Unit 4 AP Macroeconomics
An increase in government spending will affect the demand for money and nominal interest rates in which of the following ways? A Demand for MoneyNominal Interest RatesIncreaseIncrease B Demand for MoneyNominal Interest RatesIncreaseDecrease C Demand for MoneyNominal Interest RatesIncreaseIndeterminate D Demand for MoneyNominal Interest RatesDecreaseIncrease E Demand for MoneyNominal Interest RatesDecreaseDecrease
A Demand for MoneyNominal Interest RatesIncreaseIncrease
The diagram shows the effect of a monetary policy action on aggregate demand. Which of the following will shift the aggregate demand curve in the direction shown in the diagram above? A A decrease in the money supply B A decrease in the monetary base C A decrease in the overnight interbank lending rate D An increase in the required reserve ratio E The sale of bonds to the private sector by the central bank
C A decrease in the overnight interbank lending rate
Which of the following will happen if the central bank of a nation purchases government bonds on the open market? A The monetary base will increase and the money supply will increase. B The monetary base will increase and the money supply will not change. C The monetary base will decrease and the money supply will increase. D The monetary base will decrease and the money supply will not change. E The monetary base will decrease and the money supply will decrease.
A The monetary base will increase and the money supply will increase.
Which of the following is included in the monetary base? A Currency held by the public and commercial bank reserves held with the central bank B Currency held by the public, demand deposits at depository institutions, and commercial bank reserves held with the central bank C Currency held by the public, demand deposits, savings deposits, and certificates of deposit D Currency held by the public and small and large time deposits E Currency held by the public, small and large time deposits, and commercial bank reserves held with the central bank
A Currency held by the public and commercial bank reserves held with the central bank The monetary base includes currency in circulation and bank reserves.
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
When the Federal Reserve buys government securities on the open market, which of the following will decrease in the short run? A Interest rates B Taxes C Investment D The amount of money loaned by banks E The money supply
A Interest rates
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
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
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
An increase in the price level will most likely cause which of the following? A A leftward shift of the aggregate demand curve B An increase in the demand for money C An increase in the real interest rate D A decrease in the nominal interest rate E An increase in t
B An increase in the demand for money
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 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 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
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? A Real Interest RatesReal OutputDecreaseDecrease B Real Interest RatesReal OutputDecreaseIncrease C Real Interest RatesReal OutputIncreaseDecrease D Real Interest RatesReal OutputIncreaseNo change E Real Interest RatesReal OutputNo changeIncrease
B Real Interest RatesReal OutputDecreaseIncrease
Which of the following is a monetary policy action a central bank would implement to control inflation? A Target a lower overnight interbank lending rate B Sell government bonds to the public C Lower the discount rate D Lower the required reserve ratio E Increase the monetary base
B Sell government bonds to the public
Country X's economic situation is depicted by the graph above. Which of the following will happen if Country X's central bank conducts a contractionary monetary policy? A The economy will be in a recessionary gap; the price level will decrease, and the real output level will increase. B The economy will be in a recessionary gap; the price level and the real output level will decrease. C The economy will be at full employment; the price level and the real output level will increase. D The economy will be in an inflationary gap; the price level and the real output level will increase. E The economy will be in an inflationary gap; the price level will increase, and the real output level will decrease.
B The economy will be in a recessionary gap; the price level and the real output level will decrease. The economy is currently in long-run equilibrium producing the full-employment output. A contractionary monetary policy will cause the AD curve to shift to the left, leading to a decrease in the price level and the real output level. Real output will be lower than full employment and the economy will be in a recessionary gap.
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? A The monetary base will increase. B The nominal interest rate will increase. C The money multiplier will increase. D The money demand curve will shift right. E Spending will increase.
B The nominal interest rate will increase.
A country's central bank purchased government bonds from the public in the open market. How would this action affect the nominal interest rate and the price level in the short run? A There would be a decrease in the nominal interest rate and a decrease in the price level. B There would be a decrease in the nominal interest rate and an increase in the price level. C There would be an increase in the nominal interest rate and a decrease in the price level. D There would be an increase in the nominal interest rate and a decrease in the price level. E There would be an increase in the nominal interest rate and no change in the price level.
B There would be a decrease in the nominal interest rate and an increase in the price level. When the central bank buys government bonds, the money supply increases, which decreases the nominal interest rate. This increases interest-sensitive spending and increases aggregate demand, real output, and the price level.
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 is most likely to increase the real interest rate in Country Z ? A Country Z's central bank purchases government securities from banks and citizens. B Country Z reduces government expenditures. C Country Z is viewed as having increased political and economic risk. D Country Z's citizens increase their savings in anticipation of needed retirement income. E Country Z introduces a tax on consumption goods.
