AP ECON UNIT 4 TEST
Which of the following most undermines the ability of a nation's currency to store value? A A decrease in the purchasing power of the currency B The use of credit and debit cards as mediums of exchange C An increase in the prices of federal bonds D Appreciation of the currency in the international money market E An increase in the supply of foreign currencies in the international money market
A A decrease in the purchasing power of the currency
Which of the following will increase the supply of loanable funds? A An increase in household saving B An increase in open market sales by the central bank C An increase in government spending D An increase in transfer payments E An increase in investment demand
A An increase in household saving
Which of the following will cause an increase in the equilibrium real interest rate? A An increase in investment demand B An increase in national saving C An increase in the government budget surplus D A decrease in the government budget deficit E The purchase of government bonds by the central bank
A An increase in investment demand
Which of the following shifts the money demand curve to the right? A An increase in the price level B A decrease in the price level C An increase in interest rates D A decrease in interest rates E A decrease in the nominal gross domestic product
A An increase in the price level
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? A Nominal Interest RateAggregate DemandIncreaseDecrease B Nominal Interest RateAggregate DemandIncreaseIncrease C Nominal Interest RateAggregate DemandIncreaseNot change D Nominal Interest RateAggregate DemandDecreaseDecrease E Nominal Interest RateAggregate DemandDecreaseIncrease
A Nominal Interest RateAggregate DemandIncreaseDecrease
To decrease the money supply, a country's central 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.
Which of the following describes a major difference between stocks and bonds? A Stocks represent ownership in a corporation, and bonds represent a loan to a corporation. B Bonds represent ownership in a corporation, and stocks represent a loan to a corporation. C Stocks are counted in gross domestic product, and bonds are not counted. D Bonds are counted in gross domestic product, and stocks are not counted. E Bonds pay dividends, and stocks earn interest.
A Stocks represent ownership in a corporation, and bonds represent a loan to a corporation.
Which of the following policy actions will directly increase the money supply? A The central bank purchases government bonds on the open market. B The central bank sells government bonds on the open market. C The government increases taxes without changing its spending. D The government decreases taxes without changing its spending. E The government decreases taxes while simultaneously decreasing its spending.
A The central bank purchases government bonds on the open market.
Which of the following statements about inflation is true? A The expected inflation rate is the difference between nominal and real interest rates. B Low expected inflation rates lead to high inflation rates. C Lenders lose from expected inflation. D Lenders gain from unexpected inflation. E Workers lose from expected inflation.
A The expected inflation rate is the difference between nominal and real interest rates.
In the narrowest definition of money, M1, savings accounts are excluded because they are A not a medium of exchange B not insured by federal deposit insurance C available from financial institutions other than banks D a store of purchasing power E interest-paying accounts
A not a medium of exchange
The loanable funds market is best described as bringing together A savers and borrowers B investors and borrowers C financial institutions and investors D savers and lenders E banks and savers
A savers and borrowers
Banks create money when A they make loans B the loans they make are repaid C they keep all excess reserves D customers increase their cash withdrawals from their savings accounts E the money multiplier is less than one
A they make loans
Fred Jones withdraws $1,000$1,000 in cash from his savings account. What immediate effect does this transaction have on the monetary aggregate measures of M1M1 and M2M2 ? A M1M1M2M2IncreasesDecreases B M1M1M2M2IncreasesNo change C M1M1M2M2DecreasesNo change D M1M1M2M2No changeDecreases E M1M1M2M2No changeNo change
B M1M1M2M2IncreasesNo change
The aggregate demand curve is downward sloping because an increase in the general price level will cause the demand for money, interest rates, and investment to change in which of the following ways? A Demand for MoneyInterest RatesInvestmentIncreaseIncreaseIncrease B Demand for MoneyInterest RatesInvestmentIncreaseIncreaseDecrease C Demand for MoneyInterest RatesInvestmentIncreaseDecreaseIncrease D Demand for MoneyInterest RatesInvestmentDecreaseIncreaseDecrease E Demand for MoneyInterest RatesInvestmentDecreaseDecreaseIncrease
B Demand for MoneyInterest RatesInvestmentIncreaseIncreaseDecrease
Which of the following is true about inflation and interest rates? A The higher the inflation rate, the higher the real interest rate. B If there is no actual or expected inflation, the nominal and real interest rates are equal. C If the economy is experiencing deflation, the nominal interest rate exceeds the real interest rate. D The higher the inflation rate, the lower the nominal interest rate. E The nominal interest rate is the difference between the real interest rate and the expected inflation rate.
B If there is no actual or expected inflation, the nominal and real interest rates are equal.
