Ap Gov Unit 4

A decrease in the supply of money will cause which of the following? A. An increase in nominal interest rates B. An increase in the demand for money C. An increase in investment D. An increase the reserve requirement E. An increase demand deposits

A. An increase in nominal interest rates

If the supply for loanable funds increases, what will happen to real interest rates and investment? Real Interest Rates / Investment A. Decrease / Increase B. Decrease / Decrease C. No change / no change D. Increase / Decrease E. Increase / Increase

A. Decrease / Increase

To eliminate an inflationary (positive) gap, the federal government might A. Increase personal income taxes B. Increase the money supply C. Decrease the federal funds rate D. Buy bonds on the open market E. Lower personal income taxes

A. Increase personal income taxes

Assume the United State has limited reserves in its banking system. To decrease the money supply, the Federal Reserve Bank can do which of the following? A. Sell government bonds B. Decrease the discount rate C. Decrease the required reserve ratio D. Increase taxes E. Increase government spending

A. Sell government bonds

The Federal Reserve can increase the federal funds rate (policy rate) most effectively by A. Selling government bonds B. Buying government bonds C. Increasing the discount rate D. Decreasing the discount rate E. Decreasing the reserve requirement

A. Selling government bonds

Which of the following combined policies is the most effective in decreasing unemployment?' Taxes / Discount Rate / Reserve Requirement A. decrease / decrease / decrease B. decrease / decrease / Increase C. Decrease / Increase / Increase D. Increase / Increase / Decrease E. No change / increase / decrease

A. decrease / decrease / decrease

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 / Unemployment Rate A. increase / decrease / decrease B. increase / decrease / increase C. decrease / decrease / decrease D. decrease / increase / increase E. decrease / increase / decrease

A. increase / decrease / decrease

If banks have high levels of reserves, and aggregate demand is growing faster than long-run aggregate supply, the Federal Reserve is likely to A. increase the interest rate on reserve balances B. increase bond prices C. increase income taxes D. decrease the discount rate E. decrease the required reserve ratio

A. increase the interest rate on reserve balances

Assume the reserve requirement is 20 percent. If a bank initially has no excess reserves and $10,000 cash is deposited, the maximum amount this bank may increase its loans is... A. $2,000 B. $8.000 C. $10,000 D. $20.000 E. $50.000

B. $8.000

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 which this bank may initially increase its loans is A. $20,000 B. $80,000 C. $100.000 D. $200,000 E. $500.000

B. $80,000

Which if the following is described as consumers holding money rather than bonds because they expect the interest rate to increase in the future? A. Transaction demand for money B. Asset demand for money C. A medium of exchange D. Liquidity E. The money multiplier

B. Asset demand for money

The federal funds rate (policy rate) is the interest rate that A. The Federal Reserve Bank charges the federal government on its loans B. Banks charge one another for short-term loans C. Banks charge their best customers D. Equalizes the vield on corporate bonds and municipal bonds E. Is equal to the nominal rate of inflation minus the real rate of inflation

B. Banks charge one another for short-term loans

The Federal Reserve can increase the money supply by A. Buying financial capital from foreign governments B. Buying bonds on the open market C. Selling government bonds on the open market D. Selling foreign currency in the exchange market E. Selling gold on the open market

B. Buying bonds on the open market

All of the following are true regarding money except... A. Money is used as a medium of exchange B. Commodity money is used more than fiat money today C. Inflation erodes money's ability to serve as a store value D. Money measures relative values when it serves as a unit of account E. The money system is more efficient than the barter system

B. Commodity money is used more than fiat money today

Suppose business are fearful that there will be a recession on the near future. Which of the following best describes the impact of this belief on demand for loanable funds and interest rate? Demand for Loanable Funds / Interest Rate A. Decrease / no change B. Decrease / decrease C. Increase / no change D. Increase / decrease E. Increase / Increase

B. Decrease / decrease

Which of the following will most likely occur in an economy if more money is demanded than is supplied? A. The amount of investment spending will increase. B. Interest rates will increase C. The supply of money will decrease D. Deflation E. The aggregate demand will increase

B. Interest rates will 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 the quantity supplied of loanable funds if the government puts a cap (ceiling) on the interest rate? Quantity Demanded / Quantity Supplied A. increase / increase B. increase / decrease C. no change / no change D. decrease / increase E. decrease / decrease

B. increase / decrease

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 A. increase / decrease B. increase / increase C. no change / increase D. decrease / no change E. decrease / increase

