AP Macro Unit 4 Exam

Which of the following is the most liquid measure of the money supply? A) M1 B) M2 C) M3 D) near-moneys E) dollar bills

A) M1

Which of the following will occur if the central bank lowers the interest paid on bank reserves (IOR)? A) The opportunity cost of making loans will decrease. B) Banks will hold more reserves. C) The money supply curve will shift to the left. D) Interest rates will rise. E) Aggregate demand will decrease.

A) The opportunity cost of making loans will decrease.

Crowding out is illustrated by which of the following changes in the loanable funds market? A) a decreasing equilibrium interest rate B) an increase in the demand for loanable funds C) a decrease in the demand for loanable funds D) an increase in the supply of loanable funds E) a decrease in the supply of loanable funds

A) a decreasing equilibrium interest rate

Which of the following will lead to an increase in the nominal interest rate? A) an increase in real GDP B) a decrease in the aggregate price level C) an increase in the money supply D) open market bond purchases E) a decrease in the federal funds rate

A) an increase in real GDP

The monetary base includes which of the following? A) bank reserves B) savings deposits C) checkable deposits D) certificates of deposit E) near-money

A) bank reserves

Which of the following is part of both the monetary base and the money supply? A) currency in circulation B) bank reserves C) currency in circulation and bank reserves D) currency in circulation and required bank reserves E) currency in circulation and excess bank reserves

A) currency in circulation

Contractionary monetary policy attempts to aggregate demand by interest rates. A) decrease; increasing B) increase; decreasing C) decrease; decreasing D) increase; increasing E) increase; maintaining

A) decrease; increasing

Which of the following is a task of the financial system? A) decreasing transaction costs B) increasing risk C) creating illiquidity D) increasing inefficiency E) creating capital outflow

A) decreasing transaction costs

Which of the following is part of the M1 money supply but not part of the monetary base? A) demand deposits B) bank reserves C) currency in circulation D) deposits at the central bank E) savings accounts

A) demand deposits

When you use money to purchase lunch, money is serving which role? A) medium of exchange B) store of value C) unit of account D) measure of usefulness E) all of the above

A) medium of exchange

A financial intermediary that creates a stock portfolio by buying and holding shares in companies and then selling shares of the stock portfolio to individual investors is a A) mutual fund. B) bank. C) corporation. D) pension fund. E) life insurance company.

A) mutual fund

Which of the following tools would a central bank use in response to a recession in an economy with ample reserves? A) quantitative easing B) raising the interest paid on bank reserves C) lowering taxes D) lowering the rate on repurchase agreements E) decreasing the money supply

A) quantitative easing

A budget surplus exists when the government does which of the following? A) saves B) collects less tax revenue than it spends C) has a negative budget balance D) increases the national debt E) uses expansionary fiscal policy

A) saves

Which of the following contributed to the creation of the Federal Reserve System? A) the bank Panic of 1907 B) the Great Depression C) the savings and loan crisis of the 1980s D)the financial crisis of 2008 E) the aftermath of World War II

A) the bank Panic of 1907

Which of the following institutions controls the monetary base? A) the central bank B) the Treasury C) Congress D) commercial banks E) investment banks

A) the central bank

The federal government is said to be "dissaving" when A) there is a budget deficit. B) there is a budget surplus. C) there is no budget surplus or deficit. D) savings does not equal investment spending. E) national savings equals private savings.

A) there is a budget deficit.

The supply curve for loanable funds is A) upward sloping. B) vertical. C) horizontal. D) downward sloping. E) U-shaped.

A) upward sloping

The real interest rate will equal the nominal interest rate when inflation is equal to A) zero B) the nominal interest rate. C) the real interest rate. D) expected inflation. E) the expected rate of return.

A) zero

Which of the following is the best example of using money as a store of value? A) A customer pays in advance for $10 worth of gasoline at a gas station. B) A babysitter puts her earnings in a dresser drawer while she saves to buy a bicycle. C) Travelers buy meals on board an airline flight. D) Foreign visitors to the United States convert their currency to dollars at the airport. E) You use $1 bills to purchase soda from a vending machine.

B) A babysitter puts her earnings in a dresser drawer while she saves to buy a bicycle.

Which of the following is true regarding central banks? A) They only exist in the United States and Europe. B) They oversee and regulate the banking system. C) They are structured to be part public and part private. D) They include multiple regional reserve banks. E) All of the above are true.

