AP Macro Unit 4 Test Review

The M1 definition of money includes which of the following?

• Currency in circulation and demand deposits

• Demand deposits and savings

• Savings accounts and small time deposits

• Small time deposits and demand deposits

• Money market accounts and currency in circulation

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.

If the legal reserve requirement is 25 percent, the value of the simple monetary multiplier is

• 2

• 4

• 5

• 10

• 1.0

Which of the following are true statements about the federal funds rate?

• I only

• II only

• III only

• I and II only

• II and III only

An open-market operation by a country’s central bank to reduce the unemployment rate would be to

• sell bonds to decrease the interest rate and to increase aggregate demand

• sell bonds to increase the interest rate and to decrease aggregate demand

• sell bonds to increase the interest rate and to increase investment

• buy bonds to decrease the interest rate and to decrease aggregate demand

• buy bonds to decrease the interest rate and to increase aggregate demand

Suppose the Federal Reserve buys $400,000 worth of securities from the securities dealers on the open market. If the reserve requirement is 20 percent and the banks hold no excess reserves, what will happen to the total money supply?

• It will be unchanged.

• It will contract by $2,000,000.

• It will expand by $2,000,000.

• It will contract by $800,000.

• It will expand by $800,000.

In the short run, a tight monetary policy tends to cause

• A decrease in the interest rate and a decrease in prices

• A decrease in the interest rate and an increase in private investment

• A decrease in prices and an increase in private investment

• An increase in the interest rate and an increase in private investment

• An increase in interest rate and a decrease in private investment

When money is used as a unit of account, a person is

• Earning more money than before

• Purchasing a necessity

• Making a financial transaction

• Making price comparisons among products

• Writing a check for groceries

If the required reserve ratio is 10 percent, actual reserves are $10 million, and currency in circulation is equal to $20 million, M1 will at most be equal to

• $20 million

• $30 million

• $90 million

• $120 million

• $150 million

Which of the following does the Federal Reserve use most to combat a recession?

• Selling securities

• Buying securities

• Reducing the reserve requirement

• Increasing the discount rate

• Increasing the federal funds rate