Assume that the government finances its spending by borrowing from the public. If the government increases deficit spending, the price of previously issued bonds and the real interest rate will change in which of the following ways? A Price of BondsReal Interest RateDecreaseDecrease B Price of BondsReal Interest RateDecreaseIncrease C Price of BondsReal Interest RateIncreaseDecrease D Price of BondsReal Interest RateIncreaseNo change E Price of BondsReal Interest RateIncreaseIncrease
B Price of BondsReal Interest RateDecreaseIncrease
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? A The borrower would benefit. B The lender would benefit. C The real interest rate would be lower than expected. D The nominal interest rate would be higher than expected. E The nominal interest rate would increase.
B The lender would benefit.
Which of the following results when the Federal Reserve sells bonds to commercial banks? A The total assets held by commercial banks will eventually increase. B The money supply decreases. C The discount rate increases. D The public increases its cash holdings. E The required reserve ratio increases because of decreasing excess reserves.
B The money supply decreases.
Which of the following is true when interest rates rise? A The opportunity cost of holding cash decreases. B The opportunity cost of holding cash increases. C The opportunity cost of holding cash stays the same. D The money demand curve shifts to the right. E The money supply curve shifts to the right.
B The opportunity cost of holding cash increases.
In the short run, a reduction in the money supply will cause A a rightward shift in the aggregate demand curve B a leftward shift in the aggregate demand curve C a rightward shift in the aggregate supply curve D a leftward shift in the aggregate supply curve E a movement along the aggregate demand curve
B a leftward shift in the aggregate demand curve
Of the following, the most liquid asset is A mutual funds B currency C time deposits D demand deposits E savings deposits
B currency
The money demand curve is downward sloping because A the transaction demand for money decreases as interest rates fall B people hold less money as the opportunity cost of holding money rises C money is less liquid as interest rates rise, so people are able to hold less of it D banks are more willing to create money when interest rates fall E with higher incomes, people are willing to hold smaller percentages of their money
B people hold less money as the opportunity cost of holding money rises
The demand curve for money shifts to the right when A the nominal interest rate decreases B the nominal gross domestic product increases C the real gross domestic product decreases D inflation decreases E the velocity of money increases
B the nominal gross domestic product increases
A bank has $200 million in demand deposits and $150 million in reserves. The reserve ratio is 20 percent. What is the maximum amount of loans the bank can make from its reserves? A $750 million B $150 million C $110 million D $50 million E $40 million
C $110 million
The table below shows monetary assets for a banking sector at the end of a year. Monetary AssetsValue (in millions)Monetary Base$4,000$4,000Currency in Circulation$1,500$1,500M1$6,500$6,500 Based on the data provided, what is the value of total reserves held by depository institutions? A $500 million B $1,500 million C $2,500 million D $5,500 million E $8,000 million
C $2,500 million
Assume that the nominal interest rate is 10 percent. If the expected inflation rate is 5 percent, the real interest rate is A 0.5% B 2% C 5% D 10% E 15%
C 5%
For Arthur's graduation gift, Arthur's grandmother gives him a choice: he can receive $1,000 today or $1,050 one year from today. At what annual interest rate would Arthur be indifferent to choosing between the two options? A 50% B 10% C 5% D 2.5% E 0.5%
C 5%
Which of the following will most likely result in an increase in aggregate demand? A An increase in the interest rates charged on credit card balances B A disruption in global oil supply C An open-market purchase of government bonds by the central bank D A reduction of pay and benefits for government employees E A decrease in the wealth of households
C An open-market purchase of government bonds by the central bank
Which of the following will lower the prices of a country's outstanding government bonds? A An open-market purchase of government bonds by the country's central bank B A decrease in the required reserve ratio for the country's commercial banks C An outflow of financial capital to other countries D A decrease in the country's government spending E A decrease in inflationary expectations in the country
C An outflow of financial capital to other countries
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 decrease. C Interest rates will increase. D The demand curve for money will shift to the left. E The demand curve for money will shift to the right.
C Interest rates will increase.
When there is excess demand in the loanable funds market, which of the following will occur? A National savings will exceed investment spending. B The economy will remain at full employment. C Real interest rates will increase. D An inflationary gap will exist. E The money supply will increase.
C Real interest rates will 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 percent. The rate of expected inflation at the time was 3 percent. If the actual rate of inflation was 4.5 percent, which of the following is true? A The bank gained because the real rate of interest increased by 1.5%. B The bank gained because the real rate of interest became 3.5%. C The bank lost because the real rate of interest decreased by 1.5%. D Ms. Jones gained because the nominal rate of interest increased by 1.5%. E Ms. Jones lost because the nominal rate of interest became 3.5%.