B) They oversee and regulate the banking system.

Which of the following will increase the demand for loanable funds? A) a federal government budget surplus B) an increase in perceived business opportunities C) a decrease in the interest rate D) positive capital inflows E) a decrease in private saving rates

B) an increase in perceived business opportunities

Which of the following will increase the demand for money? A) a fall in the aggregate price level B) an increase in real GDP C) technological advances D) open market operations by the central bank E) a decrease in the interest rate

B) an increase in real GDP

What will happen to the money supply and the equilibrium interest rate if a central bank sells government bonds? Money supply Equilibrium interest rate increase increase decrease increase increase decrease decrease decrease decrease no change

B) decrease increase

Which of the following actions could the central bank use to address inflation? A) buy government bonds B) increase interest rates C) pursue quantitative easing D) decrease money demand E) raise taxes

B) increase interest rates

Compared to the M1 money supply, the M2 money supply is A) smaller. B) less liquid. C) more narrowly defined. D) easier to measure. E) All of these

B) less liquid

The real interest rate is calculated in hindsight as the nominal interest rate A) plus the rate of inflation. B) minus the rate of inflation. C) minus the expected rate of inflation. D) plus the expected rate of inflation. E) unadjusted for inflation.

B) minus the rate of inflation

The interest rate published by a bank in an advertisement is the A) real interest rate. B) nominal interest rate. C) prime interest rate. D) expected interest rate. E) discount rate.

B) nominal interest rate

Which of the following is NOT a role of the Federal Reserve System? A) controlling bank reserves B) printing currency C) carrying out monetary policy D) supervising and regulating banks E) holding reserves for commercial banks

B) printing currency

Which of the following is an example of using money as a unit of account? A) buying a new T-shirt B) purchasing $10 worth of candy C) keeping the dollar you receive each year for your birthday for 10 years D) putting money into your savings account E) paying for lunch with your debit card

B) purchasing $10 worth of candy

When lenders begin to expect inflation, nominal interest rates will A) fall. B) rise. C) equal real interest rates. D) equal zero. E) be negative.

B) rise

The required reserve ratio is A) the most cash that banks are allowed to hold in their vault. B) set by the central bank. C) responsible for most bank runs. D) equal to 5% of bank deposits. E) the fraction of bank loans held as reserves.

B) set by the central bank

The central bank sets a target for which of the following? A) the income tax rate B) the overnight interbank lending rate C) the money supply D) the prime interest rate E) the unemployment rate

B) the overnight interbank lending rate

The interest rate is A) the opportunity cost of lending money. B) the price borrowers pay for the use of lenders' savings. C) a percentage of the amount saved by borrowers. D) the rate charged by banks to hold savings for one year. E) the amount earned by using profits to build a new factory.

B) the price borrowers pay for the use of lenders' savings.

The money supply curve is A) upward sloping. B) vertical. C) horizontal. D) downward sloping. E) U-shaped.

B) vertical

If rr is the reserve requirement, the money multiplier is equal to A) rr B) 1-rr C) 1/rr D) rr^2 E) 1/rr^2

C) 1/rr

Which of the following changes would be the most likely to reduce the size of the money multiplier? A) a decrease in the required reserve ratio B) a decrease in excess reserves C) an increase in cash holding by consumers D) a decrease in bank runs E) an increase in deposit insurance

C) an increase in cash holding by consumers

Which of the following will increase the supply of loanable funds? A) an increase in perceived business opportunities B) decreased government borrowing C) an increase in private saving rates D) an increase in the expected inflation rate E) a decrease in capital inflows

C) an increase in private saving rates

In an economy with ample reserves, which of the following central bank actions would be used to combat inflation? A) quantitative easing B) buying bonds C) increasing the interest paid on reserves D) raising reserve requirements E) increasing the discount rate

C) increasing the interest paid on reserves

If nominal interest rates equal 3% and real interest rates are 2%, the expected rate of inflation A) can't be determined. B) is equal to zero. C) is 1%. D) is 2%. E) is 3%.

C) is 1%

When commercial banks make loans to each other, they charge the A) prime rate. B) discount rate. C) overnight interbank lending rate. D) CD rate. E) mortgage rate.

