AP Macro Quiz

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?

$110 million

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

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?

Bond Prices Decrease; Price Level Increase

Which of the following is considered the most liquid asset?

Currency

Which of the following is true of the opportunity cost of holding cash?

It increases as the interest rate rises.

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?

The actual inflation rate was greater than the expected inflation rate.

Which of the following statements about inflation is true?

The expected inflation rate is the difference between nominal and real interest rates.

A barter economy is different from a money economy in that a barter economy

involves higher costs for each transaction

Banks expand the money supply when

making loans

Pat deposits a portion of her wages into a personal savings account every week. The saved money can be considered to be primarily a

store of value

Banks create money when

they make loans