AP Macro Units 3-4
What is the maximum amount of new loans the bank could lend with the given amounts of reserves?
$10,000
Suppose the required reserve ratio is 20% and a single bank with no excess reserves receives a $100 deposit from a new customer. The bank now has excess reserves equal to
$80
A commercial bank keeps no excess reserves and the reserve requirement is 10%. If a new customer deposits $10,000, what is the maximum change in the money supply
$90,000
Assume that the marginal propensity to consume is 0.90. As a result of an increase in the tax rates, the government collects an additional $20 million. What will be the impact in gross domestic product?
1/1-.9 = 10 10-1 = 9 20*9 = 180 GDP will decrease by a maximum of $180 million
If the marginal propensity to consume is 0.75, then a $100 increase in investment will result in a maximum increase in equilibrium real gross domestic product of
1/1-0.75 = 1/.25 = 4 100*4 = 400 $400
Supposed that the economy is in the midst of a recession and government policy makers want to increase aggregate demand by $600 billion. If the economy's marginal propensity to consume is 0.75 and there is no crowding out, the government should do which of the following?
1/1-0.75 = 1/0.25 = 4 600/4 = 150 Increase spending by $150 billion
What is the money multiplier?
5
Assume that the nominal interest rate is 10%. If the expected inflation rate is 5%, the real interest rate is
5%
Which of the following will most likely result from a decrease in government spending?
A decrease in aggregate demand
Which of the following combinations of policies is designed to decrease inflation?
A decrease in government spending and an open market sale of government
Which of the following will cause an increase in aggregate demand?
A decrease in income taxes
An increase in the price of oil, an important input to production, will result in which of the following in the short run?
A decrease in short-run aggregate supply
Which of the following will cause a rightward shift of the short-run aggregate supply curve?
A decrease in the costs of production
The required reserve ratio is 0,2 and the central bank SELLS $1 million in securities. Assuming the banking system has limited reserves and banks do not hold excess reserves, which of the following is the maximum change in the money supply?
A decrease of $5 million
Which of the following is a reason why the aggregate demand curve is downward sloping?
A higher price level decreases real wealth.
Assume that the economy is at full-employment equilibrium. Which of the following would lead to stagflation?
A leftward shift of the short-run aggregate supply curve only
A high marginal propensity to consume implies which of the following?
A low marginal propensity to save
Which of the following is NOT a function of fiat money?
A source of intrinsic value
If AD and AS represent aggregate demand and aggregate supply curves, respectively, and the arrows indicate the movement of the curves, which of the following graphs best illustrates long-run economic growth?
AS 1 shifts to the right (Graph D)
Assume the marginal propensity to consume is 0.8. How will a decrease in taxes of $100 billion and a decrease in government spending of $100 billion affect aggregate demand?
Aggregate demand will decrease by $100 billion.
Suppose that from 1985 to 1986, unemployment fell from 7.2 to 7.0 percent and inflation fell from 3.8 to 1.1 percent. An explanation of these changes might be that
Aggregate supply curve shifted to the right
Which of the following changes will necessarily cause inflation
An increase in aggregate demand and a decrease in short-run aggregate supply.
Which of the following will result in a rightward shift of the aggregate demand curve?
An increase in exports
Which of the following will cause a movement from point X to point Y along the short-run Phillips curve that is shown in the graph above?
An increase in government spending
The movement from point g to h is best described as which of the following? (g moving up to h, upward sloping)
An increase in real output due to an increase in price level
An economy is in long-run macroeconomic equilibrium. What will be the short-run effects of an increase in investment spending?
An increase in real output, a decrease in unemployment, and an increase in the price level
Which of the following will lead to a decrease in the nation's money supply?
An increase in reserve requirements
Which of the following policy combinations could reduce a government deficit without changing aggregate demand?
An increase in taxes and an increase in the money supply
An inflationary gap could be reduced by
An increase in the income tax rate
Given the graph of the short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS) curves above, which of the following is true?
At point X, the economy is experiencing a recessionary gap
The federal funds rate is the interest rate that
Banks charge one another for short-term loans
If the Federal Reserve lowers its administered interest rates, which of the following would most likely occur?
Businesses will purchase more factories and equipment
In a country whose banking system has limited reserves, which of the following actions by the central bank increases the money supply?
Buying government bonds on the open market
Open market operations take place when the
Central bank buys or sells government bonds
Under which of the following conditions would consumer spending most likely increase?
Consumers' wealth is increased by changes in the stock market.
If a nation's government cuts income taxes, how will consumption spending, real output, and unemployment change in the short run?
Consumption spending will increase, real output will increase, and unemployment will decrease
Which of the following is considered the most liquid asset?