C) overnight interbank lending rate

Which of the following is a goal of monetary policy? A) zero inflation B) deflation C) price stability D) increased potential output E) decreased actual real GDP

C) price stability

A business will decide whether or not to borrow money to finance a project based on a comparison of the interest rate with the from its project. A) expected revenue B) profit C) rate of return D) cost generated E) demand generated

C) rate of return

Bank deposits actually held as reserves are equal to which of the following? A) reserved reserves B) excess reserves C) required and excess reserves D) the monetary base E) currency in circulation

C) required and excess reserves

The liquid assets banks keep in their vaults are known as bank A) deposits. B) savings. C) reserves. D) money. E) returns.

C) reserves

When money acts as a means of holding purchasing power over time, it is serving which function? A) medium of exchange B) source of liquidity C) store of value D) unit of account E) source of wealth

C) store of value

When you decide you want "$10 worth" of a product, money is serving which role? A) medium of exchange B) store of value C) unit of account D) measure of usefulness E) all of the above

C) unit of account

If the required reserve ratio is 10% and excess reserves increase by $1,000, what is the maximum possible increase in checkable deposits throughout the banking system? A) $0 B) $100 C) $1,000 D) $10,000 E) $100,000

D) $10,000

If a bank has $100,000 in deposits and holds $5,000 in required reserves, what is the value of the money multiplier? A) 0.05 B) 0.5 C) 5 D) 20 E) 50

D) 20

If lenders require a real interest rate of 3% and they expect 2% inflation, the nominal interest rate will equal A) 1%. B) 2%. C) 3%. D) 5%. E) 6%.

D) 5%

When the expected inflation rate is 2% and lenders want a return of 3% on their loans, the nominal interest rate will be set at A) 1%. B) 2%. C) 3%. D) 5%. E) 6%.

D) 5%

Which of the following is true of the money demand curve? A) It is set by the central bank. B) It is vertical. C) It is horizontal. D) It illustrates the opportunity cost of holding money. E) It shows a positive relationship between the interest rate and the quantity of money held as cash.

D) It illustrates the opportunity cost of holding money.

If the central bank in an economy with ample reserves raises the interest rate on reserves, what happens to bank reserves? A) They will increase. B) They will decrease. C) They will fall to zero. D) They will not change. E) They will be loaned out.

D) They will not change.

Which of the following will decrease the demand for money, shifting the demand curve to the left? A) an increase in the interest rate B) inflation C) an increase in real GDP D) an increase in the variety of electronic payments E) a change to allow banks to pay interest on checkable account balances

D) an increase in the variety of electronic payments

In most countries, including the United States, the money supply is A) made up of only currency in circulation. B) made up of only illiquid assets. C) considered commodity-backed. D) commonly defined as either M1 or M2. E) always defined to include "near moneys."

D) commonly defined as either M1 or M2

The Federal Reserve is a(n) A) single central bank located in New York. B) government agency overseen by the Secretary of the Treasury. C) system of 10 regional banks. D) institution that oversees the banking system. E) depository institution that lends to large corporations.

D) institution that oversees the banking system.

An asset that can be easily converted into cash is considered A) risky. B) interest-bearing. C) secure. D) liquid. E) an equity.

D) liquid

Who oversees the Federal Reserve System? A) Congress B) the president of the United States C) the Federal Open Market Committee D)the Board of Governors of the Federal Reserve System E) the Reconstruction Finance Corporation

D) the Board of Governors of the Federal Reserve System

Which of the following correctly shows the chain of events through which an increase in IOR will affect real GDP? A) ↑i → ↑I → ↑AD → ↑real GDP B) ↑i → ↓I → ↑AD → ↓real GDP C) ↓i → ↑I → ↑AD → ↑real GDP D) ↑i → ↓I → ↓AD → ↓real GDP E) savings = investment spending

D) ↑i → ↓I → ↓AD → ↓real GDP

Which of the following correctly describes how contractionary monetary policy will ultimately affect real GDP? A) ⬆️i -> ⬇️I -> ⬆️C -> ⬇️ -> ⬇️ real GDP B) ⬆️i -> ⬇️I ->⬇️C -> ⬇️ -> ⬇️ real GDP C) ⬆️i -> ⬆️I ->⬆️C -> ⬇️ -> ⬇️ real GDP D) ⬇️i -> ⬇️I ->⬇️C -> ⬆️ -> ⬇️ real GDP E) ⬇️i -> ⬇️I ->⬇️C -> ⬇️ -> ⬇️ real GDP

D) ⬇️i -> ⬇️I ->⬇️C -> ⬆️ -> ⬇️ real GDP

The graph of the loanable funds market is different from that of the money market in which of the following ways? A) The demand curve slopes downward. B) The demand curve slopes upward. C) The supply curve slopes downward. D) The supply curve slopes upward. E) Price is on the vertical axis.

