Unit 4 AP Macroeconomics

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

Under which of the following conditions would a restrictive monetary policy be most appropriate? (A) High inflation (B) High unemployment (C) Full employment with stable prices (D) Low interest rates (E) A budget deficit

(A) High inflation

Assume a country's banking system has limited reserves. If the central bank sells a significant amount of government securities in the open market, which of the following will occur? (A) The total amount of loans made by commercial banks will decrease. (B) The total amount of loans made by commercial banks will increase. (C) The money supply will increase. (D) Rates of interest will decrease. (E) Rates of interest and amount of loans made by commercial banks will remain unchanged.

(A) The total amount of loans made by commercial banks will decrease.

Under a fractional reserve banking system, banks are required to (A) keep part of their demand deposits as reserves (B) expand the money supply when requested by the central bank (C) insure their deposits against losses and bank runs (D) pay a fraction of their interest income in taxes (E) charge the same interest rate on all their loans

(A) keep part of their demand deposits as reserves

The Federal Reserve can cause an increase in interest rates in an attempt to (A) reduce inflation (B) reduce cyclical unemployment (C) reduce structural unemployment (D) increase aggregate demand (E) increase investment spending

(A) reduce inflation

The demand for money increases when national income increases because (A) spending on goods and services increases (B) interest rates increase (C) the budget deficit increases (D) the money supply increases (E) the public becomes more optimistic about the future

(A) spending on goods and services increases

Assume that the reserve requirement is 20 percent. If a bank initially has no excess reserves and $10,000 cash is deposited in the bank, the maximum amount by which this bank may increase its loans is (A) $2,000 (B) $8,000 (C) $10,000 (D) $20,000 (E) $50,000

(B) $8,000

Which of the following would be included as a liability on a commercial bank's balance sheet? (A) Consumer loans (B) Demand deposits (C) Net worth (D) Bank reserves (E) Treasury bonds

(B) Demand deposits

Which of the following is true of the quantity of money demanded? (A) It rises when interest rates rise, because the return from holding money increases. (B) It falls when interest rates rise, because the opportunity cost of holding money increases. (C) It remains constant when interest rates rise, as long as inflation remains constant. (D) It rises when interest rates rise, as long as inflation is declining. (E) It falls when the money supply increases, as long as inflation remains constant.

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

Assume that the reserve requirement is 15 percent and that a bank receives a new checking deposit of $200. Which of the following will most likely occur in the bank's balance sheet? (A) Liabilities: Increase by $200 Required Reserves: Increase by $170 (B) Liabilities: Increase by $200 Required Reserves: Increase by $30 (C) Liabilities: Increase by $200 Required Reserves: Not change (D) Liabilities: Decrease by $200 Required Reserves: Decrease by $30 (E) Liabilities: Decrease by $200 Required Reserves: Decrease by $170

(B) Liabilities: Increase by $200 Required Reserves: Increase by $30

An inflationary gap can be eliminated by all of the following EXCEPT.. (A) an increase in personal income taxes (B) an increase in the money supply (C) an increase in interest rates (D) a decrease in government spending (E) a decrease in net exports

(B) an increase in the money supply

The federal funds rate is the interest rate that (A) the Federal Reserve charges the federal government on its loans (B) banks charge one another for short-term loans (C) banks charge their best customers (D) equalizes the yield on government bonds and corporate bonds (E) is equal to the inflation rate

(B) banks charge one another for short-term loans

Assume a country's banking system has limited reserves. If the reserve requirement is 25 percent and banks hold no excess reserves, an open market sale of $400,000 of government securities by the central bank will.. (A) increase the money supply by up to $1.6 million (B) decrease the money supply by up to $1.6 million (C) increase the money supply by up to $300,000 (D) increase the money supply by up to $100,000 (E) decrease the money supply by up to $100,000

(B) decrease the money supply by up to $1.6 million

All of the following are components of the money supply in the United States EXCEPT (A) paper money (B) gold bullion (C) checkable deposits (D) coins (E) demand deposits