C Country Z is viewed as having increased political and economic risk.
Suppose that the economy has entered a recession. Which of the following is a monetary policy action a central bank can take to restore full-employment output? A Selling government bonds B Decreasing government spending C Decreasing the discount rate D Increasing the federal funds rate E Increasing the required reserve ratio
C Decreasing the discount rate Decreasing the discount rate is an expansionary monetary policy action that will encourage commercial banks to borrow funds from the central bank and extend new loans, thereby expanding the money supply. Expanding the money supply will decrease nominal interest rates, which will increase interest-sensitive spending, moving the economy back towards full employment.
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.
Which of the following is true about the loanable funds market? A The demand for loanable funds shows a positive relationship between real interest rates and the quantity demanded of loanable funds. B The supply of loanable funds shows an inverse relationship between real interest rates and the quantity supplied of loanable funds. C Investment is financed by national savings in a closed economy. D Investment is financed by government borrowing in an open economy. E Public savings is the sum of national savings and private savings.
C Investment is financed by national savings in a closed economy. Investment is financed by national savings in a closed economy. In a closed economy, Y = C + I + G, and national savings is S = Y −C − G. Therefore, Y − C − G= I; i.e., S=I.
Which of the following explains why the amount predicted by the value of the simple money multiplier may be overstated? A It does not take into account the amount of bank loans. B It does not take into account the marginal propensity to consume. C It does not take into account a bank's desire to hold excess reserves. D It does not take into account changes in expected inflation. E It does not take into account changes in savings.
C It does not take into account a bank's desire to hold excess reserves. The amount predicted by the simple money multiplier may be overstated because it does not take into account a bank's desire to hold excess reserves or the public holding more currency.
Which of the following transactions will keep M1 unchanged? A Sam transferred money from his savings account to his checking account. B Mike purchased government bonds and paid with a check. C Leila deposited coins from her piggy bank into her checking account. D Sandy withdrew money from her savings accounts. E Patty increased her monthly cash deposits to her retirement funds.
C Leila deposited coins from her piggy bank into her checking account. M1 is composed of currency in circulation and checkable deposits. This transaction will keep M1unchanged because currency will decrease and checkable deposits will increase by the s
An increase in the price level will affect the money market and bond market in which of the following ways? A The nominal interest rate rises, and the price of previously issued bonds rises. B The nominal interest rate falls, and the price of previously issued bonds is unaffected. C The nominal interest rate rises, and the price of previously issued bonds falls. D The nominal interest rate falls, and the price of previously issued bonds rises. E The nominal interest rate is unaffected, and the price of previously issued bonds rises.
C The nominal interest rate rises, and the price of previously issued bonds falls. A rise in price level causes the money demand curve to shift to the right, causing the nominal interest rate to rise. Nominal interest rates and bond prices move in opposite directions. Therefore, an increase in the nominal interest rate will result in a decrease in the price of previously issued bonds.
An increase in which of the following will cause an increase in the demand for money? A The interest rate B The supply of money C The price level D The velocity of money E The trade deficit
C The price level
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
The amount of money that the public wants to hold in the form of cash will A be unaffected by any change in interest rates or the price level B increase if interest rates increase C decrease if interest rates increase D increase if the price level decreases E decrease if the price level remains constant
C decrease if interest rates increase
Which of the following changes would most likely cause an increase in interest rates in the short run? A A decrease in reserve requirements B An increase in trade deficits C An open market purchase of government bonds by the Federal Reserve D An increase in government spending financed by borrowing E An increase in the price of bonds
D An increase in government spending financed by borrowing
If the Federal Reserve lowers the reserve requirement, 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 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
Which of the following actions by the Federal Reserve reduces the ability of the banking system to create money? A Decreasing the federal funds rate B Decreasing the discount rate C Increasing the money supply D Increasing the reserve requirement E Buying government bonds on the open market
D Increasing the reserve requirement
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
Mia transferred $1,000 from her checking account to her savings account. How will M1 and M2 measures of the money supply change? A M1 will increase and M2 will decrease. B M1 will increase and M2 will increase. C M1 will decrease and M2 will increase. D M1 will decrease and M2 will not change. E M1 will not change and M2 will increase.
D M1 will decrease and M2 will not change. M1 is composed of currency in circulation and demand deposits. M2 is composed of M1 and other short term and long term savings accounts. Therefore, transferring money from checking accounts to savings accounts will reduce M1 but will not affect M2.
