AP Econ Unit 5 Test
If the annual interest rate is 5%, then the present value of 1.00 received one year from now is closest to
$0.95
Suppose that the federal reserve buys $400 billion worth of government securities from the public. If the required reserve ratio is 20 percent, the maximum increase in the money supply is
$2,000 billion
A bank has $800 million in demand deposits and $100 million in reserves. If the reserve requirement is 10 percent, the bank's excess reserves equal
$20 million
If the reserve requirement is 20 percent, the existence of $100 worth of excess reserves in the banking system can lead to a maximum increase in the money supply equal to
$500
Assume the required reserve ratio is .2. If a bank initially has no excess reserves and $100,000 cash is deposited in the bank, the maximum amount by the bank may increase its loans is
$80,000
Suppose that all banks hold no excess reserves and the reserve requirement is 20%. If Paula deposits $200 she earned babysitting in the bank, what is the maximum increase in the total money supply?
$800
Assume that the required reserve ratio is 10 percent, banks keep no excess reserves, and borrowers deposit all loans made by banks. Suppose you have saved 100 cash at home and decide to deposit it in your checking account. As a result of your deposit, the money supply can increase by a maximum of
$900
Suppose that all banks keep only the minimum reserves required by law and that there are no currency drains. The legal reserve requirement is 10 percent. If Maggie deposits the $100 bill she received from her grandmother into her checking account, the maximum increase in the total money supply will be
$900
Buying bonds
- increase money supply - decrease interest rates - increase bond prices
Selling bonds
- increase nominal interest rates - decrease money supply - decrease bond prices
If the required reserve ratio is 10 percent, actual reserves are $10 million, and currency in circulation is equal to $20 million, M one will at most be equal to
120 million
If on receiving a checking deposit of $300 a bank's excess reserves increased by $255, the required reserve ratio must be
15%
A commercial bank is facing the conditions given above. If the reserve requirement is 12 percent and the bank does not sell any of its securities, the maximum amount of additional lending this bank can undertake is
3,000 = 15,000 - 100,000(.12) 3,000 = 15,000 - 12,000 C) 3,000
Assume that the nominal interest rate that a bank charged was 7% and the expected inflation rate was 5%. If the actual inflation was 11%, what is the expected real interest rate vs. the actual interest rate?
7-5 = 2% {expected} 7-11 = -4% {actual} a. 2%, -4%
Assume that the reserve requirement is 20 percent. If a bank initially has no excess reserves and $10,000 cash is deposited in the bank, the maximum amount by which this bank may increase its loans is
8,000
When a central bank sells securities in the open market, which of the following set of events is most likely to follow?
A decrease in the money supply, an increase in interest rates, and a decrease in aggregate demand
Which of the following undermines the ability of a nation's currency to store value?
A decrease in the purchasing power of the currency
Which of the following is NOT a function of fiat money?
A source of intrinsic value
According to the Keynesian model, which of the following would increase aggregate demand?
An increase in autonomous investment
During a mild recession, if policymakers want to reduce unemployment by increasing investment, which of the following policies would be most appropriate?
An increase in government expenditure only
If the velocity of money is stable, the quantity theory of money predicts that an increase in the money supply will lead to a proportional
An increase in the nominal output
Suppose that the government decreases taxes at the same time the central bank decreases the discount rate. The combined actions will result in
An increase in the real gross domestic product and an indeterminate change in the interest rate
Which of the following will lead to a decrease in a nation's money supply?
An increase in the reserve requirements
Which of the following will most likely cause the United States economy to fall into a recession
An open market sale by the Federal Reserve
Assume that the economy is in equilibrium. If aggregate demand increases, nominal interest rates and bond prices will most likely change in which of the following ways?
B) Nominal interest rates = increase Bond prices = decreases
Based on the balance sheet above for three different banks, which of the following is true, if the reserve requirement is 10%?
Bank b can increase its loans by $40
If the public's desire to hold money increases, what will the impact be on the banking system?
Banks would be less able to expand credit
In the short run, which of the following would occur to bond prices and interest rates if a central bank bought bonds through open-market operations?
Bond prices / interest rates Increase / decrease
If the federal reserve lowers the reserve requirement, which of the following would most likely occur?
Businesses will purchase more factories and equipment
Which of the following constitutes the largest component of the United States money supply?
Checkable deposits (demand deposits)
One way in which the Federal Reserve works to change the United States money supply is by changing the
Discount rate
If an economy is operating at full employment and there is a substantial increase in the money supply, the quantity theory of money predicts an increase in
E) the price level
Which of the following is an asset for the ACDC bank?
E. II, III, and IV only Certificates of Deposits Vault cash Money that ACDC has deposited with the Federal ReserveIf a central bank singi
Suppose that the fed is committed to keeping the nominal interest rate fixed. To maintain the interest rate target in the face of an expansionary fiscal policy, the fed can do which of the following?
