unit 4 practice set AP ECON

Assuming a banking system with limited reserves, which of the following set of events is most likely to follow when a central bank sells securities in the open market?

A decrease in the money supply, an increase in interest rates, and a decrease in aggregate demand

When an economy is operating below the full-employment level of output, an appropriate monetary policy would be to decrease which of the following?

Administered interest rates

An increase in the equilibrium nominal interest rate could be caused by which of the following changes?

An increase in real income

Expansionary monetary policy can affect the economy through which of the following chains of events

Decreasing the administered interest rates lowers nominal interest rates, which increases investment

Which of the following accurately describes the difference between how open market operations are used in a banking system with limited reserves compared to a banking system with ample reserves?

In a banking system with limited reserves, open market operations are used to indirectly influence the nominal interest rate by changing the money supply, whereas in a banking system with ample reserves, open market operations are used to maintain sufficient reserves.

Which of the following sequences of events would occur if the Federal Reserve implemented contractionary monetary policy?

Interest rates increase, investment and consumption spending decrease, aggregate demand decreases, and output and prices decrease.

Assuming a banking 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 is true of the quantity of money demanded?

It falls when interest rates rise, because the opportunity cost of holding money increases.

Assuming a banking system with limited reserves, which of the following is a monetary policy action a central bank would implement to control inflation?

Sell government bonds to the public

If an economy is operating with significant unemployment, a decrease in which of the following will most likely cause employment to increase and the interest rate to decrease?

The central bank's administered interest rates

Assume a country's banking system has limited reserves. If the central bank buys government bonds from individuals on the open market and banks do not loan out any excess reserves created by the open market purchase, which of the following will happen?

The money supply will increase.

The amount of money that the public wants to hold is $10 billion. With a monetary base of $2 billion and a money multiplier of 4, which of the following will most likely occur?

The nominal interest rate will increase

Which of the following changes will necessarily occur as a result of an increase in the nominal interest rate?

The quantity of money demanded will decrease.

In the short run, an increase in the policy rate will cause...

a leftward shift in the aggregate demand curve

Assume a country's banking system has limited reserves. To counteract a recession, the central bank should...

buy securities on the open market and lower the discount rate

Assume a country's banking system has limited reserves. 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 $100,000

An increase in government spending will affect the demand for money and nominal interest rates in which of the following ways?

demand for money increases, and nominal interest rates increase

If a country's economy is operating below the full-employment level of output at a very low inflation rate, the central bank of the country is most likely to...

lower administered interest rates to generate an increase in output

When a central bank conducts open-market bond sales in a banking system with limited reserves, the money supply, interest rate, and aggregate demand will change in which of the following ways in the short run?

money supply decreases, interest rates increase, and aggregate demand decreases

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

The money demand curve is downward sloping because

people hold less money as the opportunity cost of holding money rises