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? A OutputPrice LevelIncreaseIncrease B OutputPrice LevelIncreaseNo change C OutputPrice LevelIncreaseDecrease D OutputPrice LevelDecreaseDecrease E OutputPrice LevelDecreaseIncrease
D OutputPrice LevelDecreaseDecrease
Northern City Bank keeps no excess reserves. Assume Northern City Bank receives a deposit of $50 million dollars. As a result of the deposit, Northern City Bank's required reserves increase by $10 million. What is the maximum possible change in the money supply in the banking system that could result from the $50 million deposit? A The money supply will increase by a maximum of $10 million. B The money supply will increase by a maximum of $40 million. C The money supply will increase by a maximum of $50 million. D The money supply will increase by a maximum of $200 million. E The money supply will increase by a maximum of $250 million.
D The money supply will increase by a maximum of $200 million. Since the bank keeps no excess reserves, all excess reserves will be lent out and will result in a maximum increase in loans of $200 million, which is the product of excess reserves (=deposits−required reserves=$50million−$10million=$40million) and the money multiplier (=1required reserve ratio=1(required reserves / deposits)=1($10million / $50million)=10.2=5).Therefore, the money supply will increase by a maximum of $200 million.
Which of the following is true at the nominal interest rate (i3) ? A The money market is at equilibrium because the quantity demanded is equal to the quantity supplied. B There is a surplus in the money market because the quantity demanded is less than the quantity supplied. C There is a surplus in the money market because the quantity demanded is greater than the quantity supplied. D There is a shortage in the money market because the quantity demanded is greater than the quantity supplied. E There is a shortage in the money market because the quantity demanded is less than the quantity supplied.
D There is a shortage in the money market because the quantity demanded is greater than the quantity supplied. At i3 the quantity of money demanded is greater than the quantity of money supplied; therefore, there is a shortage in the money market.
Country X's economy is enjoying political stability and attracting foreign financial capital. At the same time Country X's government is borrowing to finance spending. How will these changes affect the loanable funds market in Country X? A There will be a decrease in the supply of loanable funds. B There will be a decrease in the demand for loanable funds. C There will be an increase in the equilibrium nominal interest rate. D There will be an indeterminate effect on the equilibrium real interest rate. E There will be an indeterminate effect on the equilibrium quantity of loanable funds.
D There will be an indeterminate effect on the equilibrium real interest rate. The increase in foreign financial capital increases the supply of loanable funds, which lowers the real interest rate. The increase in government borrowing increases the demand for loanable funds, which increases the real interest rate. Thus, the overall impact on the equilibrium 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 the interest rate on a one-year loan is 5% and the expected inflation rate is −2% for the same period, what is the expected real interest rate on the loan? A −7% B −2% C 2% D 3% E 7%
E 7% The expected real interest rate is calculated as the nominal interest rate minus the expected inflation rate; 5%−(−2%)=7%.
The required reserve ratio is 0.2 and the Federal Reserve sells $1 million in securities. If there are no leakages and banks do not hold excess reserves, then which of the following is the change in the money supply? A An increase of $1 million B An increase of $1.2 million C An increase of $5 million D A decrease of $1.2 million E A decrease of $5 million
E A decrease of $5 million
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 open market sale by the Federal Reserve
E An open market sale by the Federal Reserve
Expansionary monetary policy can affect the economy through which of the following chains of events? A Increasing the discount rate lowers the real interest rate, which raises investment. B Reducing taxes lowers the discount rate, which raises consumption. C Increasing government expenditure lowers the interest rate, which raises investment. D Increasing the reserve requirement decreases the interest rate, which increases investment. E Buying bonds increases the money supply, which lowers the interest rate.
E Buying bonds increases the money supply, which lowers the interest rate.
With a constant money supply, if the demand for money decreases, the equilibrium interest rate and quantity of money will change in which of the following ways? A Interest RateQuantity of MoneyIncreaseDecrease B Interest RateQuantity of MoneyIncreaseNot change C Interest RateQuantity of MoneyDecreaseDecrease D Interest RateQuantity of MoneyDecreaseIncrease E Interest RateQuantity of MoneyDecreaseNot change
E Interest RateQuantity of MoneyDecreaseNot change
Which of the following describes the relationship between the nominal interest rate and the quantity of money people want to hold as depicted by the money demand curve? A Positive, and the money demand curve is upward sloping. B Positive, and the money demand curve is downward sloping. C Positive, and the money demand curve is vertical. D Inverse, and the money demand curve is upward sloping. E Inverse, and the money demand curve is downward sloping.