C The bank lost because the real rate of interest decreased by 1.5%.
Which of the following will occur in the money market when the aggregate price level increases? A The money supply will increase and nominal interest rates will decrease. B The demand for money will increase and nominal interest rates will decrease. C The demand for money will increase and nominal interest rates will increase. D The demand for money will decrease and nominal interest rates will decrease. E The opportunity cost of holding money will decrease.
C The demand for money will increase and nominal interest rates will increase.
Which of the following is a defining characteristic of a fractional reserve banking system? A The existence of a central bank with a monopoly on money creation B The use of paper money backed by a commodity such as gold or silver C The fact that banks retain an amount of bank reserves that is less than the amount of customer demand deposits D The requirement that banks maintain a certain percentage of their reserves as a deposit in an account at the central bank E The regulations that separate investment banking from commercial banking
C The fact that banks retain an amount of bank reserves that is less than the amount of customer demand deposits
Which of the following measures the opportunity cost of holding currency? A The nominal wage rate B The increase in the demand for money C The forgone interest on alternative assets D The ability to access currency to meet unexpected expenses E The average income tax rates
C The forgone interest on alternative assets.
Expansionary fiscal policy will most likely result in A a decrease in the money supply B an increase in the marginal propensity to consume C an increase in nominal interest rates D a decrease in the level of output E a decrease in the price level
C an increase in nominal interest rates
All of the following changes will shift the investment demand curve to the right EXCEPT A a decrease in the corporate income tax rate B an increase in the productivity of new capital goods C an increase in the real interest rate D an increase in corporate profits E an increase in real gross domestic product
C an increase in the real interest rate
Investment in physical capital is most likely to occur as a result of an increase in A interest rates B inflation rates C business confidence D money demand E personal consumption
C business confidence
The money-creating ability of the banking system will be less than the maximum amount indicated by the money multiplier when A interest rates are high B the velocity of money is rising C people hold a portion of their money in the form of currency D the unemployment rate is low E the government's budget is in deficit
C people hold a portion of their money in the form of currency
In the short run, government deficit spending will most likely A raise the unemployment rate B lower the inflation rate C raise nominal interest rates D lower private savings E raise net exports
C raise nominal interest rates
Pat deposits a portion of her wages into a personal savings account every week. The saved money can be considered to be primarily a A means of payment B unit of account C store of value D measure of value E medium of exchange
C store of value
Ms. Smith withdraws $1,000$1,000 from her safe and deposits the money in a bank. If the bank holds no excess reserves and the reserve requirement is 1010 percent, how will this deposit increase the bank's required reserves and the bank's loans? A Required ReservesLoans$1,000$1,000$9,000$9,000 B Required ReservesLoans$1,000$1,000$10,000$10,000 C Required ReservesLoans$900$900$100$100 D Required ReservesLoans$100$900 E Required ReservesLoans$100$100$1,000
D Required ReservesLoans$100$900
If the required reserve ratio is 10 percent, what is the maximum change in the money supply from John's deposit of $50,000 cash into his checking account? A $5,000 B $45,000 C $55,000 D $450,000 E $500,000
D $450,000
If the reserve requirement is 20 percent, the existence of $100 worth of excess reserves in the banking system can lead to a maximum expansion of the money supply equal to A $20 B $100 C $300 D $500 E $750
D $500
Suppose that the real interest rate is equal to seven percent and the expected inflation rate is currently three percent. If an oil crisis in the Middle East increases the expected inflation rate to four percent, the new nominal interest rate is equal to A 3% B 4% C 7% D 11% E 14%
D 11%
Assume that a country's government increases borrowing. What will most likely happen to the prices of previously issued bonds and the price level in the short run? A Bond PricesPrice LevelIncreaseIncrease B Bond PricesPrice LevelIncreaseDecrease C Bond PricesPrice LevelIncreaseNo change D Bond PricesPrice LevelDecreaseIncrease E Bond PricesPrice LevelDecreaseDecrease
D Bond PricesPrice LevelDecreaseIncrease
If investors feel that business conditions will deteriorate in the future, the demand for loans and real interest rate in the loanable funds market will change in which of the following ways in the short run? A Demand for LoansReal Interest RateIncreaseIncrease B Demand for LoansReal Interest RateIncreaseDecrease C Demand for LoansReal Interest RateDecreaseIncrease D Demand for LoansReal Interest RateDecreaseDecrease E Demand for LoansReal Interest RateDecreaseNot change
D Demand for LoansReal Interest RateDecreaseDecrease
When the central bank sells government bonds on the open market, which of the following will most likely increase? A Bank reserves B Price of bonds C Money supply D Nominal interest rates E The required reserve ratio
D Nominal interest rates
Which of the following is a monetary policy aimed at increasing the equilibrium interest rate in the money market? A Raising taxes B Lowering the discount rate C Lowering the federal funds rate D Selling bonds on the open market E Lowering the required reserve ratio
D Selling bonds on the open market
When Stephanie took out a one-year fixed-rate loan, she expected to pay a real interest rate of 3 percent. At the end of the year, the real interest rate had fallen to 2 percent. Which of the following could have caused the decrease in the real interest rate? A There was an increase in the nominal interest rate. B There was a decrease in the nominal interest rate. C There was a decrease in the money supply. D The actual inflation rate was greater than the expected inflation rate. E The actual inflation rate was less than the expected inflation rate.
