AP Macro: Unit 4 Review

Sam pays monthly installments on a five-year fixed interest rate auto loan. If the expected inflation rate increases, which of the following will happen?

• Sam will pay a lower nominal interest rate.

• Sam will pay a higher nominal interest rate.

• Sam will pay a lower real interest rate.

If the loanable funds market is in equilibrium, then which of the following must be true?

• Government spending equals tax revenues.

• Investment spending equals private savings.

• Borrowing equals lending.

Which of the following changes in the loanable funds market will decrease the equilibrium real interest rate

• An increase in foreign financial capital inflows

• An increase in government spending on highways financed by borrowing

• An investment tax credit for plant and equipment

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

• The opportunity cost of holding money will increase.

• Investment spending will increase

• The spending multiplier will decrease.

Which of the following is a monetary policy action a central bank would implement to control inflation?

• increase the required reserve ratio

• Lower the discount rate

• Target a lower overnight interbank lending rate

Which of the following will happen if the central bank of a nation purchases government bonds on the open market?

• The monetary base will increase and the money supply will not change.

• The monetary base will increase and the money supply will increase.

• The monetary base will decrease and the money supply will increase.

Which of the following is considered the most liquid asset?

• Currency

• Real estate

• Bonds

• Stocks

On the island of Mabera, the local money is called “favoli.” The price of every good in Mabera is expressed as the number of favolis needed to buy the good. The use of favolis to express the price of goods is ...

• Medium of exchange

• Store of value

• Unit of account

Which of the following changes will necessarily occur as a result of an increase in the nominal interest rate?

• The quantity of money demanded will decrease.

• The quantity of money supplied will decrease.

• The money demand curve will shift to the right.