E Inverse, and the money demand curve is downward sloping. As the nominal interest rate falls, people hold more money because the opportunity cost of holding money decreases, which leads to a downward-sloping money demand curve.
Nathan has been unable to trust banks since the failure of his savings and loan bank. He claims that storing his hard-earned money at home is costless. Is Nathan correct? A Yes, because money is the most liquid form of financial assets. B Yes, because there is no opportunity cost in holding money. C Yes, because the opportunity cost of holding money is the real value of goods and services it can purchase. D No, because money is the least liquid form of financial assets. E No, because the opportunity cost of holding money is the lost interest he could have earned on other financial assets.
E No, because the opportunity cost of holding money is the lost interest he could have earned on other financial assets. Nathan is incorrect because the opportunity cost of holding money is the interest income that could have been earned from holding other financial assets, such as b
During a mild recession, if policymakers want to reduce unemployment by increasing investment, which of the following policies would be most appropriate? A Equal increases in government expenditure and taxes B An increase in government expenditure only C An increase in transfer payments D An increase in the reserve requirement E Purchase of government securities by the Federal Reserve
E Purchase of government securities by the Federal Reserve
Which of the following is adjusted by the actual inflation rate? A Nominal wages B Automatic stabilizers C Unemployment rate D Price of previously issued bonds E Real interest rates
E Real interest rates Real values are adjusted for inflation. A real interest rate is adjusted for inflation.
Spencer took a 9 percent one-year fixed-rate loan to buy a new car. He expected to pay a real interest rate of 5 percent. If at the end of the year Spencer only paid a 3 percent real interest rate, which of the following is true? A The nominal interest rate was 3%. B The nominal interest rate was 5%. C The actual inflation rate was 2%. D The actual inflation rate was 4%. E The actual inflation rate was 6%.
E The actual inflation rate was 6%. The actual inflation rate is the difference between the nominal interest rate and the actual real interest rate, 9%−3%=6%.
Southern City Bank has $100 million in deposits and has $8 million in excess reserves. If the required reserve ratio is 5%, which of the following is true? A The money multiplier is 20, and the bank can lend out up to $160 million. B The money multiplier is 8, and the bank can lend out up to $20 million. C The money multiplier is 8, and the bank can lend out up to $5 million. D The money multiplier is 8, and loans can increase in the banking system by a maximum of $8 million. E The money multiplier is 20, and loans can increase in the banking system by a maximum of $160 million.
E The money multiplier is 20, and loans can increase in the banking system by a maximum of $160 million. The money multiplier is the inverse of the required reserve ratio and is equal to 10.05=20. The bank can lend out its excess reserves up to $8 million. When the bank lends out all its excess reserves, loans in the banking system can increase by a maximum of $160 million which is equal to the product of the bank's excess reserves and the money multiplier; $8million×20 = $160million.
Which of the following changes will necessarily occur as a result of an increase in the nominal interest rate? A The money demand curve will shift to the left. B The money demand curve will shift to the right. C The money supply curve will shift to the left. D The quantity of money supplied will decrease. E The quantity of money demanded will decrease.
E The quantity of money demanded will decrease.
The loanable funds market is currently in equilibrium at a real interest rate of r1. An increase in household savings will affect the loanable funds market in which of the following ways? A There will be a surplus of funds and the real interest rate will increase. B There will be a shortage of funds and the real interest rate will decrease. C The demand for loanable funds will increase and the real interest rate will increase. D The supply of loanable funds will increase and the real interest rate will increase. E The supply of loanable funds will increase and the real interest rate will decrease.
E The supply of loanable funds will increase and the real interest rate will decrease. An increase in household savings will shift the supply curve of loanable funds to the right, which results in a lower real interest rate.
One way in which the Federal Reserve works to change the United States money supply is by changing the A number of banks in operation B velocity of money C price level D prime rate E discount rate
E discount rate
Cash, a house, bonds, and a savings account are all financial assets. Which of the following rankings lists these assets from the least liquid to the most liquid? - Cash, bonds, house, savings account - Bonds, house, savings account, cash - Savings account, cash, bonds, house - House, bonds, savings account, cash - Cash, savings account, bonds, house
House, bonds, savings account, cash House, bonds, savings account, cash are listed in order from least liquid to most liquid.
Which of the following is true for both stocks and bonds? - They are interest-bearing assets. - They are easily converted to cash. - They are risk-free assets. - They are equity. - They are the most liquid form of financial assets.
They are easily converted to cash. Bonds and stocks are easily converted to cash by selling them in financial markets in order to be used as a medium of exchange.