Currency
The amount of money that the public wants to hold in the form of cash will
Decrease if interest rates increase
An increase in the demand for lonable funds could best be explained by which of the following?
Firms are optimistic about the future performance of the country's economy
All of the following are components of the money supply in the United States EXCEPT
Gold
A country's government runs a budget deficit when which if the following occurs in a given year?
Government spending exceeds tax revenues
If the economy is in a severe recession, which of the following is the fiscal policy most effective in stimulating production?
Government spending increases
Crowding out due to government borrowing occurs when
Higher interest rates decrease private sector investments
A country's economy is in equilibrium at point H. Which of the following policies would be most effective to reduce the price level in the short run?
Increasing interest on reserves
If an economy is in long-run equilibrium, which of the following combinations of policy actions will result in inflation?
Increasing the money supply and increasing government spending
According to the short-run Phillips curve, there is a trade-off between
Inflation and unemployment
Expansionary monetary policy will most likely cause interest rates and investments to change in which of the following ways in the short run?
Interest Rates: Decrease Investment: Increase
If the Federal Reserve institutes a policy to reduce inflation, which of the following is most likely to increse?
Interest rates
Assuming a bank system with limited reserves, which of the following is most likely to occur when the central bank buys government bonds on the open market?
Interest rates will decrease
Which of the following statements best describes the concept of an automatic stabilizer?
It is nondiscretionary fiscal policy that mitigates business cycles by increasing aggregate demand during recessions and decreasing aggregate demand during expansions
Which of the following is true of the long-run Phillips curve?
It is vertical at the natural rate of unemployment
On a short-run Phillips curve, high rates of inflation coincide with
Low unemployment rates
Which of the following is a monetary policy that can be used to counteract a recession?
Lowering the interest rate paid on reserves
If the price level is $20, output is $80, and the money supply is $400, what is the velocity of money?
M x V = P x Y 400 x V = 80 x20 V = 4
The transaction demand for money is very closely associated with money's used as a
Medium of exchange
Assuming a banking system with limited reserves, which of the following sets of events is most likely to follow when a central bank sells securities in the open market?
Money Supply: Decrease Interest Rates: Increase Aggregate Demand: Decrease
In the short run, cost-push inflation can be caused by
Negative supply shocks
Assume that Linda deposits in her checking account the $1,000 cash she was keeping at home for an emergency. If the required reserve ratio is 0.20, what is the immediate change in the money supply from her deposit?
No change
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?
Nominal Interest Rates: Increase Bond Prices: Decrease
Given a constant velocity of money, in the short run a 5% increase in the money supply will translate to a 5% increase in
Nominal gross domestic product
An economy is currently in short-run equilibrium, and real output is below the full-employment level of output. Which of the following market adjustments is most likely to occur in the long run?
Nominal wages will fall, shifting the short-run aggregate supply curve to the right
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: Increase Real GDP: Increase
An increase in the money supply will affect the price level and real gross domestic product (GDP) in which of the following ways in the long run?
Price Level: Increase Real GDP: No change
Which of the following is an example of an automatic stabilizer?
Progressive income taxes
Based on the diagram above, what effect will an increase in the world supply of oil have in real gross domestic product and price level?
Real GDP: Increase Price Level: Decrease
The loanable funds market is best described as bringing together
Savers and borrowers
An increase in the marginal propensity to consume causes an increase in which of the following?
Spending multiplier
Which of the following describes a major difference between stocks and bonds?
Stocks represent ownership in a corporation, and bonds represent a loan to a corporation
Which of the following combinations of economic polices would be most effective to correct a severe recession
Taxes: Decrease Money Supply: Increase
When purchasing her house, Ms. Jones took out a 15-year mortgage loan from a local bank at a fixed interest rate of 7%. The rate of expected inflation at the time was 3%. If the actual rate of inflation was 4.5%, which of the following is true?
The bank lost because the real rate of interest decreased by 1.5%
Which of the following will most likely result in a lower real interest rate in a nation?
The citizens of the nation increase their savings for retirement
Based on the diagram above, which of the following describes the short-run equilibrium?
The economy is operating above full employment
The real value of the United States dollar is determined by
The goods and services it will buy
The shifting of a country's production possibilities curve to the right will most likely cause
The long-run aggregate supply curve to shift to the right
Which of the following will happen when interest rates increase in the economy?
The opportunity costs of holding money will increase
The national debt is equal to which of the following?
The sum of all past government budget deficits and surpluses
An unanticipated decrease in aggregate demand will most likely cause the unemployment rate and the inflation rate to change in which of the following ways?
Unemployment Rate: Increase Inflation Rate: Decrease
An increase in which of the following would cause an increase in aggregate supply?
labor productivity