4.3-4.5 AP Macro

4.3-4.5 AP Macro

Let's do some practice....

Multiple Choice

Under a fractional reserve banking system, banks are required to

• keep part of their demand deposits as reserves

• expand the money supply when requested by the central bank

• insure their deposits against losses and bank runs

• pay a fraction of their interest income in taxes

• charge the same interest rate on all their loans

Multiple Choice

Which of the following describes a major difference between stocks and bonds?

• Stocks represent ownership in a corporation, and bonds represent a loan to a corporation.

• Bonds represent ownership in a corporation, and stocks represent a loan to a corporation.

• Stocks are counted in gross domestic product, and bonds are not counted.

• Bonds are counted in gross domestic product, and stocks are not counted.

• Bonds pay dividends, and stocks earn interest.

Multiple Choice

Which of the following will happen when interest rates increase in an economy?

• The cost of borrowing will decrease.

• The spending multiplier will decrease.

• Investment spending will increase.

• The price of previously issued bonds will increase.

• The opportunity cost of holding money will increase.

Multiple Choice

If the interest rate on loans before adjusting for inflation is 9%, and the expected inflation rate is 4%, then which of the following must be true?

• Lenders are expected to receive an additional 4% on their loaned funds.

• Borrowers are expected to pay an additional 4% on their borrowed funds.

• The expected real interest rate is 9%.

• The expected real interest rate is 13%.

• The nominal interest rate is 9%.

Multiple Choice

Which of the following best describes the nominal interest rate on a mortgage loan that a bank offers to a customer?

• It is the real interest rate divided by the price level.

• It is the real interest rate minus the expected inflation rate.

• It is the interest rate charged by the bank.

• It is the interest rate charged by the bank minus the expected inflation rate.

• It is the interest rate charged by the bank minus the interest rate the bank pays to its depositors.

Jot down the amounts for practice..

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Calculate the required reserve ratio

Multiple Choice

Suppose that an individual deposits $5,000 of cash into her checking account. What is the immediate effect of the cash deposit on the M1 measure of the money supply?

• Increase

• Decrease

• No change

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What is the dollar value of the bank’s required reserves after the $5,000 deposit in the last question

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What is the money multiplier?

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What is the dollar value of the bank’s excess reserves after the $5,000 deposit?

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What is the dollar value of the bank’s excess reserves after the $5,000 deposit?

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Calculate the maximum amount that the money supply can change as a result of the $5,000 deposit

Balance sheet for Bank of Hack. Identify the following immediately after Pearson withdraws $1,000 of cash from the bank.

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Reserve Ratio?

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Government securities?

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Demand deposits?

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Required reserves?

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Excess reserves?

Fast Review....

Get ready!

Multiple Choice

Money creation by the banking system will decrease if

• the velocity of money increases

• real interest rates are increase

• unemployment is low

• people keep cash in their mattresses

Multiple Choice

Our current money is _______ money. Meaning that it has value because the government has ordered that it is an acceptable means to pay debts.

• Commodity
• Fiat
• Representative
• Funny

Multiple Choice

1/required reserve ratio determines the

• required reserves

• excess reserves

• lending capacity

• money multiplier

Multiple Choice

When money is used to acquire goods and services, it is functioning as a

• Medium of exchange.

• Store of value.

• Standard of account.

• Equation of value.

Multiple Choice

What is the price paid for the use of borrowed money?

• Principal
• Interest
• Default
• FDIC

Multiple Choice

Which of the following is an example of money as a unit of account?

• Purchasing a toy for $8.99
• Lending a friend $25.00
• Opening a savings account at a bank
• Checking the price of a camera at several stores before buying it at the lowest price

Multiple Choice

If Takeoff withdraws a $100 bill from his checking account and Quavo deposits another $100 bill in his savings account, by how much will M1 and M2 change?

• M1 will increase, and M2 will increase.

• Both M1 and M2 will remain the same.

• M1 will decrease, but M2 will remain the same.

• M2 will decrease by $100.

• M1 will remain the same, and M2 will increase.

Identify the change in the following immediately after Jessie deposits $1,000 of cash into the bank

Multiple Choice

Change in reserve ratio

• no change

• increase

• decrease

Multiple Choice

Change in demand deposits

• no change

• increase $1000

• decrease $1000

• Increase $950

• Decrease $950

Multiple Choice

Change in Customer loans

• no change

• increase $1000

• decrease $1000

• Increase $950

• Decrease $950

Multiple Choice

Change in Excess reserves

• no change

• increase $1000

• decrease $1000

• Increase $950

• Decrease $950

Multiple Choice

Change in Required reserves

• no change

• increase $100

• decrease $100

• Increase $50

• Decrease $50