B. increase / increase

If required reserves is 10% and that bank receives a new demand (checking account) deposit of $300. Which of the following will most likely occur in the bank's balance sheet? Liabilities / Required Reserves A. Increase by $300 / increase by $270 B. increase by $300/ increase by $30 C. increase by $30 / no change D. Decrease by $300 / decrease by $30 E. Decrease by $30 / decrease by $270

B. increase by $300/ increase by $30

A barter economy is different from a money economy in that a barter economy A. encourages specialization and division of labor B. lack of partial items creates higher cost for each transaction C. eliminates the need for a double coincidence of wants D. has only a few assets that serve as a medium of exchange E. promotes market exchanges

B. lack of partial items creates higher cost for each transaction

Suppose banks have no excess reserves and the reserve requirement is 20%. If Paula deposits $200 she earned for babysitting in the bank, what is the maximum increase in the total money supply? A. $200 B. $400 C. $800 D. $1,000 E. $1,200

C. $800

If, on receiving a checking deposit of $500, a bank's excess reserves increased by $400, the required reserve must be: A. 10% B. 15% C. 20% D. 25% E. 80%

C. 20%

Which of the following is true regarding the balance sheet of a commercial bank? A. Banks sometimes have assets greater than the value of their liabilities. B. Loans given to consumers are considered a liability C. Demand deposits are considered a liability D. Savings accounts are considered an asset E. Loans from the Federal Reserve are considered an asset

C. Demand deposits are considered a liability

Which of the following best explains why the money demand curve is downward sloping? A. High interest rates lead to less investment B. Banks charge higher nominal interest rates on loans when price level increases C. Higher interest rates encourage people to exchange money for other interest-bearing assets D. Households need to hold money for daily transactions E. Households demand less money because of the use of debit cards.

C. Higher interest rates encourage people to exchange money for other interest-bearing assets

Which of the following is true regarding the federal funds rate (policy rate? A. It is the interest rate that the Federal Reserve charges commercial banks B. It is the highest interest rate banks can charge lenders C. It is the interest rate that banks charge each other D. It is the target rate of inflation set by the Federal Reserve E. It is usually higher than the discount rate

C. It is the interest rate that banks charge each other

if the required reserve ratio is 10% and the government sells $2 million in bonds to banks, what will happen to the money supply? A. It will decrease by $2 million B. It will decrease by $10 million C. It will decrease by $20 million D. It will increase by $10 million E. It will increase by $20 million

C. It will decrease by $20 million

If you use money as a store of value, you would be A. Buying a new watch B. Searching the Internet for a deal on a new car C. Putting money into a savings account D. Lending money to friend E. Paying for gas on your credit card

C. Putting money into a savings account

Open market operations refer to which of the following activities? A. The buying and selling of gold in the New York stock Market B. The loans paid by the Fed to member commercial banks C. The buying and selling of government securities (bonds) by the Federal Reserve D. The government's purchases and sales of municipal bonds for K-12 education E. The government's contribution to social security

C. The buying and selling of government securities (bonds) by the Federal Reserve

"A Super Bowl ticket is worth $500." This statement best illustrates money used as a A. lliquid asset B. Liquid asset C. Unit of account D. Medium of exchange E. Store of value

C. Unit of account

If the United States is below full-employment with low inflation, the federal reserve bank is likely to... A. pursue an expansionary monetary policy because it is required to do so by law whenever output is below the full-employment level B. pursue an expansionary fiscal policy because it is required to do so by law whenever output is below the full-employment level C. lower the discount rate to generate an increase in output D. sell bonds on the open market to generate an increase in output E. lower income taxes to generate an increase in output

C. lower the discount rate to generate an increase in output

If the required reserve ratio is 10 percent, actual reserves are $10 million, and currency in circulation is equal to $20 million, M1 will be equal to A. $20 million B. $30 million C. $90 million D. $120 million E. $150 million

D. $120 million

Which of the following is the best example of fractional reserve banking? A. A bank places $300 of deposits in reserve B. A bank borrows $4000 from another commercial bank C. A bank borrows $10,000 from the country's central bank D. A bank lends out $5000 of its excess reserves E. A bank buys $7000 of U.S. Treasuries

D. A bank lends out $5000 of its excess reserves

Which of the following is true for bonds but not for stocks? A. Bonds are the least liquid form of assets. B. Bonds represent partial ownership in a company. C. Bonds earn variable rates of return. D. Bonds earn interest E. Bonds have zero opportunity cost.