Engage in open-market operations
When nominal interest rate is up, bond prices
Go down
All of the following are components of the money supply except
Gold bullions
Under which of the following conditions would a restrictive monetary policy be the most appropriate
High inflation
If the supply for loanable funds increases, what will happen to the real interest rates and investments?
IR / Investment Decrease / Increase
If the money stock decreases but nominal gross domestic product remains constant, which of the following has occurred?
Income velocity of money has increased
If the federal reserve wishes to use monetary policy to reinforce congress' fiscal policy changes, it should
Increase the money supply when government spending is increased
If the federal policy institutes a policy to reduce inflation, which of the following is most likely to increase?
Interest rates
When the federal reserve buys government securities on the open market, which of the following is likely to decrease in the short run?
Interest rates
Expansionary monetary policy will most likely cause interest rates and investment to change in which of the following ways in the short run?
Interest rates - decrease Investment - increase
Under which of the following circumstances would increase the money supply be most effective in increasing real domestic gross product
Interest rates Employment Business optimism b) High Less than full High
Which of the following is most likely to occur when the fed buys government bonds on the open market?
Interest rates decrease
Which of the following will most likely occur in an economy if more money is demanded than supplied?
Interest rates will increase
Assume that the reserve requirement is 15 percent and that a bank receives a new checking deposit of $200. Which of the following will most likely occur in the bank's balance sheet?
Liabilities - increase by $200 Required reserves - increase by $15
In the Keynesian model, an expansionary monetary policy will lead to
Lower real interest rates and more investment
The transaction demand for money is very closely associated with money's use as a
Medium of exchange
An open market purchase of bonds by the Fed will most likely change the money supply, the interest rate, and the unemployment rate in which of the following ways?
Money supply / Interest rate / UE Increase Decrease Decrease
An increase in inflationary expectations will most likely affect nominal interest rates and bond prices in which of the following ways in the short run?
Nominal Interest Rates: Increase Bond Prices: Decrease
With an upward-sloping aggregate supply curve, an increase in the money supply will affect the price level and real gross domestic product (GDP) in the short run in which of the following ways?
Price level / GDP D) increase / increase
IN the short run, an expansionary monetary policy would most likely result in which of the following changes in the price level and real gross domestic product (GDP)?
Price level / GDP increase / increase
Assume that a perfectly competitive financial market for loanable funds is in equilibrium. Which of the following is most likely to occur to the quantity demanded and quantity supplied of loanable funds if the government puts a cap/ceiling on the interest rate?
Q demanded / Q supplied increase / decrease
An increase in the money supply is likely to have which of the following short run effects on real interest rates and real output
Real interest rates. Real output B) decrease. Increase
The federal reserve can cause an increase in interest rates in an attempt to
Reduce inflation
Which of the following is a determinant in the amount of money the commercial banking system can create?
The reserve requirement
Policies intended to reduce demand-pull inflation are most likely to increase which of the following in the short run?
Unemployment
Which of the following is the best example of fractional reserve banking?
a bank lends out $5000 of its excess reserves
Which of the following will cause an increase in aggregate demand?
a decrease in income taxes
Which of the following policies, if appropriately sized, would provide expansion during a recession with the smallest change of interest rates?
a decrease in taxes and an open-market purchase of government securities by the central bank
The graph above shows two aggregate demand curves, AD1 and AD2, and an aggregate supply curve, AS. The shift in the aggregate demand curve from AD1 to AD2 could be caused by
a decrease in the money supply
A decrease in the supply of money will cause which of the following?
a decrease in the nominal interest rates
Which of the following undermines the ability of a nation's currency to store value?
a decrease in the purchasing power of the currency
A commercial bank's ability to create money depends on which of the following
a fractional reserve banking system
Which of the following could cause simultaneous increases in inflation and unemployment
an increase in inflationary expectations
An increase in the price level will most likely cause which of the following?
an increase in the demand for money
An inflationary gap could be reduced by
an increase in the income tax rate
All of the following changes will shift the investment demand curve to the right EXCEPT
an increase in the real interest rate
Which of the following will lower the prices of a country's outstanding government bonds?
an outflow of financial capital to other countries
The federal funds rate is the rate that
banks charge one another for short-term loans
The federal reserve decreases the federal funds rate by
buying government bonds on the open market
If nominal GDP in a country is 1,600 and the money supply is 400, what is the velocity of money?
c) 4
All of the following are true of money except
commodity money is used more than fiat money today
Of the following, the most liquid asset is
currency
In the long-run an increase in aggregate demand due to an expansion in the money supply will increase
d. nominal output and the price level
Assume that the required reserve for demand deposits is 20 percent, that banks hold no excess reserves, and that the public holds no currency. If the central bank sells $10,000 worth of government securities to commercial banks, the total money supply will
decrease by 50,000
If the reserve requirement is 10 percent and the central bank sells 10,000 in government bonds on the open market, the money supply will
decrease by a maximum of 1000,000
Suppose businesses are fearful that there will be a recession on the near future. Which of the following best describes the impact of this belief on the demand for loanable funds and interest rates?