E) Price is on the vertical axis.

A central bank could do which of the following in order to change the monetary base? A) change the reserve requirement B) change the discount rate C) sell government bonds D) change the interest rate on reserves E) all of the above

E) all of the above

Bank reserves include which of the following? A) currency in circulation B) bank deposits held in accounts at the central bank C) customer deposits in bank checking accounts D) the monetary base E) all of the above

E) all of the above

Bonds are A) IOUs issued by a borrower. B) a financial asset for the bond owner. C) a liability for the bond issuer. D) relatively easy to resell. E) all of the above

E) all of the above

If the actual rate of inflation exceeds the expected rate of inflation, which of the following is true? A) Lenders are hurt. B) The real interest rate is lower than expected. C) The real interest rate is lower than the nominal interest rate. D) Borrowers benefit. E) all of the above

E) all of the above

Real interest rates can be negative when which of the following is true? A) Inflation rates are high. B) Lenders expect high inflation. C) Actual inflation is greater than expected inflation. D) Actual inflation is greater than the nominal interest rate. E) all of the above

E) all of the above

Stocks A) represent ownership of a business. B) have a higher historical rate of return than bonds. C) are an example of an equity. D) are used by business owners to reduce risk. E) all of the above

E) all of the above

The Federal Open Market Committee is made up of which of the following? A) members of the Board of Governors B) five voting Federal Reserve Bank presidents C) the president of the Federal Reserve Bank of New York D) eleven Federal Reserve Bank presidents on a rotating basis E) all of the above

E) all of the above

Which of the following helps to prevent bank runs? A) deposit insurance B) capital requirements C) reserve requirements D) the discount window E) all of the above

E) all of the above

Which of the following is a way for a central bank to increase the money supply? A) increase the currency in circulation B) decrease the reserve requirement C) buy government bonds D) enact quantitative easing E) all of the above

E) all of the above

Which of the following actions can the central bank take to decrease the equilibrium interest rate in an economy with limited reserves? A) increase the money supply B) increase money demand C) decrease the money supply D) decrease money demand E) both (a) and (d)

E) both (a) and (d)

Which of the following will shift the supply curve for loanable funds to the right? A) an increase in the rate of return on investment spending B) an increase in the government budget deficit C) a decrease in the national saving rate D) an increase in expected inflation E) capital inflows from abroad

E) capital inflows from abroad

Which of the following assets is most liquid? A) stock B) bond C) loan D) mutual fund E) cash

E) cash

When the interest rate increases, the price of previously issued bonds will A) increase proportionally. B) increase by a smaller amount. C) not be affected. D) equal zero. E) decrease.

E) decrease

Which of the following is a task of an economy's financial system? A) maximizing risk B) increasing transaction costs C) decreasing diversification D) eliminating liquidity E) enhancing the efficiency of financial markets

E) enhancing the efficiency of financial markets

Both lenders and borrowers base their decisions on A)expected real interest rates. B) expected nominal interest rates. C) real interest rates. D) nominal interest rates. E) nominal interest rates minus real interest rates.

E) expected nominal interest rates.

In the United States, the dollar is A) backed by silver. B) backed by gold and silver. C) commodity-backed money. D) commodity money. E) fiat money.

E) fiat money

Which of the following is NOT a type of financial asset? A) bonds B) stocks C) bank deposits D) loans E) houses

E) houses

A central bank is charged with doing all of the following EXCEPT A) providing financial services to commercial banks. B) supervising and regulating banks. C) maintaining the stability of the financial system. D) conducting monetary policy. E) insuring bank deposits.

E) insuring bank deposits

It is a basic accounting fact that the level of investment for a closed economy must equal the level of A) capital inflows. B) capital outflows. C) wealth. D) financial assets. E) national savings.

E) national savings

A change in which of the following will cause movement along the money demand curve? A) the aggregate price level B) technology C) real GDP D) banking regulations E) the nominal interest rate

E) the nominal interest rate

The quantity of money demanded rises when A) the aggregate price level increases. B) the aggregate price level falls. C) real GDP increases. D) new technology makes banking easier. E) the nominal interest rate falls.

E) the nominal interest rate falls