D. Bonds earn interest

Which of the following is the best example of the crowding-out effect? A. The government changes laws regulating banks B. The Federal Reserve buys bonds increasing private investment C. Deficit spending leads to a higher national debt D. Deficit spending results in high interest rates that decrease private investment E. Public sector borrowing increases the supply of loanable funds

D. Deficit spending results in high interest rates that decrease private investment

When an economy is at full employment, an expansionary monetary policy will lead to A. Lower interest rates and lower prices B. Lower interest rates and less investment C. Higher interest rates and lower prices D. Higher interest rates and higher prices E. Higher interest rates and lower price levels

D. Higher interest rates and higher prices

Which of the following is an asset for Millikanland Bank? I. Demand deposits (checking accounts) II. Certificates of Deposits (CDs) issued to Millikanland's customers III. Vault cash IV. Money that Millikanland has deposited with the Federal Reserve A. l only B. Il and Ill only C. Ill and IV only D. II, III, and IV only

D. II, III, and IV only

If the Federal Reserve raises the discount rate, how are interest rates and real GDP affected? Interest Rates / Real GDP A. Decrease / Decrease B. Increase / Increase C. Decrease / Increase D. Increase / Decrease E. Decrease / No change

D. Increase / Decrease

If the Federal Reserve Bank institutes a policy to reduce inflation, which of the following is most likely to increase? A. Tax rates B. Investment C. Government deficits D. Interest rates E. Real GDP

D. Interest rates

Which of the following is true regarding the central bank's use of open market operations? A. Open market operations always result in inflation B. Decreasing the discount rate will increase the money supply C. Investment will increase when the central bank sells bonds D. Interest rates will decrease when the central bank buys bonds E. Aggregate demand will decrease when the central bank buys bonds

D. Interest rates will decrease when the central bank buys bonds

The Federal Reserve can change the US money supply by changing... A. Gold in circulation B. The tax rate C. The velocity of money D. The discount interest rate E. The price level

D. The discount interest rate

Which if the following is true for the money market graph? A. The demand for money is vertical because of autonomous spending B. The supply of money is downward sloping C. There is no relationship between the nominal interest rate and the quantity of money demanded in the long-run D. There is an inverse relationship between the nominal interest rate and the quantity of money demanded E. An increase in the nominal interest rate will shift the money supply to the right

D. There is an inverse relationship between the nominal interest rate and the quantity of money demanded

The price of every item in a supermarket is expressed as the number of dollars needed to buy that item. This describes which function of money? A. Store of value B. Medium of exchange C. Means of payment D. Unit of account E. Store of wealth

D. Unit of account

Assume that the nominal interest rate that a bank charged is 7% and the expected inflation rate was 5%. If the actual inflation rate turned out to be 11%, what is the expected real interest rate and the actual real interest rate? Expected / Actual A. -2% /4% B. 2%/6% C. 12%/-6% D. -2%/-6% E. 2%/ -4%

E. 2%/ -4%

Banks may not be able to create the maximum amount of money from a new deposit as a result of A. Government banking regulation B. Increased demand for investment C. Decrease in required reserve ratio D. The banks can only make a set number of loans E. Individuals holding a larger portion of their assets as cash

E. Individuals holding a larger portion of their assets as cash

Fractional reserve banking means that banks are required to A. Charge the same interest rate on all their loans B. Expand the money supply when requested by the central bank C. Insure their deposits against losses and bank runs D. Pay a fraction of their interest income in taxes E. Keep part of their demand deposits as reserves

E. Keep part of their demand deposits as reserves

Fred Garcia withdraws $1.000 in cash from their savings account. What immediate effect does this have on monetary aggregate measures M1 and M2? A. M1 increase, M2 decrease B. M1 increase, M2 no change C. M1 decrease, M2 no change D. M1 no change, M2 decrease E. M1 no change, M2 no change

E. M1 no change, M2 no change

Which of the following is NOT part of M1? A. Savings accounts B. Checking accounts C. Coins D. Currency E. Money market accounts

E. Money market accounts

Which of the following is an appropriate monetary policy used by a central bank to reduce inflation? A. Decreasing government expenditures B. Increasing consumer income taxes C. Decreasing the reserve requirement D. Decreasing the discount rate E. Selling government bonds

E. Selling government bonds

If the Federal Reserve conducts an open market purchase of bonds, we can expect which of the following to occur in the short-run? A. Aggregate supply to shift left B. Aggregate supply to shift right C. The long-run aggregate supply will shift to the right D. There will be a movement to the right along the demand curve E. The money supply will shift to the right

E. The money supply will shift to the right

If the supply of money doesn't change, if the demand for money decreases, the equilibrium interest rate and quantity of money will change in which of the following ways? Interest Rate / Quantity of Money A. Increase / decrease B. increase / no change C. decrease / decrease D. decrease / increase E. decrease / no change

E. decrease / no change