I briefly mentioned categories earlier, but because I didn't have any way to show you what they did, I decided to wait to talk about them until we had some questions to work with. There are four default categories: System, Miscellaneous, Course, and Activity. The categories act like folders or directories, allowing the questions to be accessed at different levels or hierarchies. They are set up in what are known as contexts. Each context has its own question hierarchies, with the highest context being the Core System, moving down to Course Category, Course, and Activity. What this means is that you can select the context in which you can share your questions. By selecting the System option from the menu, any questions that have been created at this level will be available in all courses and for any quiz you have created on the site.
The next level below System to store questions is Miscellaneous, like the Course Category. This category is where all the courses you are enrolled in are found.
The questions placed in this context are available to all courses and activities in the Course Category.
This is where questions directly related to the course the quiz is being made for are stored.
Course is the default, and most Moodle users find this is a good place for their questions. Placing the items here allows you to create items specific to the course, based on exactly what was covered. It will also only use the questions developed in the course to draw on for random questions. You can also make a subcategory for questions you'd like to draw from. As long as questions are in one category, they can end up in a quiz that randomly draws questions from that category. Creating subcategories for different units in the course makes it easy to keep track of exactly which questions were used. It also helps in organization and administration of courses.
The drawback is that the questions are only able to be used in the course. So, looking at the previous graph, the Question bank in Course B would not be able to use anything from Course A. This does not mean we can't ever use them again; we will just need to export them to wherever we want to use them. We'll look at this activity later.
Creating items in the quiz Activity itself is also possible. This means that questions being created will only be available for the specific test being made.
The benefit to this is that you are assured that the questions are not available anywhere else, so, for example, if you want your test's questions to be completely isolated and unable to be used as random items in other formative or summative tests, this area would be a good place to place all the items.
The only real drawback is that the questions you spent all that time working on are limited to a single activity, a single exam.
I don't have the space here to go into how to use categories and contexts, but it isn't too hard to figure out. For a detailed and complete overview of how to create and use categories or contexts, check out these links: http://docs.moodle.org/en/Question_categories and http://docs.moodle.org/en/Question_contexts.