AP Macro Unit 4: Financial Sector

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?

• House, bonds, savings account, cash

• Savings account, cash, bonds, house

• Bonds, house, savings account, cash

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?

• The actual inflation rate was 2%.

• The actual inflation rate was 6%.

• The actual inflation rate was 4%.

Which of the following transactions will keep M1 unchanged?

• Sam transferred money from his savings account to his checking account.

• Leila deposited coins from her piggy bank into her checking account.

• Sandy withdrew money from her savings accounts.

• All of the above

Bank A keeps no excess reserves. Assume Bank A receives a deposit of $50 million dollars from a consumer. As a result of the deposit, Bank A’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?

• The money supply will increase by a maximum of $200 million.

• The money supply will increase by a maximum of $250 million.

• The money supply will increase by a maximum of $50 million.

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?

• Inverse, and the money demand curve is downward sloping.

• Positive, and the money demand curve is downward sloping.

• Inverse, and the money demand curve is upward sloping.

Which of the following is true at the nominal interest rate (i3)?

• There is a surplus in the money market because the quantity demanded is greater than the quantity supplied.

• There is a shortage in the money market because the quantity demanded is less than the quantity supplied.

• There is a shortage in the money market because the quantity demanded is greater than the quantity supplied.

An increase in the price level will affect the money market and bond market in which of the following ways?

• The nominal interest rate falls, and the price of previously issued bonds is unaffected.

• The nominal interest rate rises, and the price of previously issued bonds falls.

• The nominal interest rate rises, and the price of previously issued bonds rises.

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?

• Selling government bonds

• Increasing the required reserve ratio

• Decreasing the discount rate

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?

• There would be a decrease in the nominal interest rate and an increase in the price level.

• There would be an increase in the nominal interest rate and a decrease in the price level.

• There would be a decrease in the nominal interest rate and a decrease in the price level.

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.

• Sam will pay a higher real interest rate.