(B) gold bullion

Assuming the banking system has limited reserves, an increase in the money supply is most likely to have which of the following short-run effects on real interest rates and real output? || Real Interest Rates || Real Output || (A)Decrease/Decrease (B)Decrease/Increase (C)Increase/Decrease (D)Increase/No change (E)No change/Increase

(B) || Real Interest Rates || Real Output || Decrease/Increase

Assume the nominal interest rate on a -year fixed-rate mortgage loan is percent. If the expected inflation rate is 2 percent, the expected real interest rate is.. (A)2% (B)3% (C)5% (D)7% (E)10%

(B)3%

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 | Bond Prices | (A)Increase/Increase (B)Increase/Decrease (C)Increase/Not Change (D)Decrease/Increase (E)Decrease/Decrease

(B)| Nominal Interest Rates | Bond Prices | Increase/Decrease

A commercial bank is facing the conditions given above. If the reserve requirement is 12 percent and the bank does not sell any of its securities, the maximum amount of additional lending this bank can undertake is (A) $15,000 (B) $12,000 (C) $3,000 (D) $1,800 (E) 0

(C) $3,000

In the country of Agronomia, banks charge 10 percent interest on all loans. If the general price level has been increasing at the rate of 4 percent per year, the real rate of interest in Agronomia is (A) 14% (B) 10% (C) 6% (D) 4% (E) 2.5%

(C) 6%

An increase in the demand for loanable funds could be best explained by which of the following? (A) There is a decrease in investment spending. (B) There is an increase in the government's budget surplus. (C) Firms are optimistic about the future performance of the country's economy. (D) Domestic investors seek higher returns by investing in foreign financial assets. (E) The economy is facing political instability.

(C) Firms are optimistic about the future performance of the country's economy.

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.

Open market operations refer to which of the following activities? (A) The buying and selling of stocks in the stock market (B) The loans made by the central bank to member commercial banks (C) The buying and selling of government securities by the central bank (D) The government's purchases and sales of municipal bonds (E) The government's contribution to net exports

(C) The buying and selling of government securities by the central bank

The real value of the United States dollar is determined by (A) federal regulations regarding purchasing power (B) the value of the gold backing the dollar (C) the goods and services it will buy (D) the money multiplier (E) the marginal propensity to consume

(C) the goods and services it will buy

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) million (E) million

(C)$2,500 million

The purchase of bonds by a central bank will have the greatest effect on real gross domestic product if which of the following situations exists in the economy? (A) The banking system has ample reserves, the required reserve ratio is high, and the interest rate has a large effect on investment spending. (B) The banking system has ample reserves, the required reserve ratio is high, and the interest rate has a small effect on investment spending. (C)The banking system has limited reserves, the required reserve ratio is low, and the interest rate has a large effect on investment spending. (D) The banking system has limited reserves, the required reserve ratio is low, and the marginal propensity to consume is low. (E) The banking system has ample reserves, the marginal propensity to consume is high, and the interest rate

(C)The banking system has limited reserves, the required reserve ratio is low, and the interest rate has a large effect on investment spending.

Which of the following would lead to an increase in nominal interest rates? (A) An expansionary monetary policy accompanied by an increase in the demand for money (B) An expansionary monetary policy accompanied by a decrease in the demand for money (C) An expansionary monetary policy conducted without any change in the demand for money (D) A contractionary monetary policy accompanied by an increase in the demand for money (E) A contractionary monetary policy accompanied by a decrease in the demand for money

(D) A contractionary monetary policy accompanied by an increase in the demand for money

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) An increase in the money supply, a decrease in interest rates, and an increase in aggregate demand (B) An increase in the money supply, an increase in interest rates, and a decrease in aggregate demand (C) An increase in interest rates, an increase in the government budget deficit, and a movement toward trade surplus (D) A decrease in the money supply, an increase in interest rates, and a decrease in aggregate demand (E) A decrease in the money supply, a decrease in interest rates, and a decrease in aggregate demand

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

If the Federal Reserve lowers its administered interest rates, which of the following would most likely occur? (A) Imports will rise, decreasing the trade deficit. (B) The rate of saving will increase. (C) Unemployment and inflation will both increase. (D) Businesses will purchase more factories and equipment. (E) The budget deficit will increase.