D The actual inflation rate was greater than the expected inflation rate.
If businesses become optimistic about the profitability of investments in an economy, which of the following will happen in the loanable funds market in the short run? A The supply and demand for loanable funds will increase. B The supply and demand for loanable funds will decrease. C The demand for loanable funds by the private sector will decrease. D The real interest rate will increase. E The real interest rate will decrease.
D The real interest rate will increase.
The money demanded for the purpose of purchasing goods and services is known as A an asset demand B a derived demand C excess reserves D a transactions demand E balance of payments
D a transactions demand
The real interest rate earned is the A same as the nominal interest rate when inflation is moderate B cost of borrowing in current consumer prices C cost of borrowing in current producer prices D cost of borrowing adjusted for the rate of change in the price level E nominal interest rate adjusted for the growth rate of the economy
D cost of borrowing adjusted for the rate of change in the price level
Banks expand the money supply when A issuing credit cards B printing money C cashing checks D making loans E accepting deposits
D making loans
Assume the economy is currently in long-run equilibrium. An increase in the money supply will affect unemployment in the short run and in the long run in which of the following ways? A Short RunLong RunFallsFalls B Short RunLong RunRisesRises C Short RunLong RunNo changeRemains at the natural rate D Short RunLong RunRises above the natural rateFalls back to the natural rate E Short RunLong RunFalls below the natural rateRises back to the natural rate
E Short RunLong RunFalls below the natural rateRises back to the natural rate
If the public's desire to hold money as currency increases, what will the impact be on the banking system? A Banks would be more able to reduce unemployment. B Banks would be more able to decrease aggregate supply. C Banks would be less able to decrease aggregate supply. D Banks would be more able to expand credit. E Banks would be less able to expand credit.
E Banks would be less able to expand credit.
If both the nominal interest rate and the expected inflation rate increase, what will happen to the real interest rate? A It will increase because the expected inflation rate has increased. B It will increase because the nominal interest rate has increased. C It will increase if the expected inflation rate increases by more than the nominal interest rate. D It will decrease because the nominal interest rate has increased. E It will decrease if the expected inflation rate increases by more than the nominal interest rate.
E It will decrease if the expected inflation rate increases by more than the nominal interest rate.
Assume that banks hold no excess reserves. A decrease in the required reserve ratio will cause total reserves in banks, the money multiplier, and the money supply to change in which of the following ways? A Total ReservesMoney MultiplierMoney SupplyIncreaseIncreaseIncrease B Total ReservesMoney MultiplierMoney SupplyIncreaseNo changeIncrease C Total ReservesMoney MultiplierMoney SupplyNo changeIncreaseDecrease D Total ReservesMoney MultiplierMoney SupplyDecreaseDecreaseDecrease E Total ReservesMoney MultiplierMoney SupplyNo changeIncreaseIncrease
E Total ReservesMoney MultiplierMoney SupplyNo changeIncreaseIncrease
In the short run, a tight monetary policy tends to cause A a decrease in the interest rate and a decrease in prices B a decrease in the interest rate and an increase in private investment C a decrease in prices and an increase in private investment D an increase in the interest rate and an increase in private investment E an increase in interest rate and a decrease in private investment
E an increase in interest rate and a decrease in private investment
An open-market operation by a country's central bank to reduce the unemployment rate would be to A sell bonds to decrease the interest rate and to increase aggregate demand B sell bonds to increase the interest rate and to decrease aggregate demand C sell bonds to increase the interest rate and to increase investment D buy bonds to decrease the interest rate and to decrease aggregate demand E buy bonds to decrease the interest rate and to increase aggregate demand
E buy bods to decrease the interest rate and to increase aggregate demand
