AP Macro Fed/Money Market Questions

Which of the following will lead to a decrease in a nation’s money supply?

• A decrease in income tax rates

• A decrease in the discount rate

• An open market purchase of government securities by the central bank

• An increase in reserve requirements

• An increase in government expenditures on goods and services

Which of the following will most likely lead to a decrease in inflationary expectations?

• A decrease in the marginal propensity to save

• A decrease in imports

• A decrease in the money supply

• An increase in the government budget deficit

• An increase in the prices of raw materials

A reduction in inflation can best be achieved by which of the following combinations of fiscal and monetary policy?

• Increase taxes, Sell government bonds

• Decrease taxes, Buy government bonds

• Decrease taxes, Lower margin requirements

• Decrease government spending, Lower discount rate

• Increase government spending, Raise discount rate

A real tricky one! A simultaneous increase in inflation and unemployment could be explained by an increase in which of the following?

• Consumer spending

• The money supply

• Labor productivity

• Investment spending

• Inflationary expectations

An increase in the government budget deficit is most likely to result in an increase in which of the following?

• The marginal propensity to consume

• Exports

• The real interest rate

• The money supply

• The simple multiplier

A commercial bank’s ability to create money depends on which of the following?

• The existence of a central bank

• A fractional reserve banking system

• Gold or silver reserves backing up the currency

• A large national debt

• The existence of both checking accounts and savings accounts

Another tricky one! In the short run, which of the following would occur to bond prices and interest rates if a central bank bought bonds through open-market operations?

• no change; increase

• increase; increase

• increase; decrease

• decrease; increase

• decrease; decrease

These are hard! Here we go! Which of the following occurs as investment becomes more responsive to changes in the interest rate?

• Monetary policy becomes more effective at changing real gross domestic product.

• Fiscal policy becomes more effective at changing real gross domestic product.

• Monetary policy becomes more effective at changing interest rates

• Fiscal policy becomes more effective at changing interest rates

• There is no change in the effectiveness of either monetary or fiscal policy.

Which of the following is true about changes in tax rates, changes in the level of government expenditures, and changes in the money supply?

• They are automatic stabilizers

• They are tools of discretionary fiscal policy.

• They have different lag times between implementation of a policy and its effects on aggregate demand.

• They are favored equally by both classical and Keynesian economists to fine-tune the economy.

• All are controlled by the Federal Reserve system.

For which of the following sets of unemployment and inflation rates will a central bank be most reluctant to increase the rate of growth in the money supply?

• 10%, 2%

• 10%, 10%

• 10%, 10%

• 5%, 5%

• 5%, 10%