AP Macro Unit 4a Quiz

19. Under which of the following conditions would a restrictive monetary policy be most appropriate?

a. High inflation

22. If the money stock decreases but nominal gross domestic product remains constant, which of the following has occurred?

a. Income velocity of money has increased.

2. When the Federal Reserve buys government securities on the open market, which of the following will decrease in the short run?

a. Interest rates

16. In the Keynesian model, an expansionary monetary policy will lead to

a. Lower real interest rates and more investment

1. Under a fractional reserve banking system, banks are required to

a. keep part of their demand deposits as reserves

21. 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

b. $8,000

12. If on receiving a checking deposit of $300 a bank's excess reserves increased by $255, the required reserve ratio must be

b. 15%

9. Assume that the reserve requirement is 20 percent, but banks voluntarily keep some excess reserves. A $1 million increase in new reserves will result in

b. An increase in the money supply of less than $5 million

5. The federal funds rate is the interest rate that

b. Banks charge one another for short-term loans

18. Which (M1)? of the following constitutes the largest component of the United States money supply (M1)?

b. Checkable deposits (demand deposits)

15. 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?

b. Decrease/Increase

23. 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?

b. Liabilities: +$200 Reserve Requirements: +$30

7. 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

c. $3,000

6. In the country 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

c. 6%

13. The Federal Reserve can increase the money supply by

c. Buying government bonds on the open market

11. Which of the following will most likely occur in an economy if more money is demanded than is supplied?

c. Interest rates will increase

17. The money-creating ability of the banking system will be less than the maximum amount indicated by the money multiplier when

c. People hold a portion of their money in the form of currency

14. When consumers hold money rather than bonds because they expect the interest rate to increase in the future, they are holding money for which of the following purposes?

c. Speculation

24. Open market operations refer to which of the following activities?

c. The buying and selling of government securities by the Federal Reserve

3. If a commercial bank has no excess reserves and the reserve requirement is 10 percent, what is the value of new loans this single bank can issue if a new customer deposits $10,000?

d. $9,000

4. When a central bank sells securities in the open market, which of the following set of events is most likely to follow?

d. A decrease in the money supply, an increase in interest rates, and a decrease in aggregate demand

25. In a flexible system of exchange rates, an open market sale of bonds by the Federal Reserve will most likely change the money supply, the interest rate, and the value of the United States dollar which of the following ways?

d. Decrease/Increase/Increase

8. If the Federal Reserve institutes a policy to reduce inflation, which of the following is most likely to increase?

d. Interest rates

20. One way in which the Federal Reserve works to change the United States money supply is by changing the

e. Discount rate

10. If the economy is operating at full employment and there is a substantial increase in the money supply, the quantity theory of money predicts an increase in

e. The price level