AP Macroeconomics Remote Learning Week 5

For a commodity or token to be money it must

be accepted in exchange for all other goods and services.

A country initially has an equilibrium real interest rate of 4 percent and an equilibrium quantity of investment of $2 trillion. The government's budget deficit then increases. According to the crowding-out effect, the

demand for loanable funds curve shifts rightward, the real interest rate rises, and investment decreases.

The interest rate the Federal Reserve charges a bank when it borrows reserves from the Fed is called the

discount rate.

When Maria deposits $100 in currency in her checkable deposit at Bank of America, the immediate effect is that the quantity of M1 ________ because ________.

does not change; both currency and checkable deposits are included in M1

The required reserve ratio is 10 percent and Charlie deposits $3,000 in her checking account. The bank must

increase reserves by $300.

When the Fed buys securities from the public, banks' reserves ________ and the quantity of money ________.

increase; increases

The largest category of commercial banks' assets is

loans.

Banks create money by

making loans

Banks earn a profit by

making loans at a higher interest rate than the rates that they offer on their deposits.

Money serves as a

medium of exchange, unit of account, and store of value.

The required reserve ratio is 20 percent and banks have no excess reserves. Katie deposits $300 in her bank. What are the bank's excess reserves immediately after Katie makes her deposit?

$240

The figure above shows the loanable funds market. At an interest rate of

8 percent, there is a surplus of loanable funds.

Which of the following is true about the national debt of the United States?

It is the accumulation of past and current budget deficits and surpluses.

M2 equals

M1 plus savings deposits, small time deposits, and money market fund deposits.

________ reflects a use of loanable funds, while ________ reflects a supply of loanable funds.

The government budget deficit; private saving.

In the figure above, the leftward shift from the demand for loanable funds curve DLF1 to the demand for loanable funds curve DLF3, could be the result of

a decrease in expected profit.

The economy is at the equilibrium shown as point a in the above figure. To restore the economy to potential GDP, the Fed should

buy government securities and thereby increase aggregate demand.

In an open market purchase, the Fed ________ government securities, which ________ bank reserves and ________ the federal funds rate.

buys; increases; lowers

Which of the following is NOT held as an asset by banks?

checkable deposits

If the Fed increases the discount rate,

commercial banks pay a higher interest rate if they borrow from the Fed.

When the Fed sells government securities, banks' reserves ________, the quantity of money ________, and the federal funds rate ________.

decrease; decreases; rises

The interest rate banks charge each other on loans of reserves is called the

federal funds rate.

When Dale buys a new computer for $1,000 using a credit card,

he is taking out a loan for $1,000.

The supply of loanable funds is from

households and the government if it has a budget surplus.

A government budget surplus ________ the total supply of loanable funds and ________ the real interest rate.

increases; lowers

An increase in government deficit spending can crowd out private investment by

increasing the real interest rate

Assume that a nation's real gross domestic product (GDP) grows at a higher rate than its population over a given period of time. It can be concluded that

real GDP per capita has increased

The Fed's policy tools include

required reserve ratios, the discount rate, open market operations, and extraordinary crisis measures.

Required reserve ratios are the minimum amount of

reserves any one bank must hold as a percentage of its deposits.

When the Fed fears inflation, the Fed ________ government securities, so that the federal funds rate ________ and the quantity of money ________.

sells; rises; decreases

The amount of loans that a bank can create is limited by

the bank's excess reserves.

Fiat money means

the government has decreed that something is money.

In the short run, when the Fed raises the federal funds rate,

the real interest rate temporarily increases, thereby decreasing investment and consumption expenditure.

The demand for loanable funds curve shows the relationship between the quantity of loanable funds demanded and

the real interest rate.

The opportunity cost of the financial resources used to finance the purchase of capital is

the real interest rate.

Checkable deposits are money because

they can be converted into currency on demand and are used directly as a means of payment.