demand / interest rates decrease / decrease
Which of the following is true regarding the balance sheet of a commercial bank?
demand deposits are considered a liability
If businesses predict that the economy will improve and sales will increase in the future, which of the following will occur in the loanable funds market
demand for loans / real interest rate b. increase increase
An increase in government spending will affect the demand for money and the nominal interest rates in which of the following ways?
demand for money / nominal interest rate a. increase increase
The Federal Reserve can change the U.S. money supply by changing
discount rate
For which of the following sets of unemployment and inflation rates will a central bank be most reluctant at to increase the rate of growth in the money supply
e) 5%/10%
Which of the following best explains why the money demand curve is downward sloping?
higher interest rates encourage people to exchange money for other interest-bearing assets
Assume that the public holds part of its money in cash and the rest in checking accounts. If the central bank lowers the reserve requirement from 16 percent to 8 percent, the money supply will
increase by less than double
If the economy is in a severe recession, which of the following policy actions is most appropriate?
increasing both the money and government spending
Banks may not be able to create the maximum amount of money from a new deposit as a result of
individuals holding a larger portion of their assets as cash
If the Fed institutes a policy to reduce inflation, which of the following is most likely to increase?
interest rates
Which of the following is most likely to increase if the public decides to increase its holdings of currency
interest rates
If the Federal Reserve raises the discount rate, how are interests rates and real GDP affected?
interest rates / real gdp increase / decrease
Which of the following is true regarding the central bank's use of open market operations?
interest rates will decrease when the central bank buys bonds
Which of the following will most likely occur in an economy if more money is demanded than supplied?
interest rates will increase
A barter economy is different from a money economy in that a barter economy
involves higher costs for each transaction
Which of the following is true regarding the opportunity cost of holding cash?
it increases as the interest rate rises
The required reserve ratio is 10% and the central bank sells $2 million in bonds to banks. If banks loan out all their excess reserves and there are no leakages, what will happen to the money supply?
it will decrease by $20 million
Fractional reserve banking means that banks are required to
keep part of their demand deposits as reserves
When an economy is at full employment, an expansionary monetary policy would lead to
lower interest rates and more investment
If a country's economy is operating below the full-employment level at output at a very low inflation rate, the central bank of the country is most likely to
lower the discount rate and buy bonds on the open market to generate an increase in output
If the central bank raises the required reserve ratio, the money multiplier and the money supply will change in which of the following ways?
money multiplier / money supply e. decrease decrease
A contraction in the money supply will most likely change the nominal interest rate and aggregate demand in which of the following ways in the short-run?
nominal interest rate / aggregate demand a. increase decrease
In the narrowest definition of money, M1, savings accounts are excluded because they are
not a medium of exchange
The money-creating ability of the banking system will be less than the maximum amount indicated by the money multiplier when
people hold a portion of their money in the form of currency
If you use money as a store of value, you would be
putting money into a savings account
The Federal Reserve can cause an increase in interest rates in an attempt to
reduce inflation
If a central bank significantly increases its sales of government bonds, it is most likely responding to which of the following?
rising price levels
Which of the following is not apart of M1?
savings deposits
If aggregate demand is growing faster than long run aggregate supply, the Federal Reserve is most likely to
sell securities on the open market
The Federal Reserve can increase the federal funds rate most effectively by
selling government bonds
Which of the following is an appropriate monetary policy used by a central bank to reduce inflation?
selling government securities
When consumers hold money rather than bonds because they expect the interest rate to increase in the future, they are holding money for what purposes?
speculation
The demand for money increases when national income increases because
spending on goods and services increases
Which of the following combined policies is most effective in decreasing unemployment?
taxes = decrease discount rate = decrease reserve requirement = decrease
According to both monetarists and Keynesian, which of the following happens when the federal reserve reduces the discount rate?
the demand for money increases and market interest rates increase
The real value of the United States dollar is determined by
the goods and services it will buy
Last year both a borrower and a lender expected an inflation rate of 3 percent when they signed a long-term loan agreement with fixed nominal interest rates of 5 percent. If the actual inflation rate were lower than expected, then which of the following would be true?
the lender would benefit
If the velocity of money is constant and the aggregate supply curve is vertical, a doubling of the money supply would most likely result in a doubling of
the price level
Which of the following is true for the money market graph?
there is an inverse relationship between the nominal interest rate and the quantity of money demanded
If the Federal Reserve conducts an open market purchase of bonds, we can expect which of the following to occur in the short run?
there will be a movement to the left along the short-run Phillips curve
The money demanded for the purpose of purchasing goods and services is known as
transactions demand
The price of a Super Bowl ticket is $500. This statement illustrates money as a
unit of account
When government spending cause an increase in real interest rates, gross private domestic investment
will experience crowding out