(D) Businesses will purchase more factories and equipment.

If the Federal Reserve institutes a policy to reduce inflation, which of the following is most likely to increase? (A) Tax rates (B) Investment (C) Government spending (D) Interest rates (E) Gross domestic product

(D) Interest rates

An increase in investment demand for capital goods accompanied by an increase in household savings will result in which of the following in the market for loanable funds? (A) The demand curve for loanable funds will shift to the right along an unchanged supply curve, increasing the quantity supplied of funds and the real interest rate. (B) The demand and supply curves of loanable funds will shift to the right, causing a decrease in the real interest rate. (C) The equilibrium real interest rate will increase, but the impact on the quantity of loanable funds is indeterminate. (D) The equilibrium quantity of loanable funds will increase, but the impact on the real interest rate is indeterminate. (E) There will be a surplus of funds in the market for loanable funds.

(D) The equilibrium quantity of loanable funds will increase, but the impact on the real interest rate is indeterminate.

An increase in government spending with no change in taxes leads to a (A) lower income level (B) lower price level (C) smaller money supply (D) higher interest rate (E) higher bond price

(D) higher interest rate

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? || Demand for loans || Real Interest Rates || (A)Increase/Increase (B)Increase/Decrease (C)Decrease/Increase (D)Decrease/Decrease (E)Decrease/Not Change

(D) || Demand for loans || Real Interest Rates || Decrease/Decrease

If the Federal Reserve pursues a contractionary monetary policy, output and the price level will change in which of the following ways in the short run? Output || Price Level (A)Increase/Increase (B)Increase/No change (C)Increase/Decrease (D)Decrease/Decrease (E)Decrease/Increase

(D) || Output || Price Level || Decrease/Decrease

If currently at full employment, which of the following would most likely cause the United States economy to fall into a recession? (A) An increase in welfare payments (B) An increase in exports (C) A decrease in savings by consumers (D) A decrease in the required reserve ratio (E) An increase in administered interest rates

(E) An increase in administered interest rates

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.

Country H's current domestic output is lower than its potential domestic output. Assume that the central bank now decreases its administered interest rates. What will be the short-run effects of the central bank's action on cyclical unemployment and real income? (A) Cyclical unemployment will increase, and real income will increase. (B) Cyclical unemployment will increase, and real income will decrease. (C) Cyclical unemployment will remain the same, and real income will increase. (D) Cyclical unemployment will remain the same, and real income will decrease. (E) Cyclical unemployment will decrease, and real income will increase.

(E) Cyclical unemployment will decrease, and real income will increase.

Expansionary monetary policy can affect the economy through which of the following chains of events? (A) Increasing the discount rate lowers real interest rates, which raises investment. (B) Reducing taxes lowers the discount rate, which raises consumption. (C) Increasing government expenditures lowers nominal interest rates, which raises investment. (D) Increasing the reserve requirement lowers nominal interest rates, which increases investment. (E) Decreasing the administered interest rates lowers nominal interest rates, which increases investment.

(E) Decreasing the administered interest rates lowers nominal interest rates, which increases investment.

Assume a country's banking system has limited reserves. To counteract a recession, the central bank should (A) raise the reserve requirement and the discount rate (B) sell securities on the open market and raise the discount rate (C) sell securities on the open market and lower the discount rate (D) buy securities on the open market and raise the discount rate (E) buy securities on the open market and lower the discount rate

(E) buy securities on the open market and lower the discount rate

Commercial banks can create money by (A) transferring depositors' accounts at the Federal Reserve for conversion to cash (B) buying Treasury bills from the Federal Reserve (C) sending vault cash to the Federal Reserve (D) maintaining a 100 percent reserve requirement (E) lending excess reserves to customers

(E) lending excess reserves to customers

Changes in which of the following will change the money supply? (A) number of banks in operation (B) velocity of money (C) price level (D) prime rate (E) open market operations

(E) open market operations