate stocks

Question 18

Which statement describes the Bretton Woods system (1944–1971)?

Accepted Answer

Other currencies were pegged to the dollar, which foreign central banks could convert into gold at $35 an ounce.

Answer

Major currencies floated freely, with values set by daily supply and demand.

Answer

Every country circulated gold coins, and each paper note in circulation had to be fully backed by gold in the vault.

Answer

Currencies were pegged to a basket of European currencies rather than the dollar.

Question 19

Which 1999 law removed the Glass-Steagall barriers that had kept commercial banking, investment banking and insurance in separate companies?

Accepted Answer

The Gramm-Leach-Bliley Act

Answer

The Dodd-Frank Act

Answer

The Riegle-Neal Interstate Banking and Branching Efficiency Act

Answer

The Depository Institutions Deregulation and Monetary Control Act

Question 20

A bank has $500 million in assets and $25 million in equity capital, and it earns a return on assets (ROA) of 1%. What is its return on equity (ROE)?

Accepted Answer

20%

Answer

1%

Answer

5%

Answer

25%

Question 21

According to new classical economists who assume rational expectations, what is the effect of a fully anticipated increase in the money supply?

Accepted Answer

The price level rises, with little or no effect on real output even in the short run.

Answer

Real output rises permanently because spending increases.

Answer

Real output rises in the short run, and only later, as expectations catch up, do prices rise.

Answer

Interest rates fall permanently, raising investment.

Question 22

A bank sharply raises the interest rate it charges on all business loans. Afterward it finds that the firms still eager to borrow are mostly those with the riskiest plans. Which problem does this illustrate?

Accepted Answer

Adverse selection

Answer

Moral hazard

Answer

Liquidity risk

Answer

Disintermediation

Question 23

Which policy did Milton Friedman and other monetarists recommend for the central bank?

Accepted Answer

Let the money supply grow at a steady, fixed rate each year.

Answer

Change money growth often to fine-tune output and employment.

Answer

Peg long-term interest rates at a low level.

Answer

Fix the exchange rate and let the money supply follow.

Question 24

Which feature of the Federal Reserve most helps keep it independent of the annual budget process in Congress?

Accepted Answer

It pays its costs mainly from interest on the securities it holds.

Answer

Its governors are elected by the commercial banks that are members.

Answer

Its Chair is appointed for life.

Answer

Its policy decisions must be approved by the Senate.

Question 25

Which item appears on the liability side of a commercial bank's balance sheet?

Accepted Answer

Checking deposits held by the bank's customers

Answer

Loans the bank has made to local businesses

Answer

Reserves the bank holds at the Federal Reserve

Answer

Treasury securities the bank owns

Free DSST Money and Banking Practice Test (2026)

The practice test

Create a free account to see your score and every explanation

How you did on the Money and Banking practice test

By topic

Every question, with the explanation

Ready for the real exam?

More free DSST practice tests 37

Not sure where to start?