AP Macro Unit 4 Review

What will happen to the supply of loanable funds and the equilibrium interest rate if the Federal Reserve buys government securities?

Supply/Interest rate

• Increase/Increase

• Increase/Decrease

• Decrease/Decrease

• Decrease/Increase

• Decrease/remain unchanged

Expansionary monetary policy results in which of the following in the short run?

• I and II only

• I, II, and III

• I, II, and IV

• III and IV only

• IV only

Which of the following is the best example of the crowding-out effect?

• The government changes laws regulating banks.

• The Federal Reserve buys bonds increasing private investment.

• Deficit spending leads to a higher national debt.

• Deficit spending results in high interest rates that decrease private investment.

• Public sector borrowing increases the supply of loanable funds.

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

• Lower the required reserve ratio

• Lower the discount rate

• Target a lower overnight interbank lending rate

• Sell government bonds to the public

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.

• The monetary base will decrease and the money supply will not change

Which of the following will most likely result in a lower real interest rate in a nation?

• The nation provides an investment tax credit to new businesses.

• The nation’s central bank sells government bonds in the open market.

• The nation is experiencing political instability and economic risk.

• The citizens of the nation increase their savings for retirement.

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.

• The money demand curve will shift to the left.

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.

• The cost of borrowing will decrease.

What is the primary tool used by the Federal Reserve to control the money supply?

• A) Open market operations

• B) Discount rate

• C) Reserve requirements

• D) Interest on reserves

Which of the following is a consequence of contractionary monetary policy?

• A) Decrease in interest rates

• B) Increase in inflation

• C) Decrease in aggregate demand

• D) Increase in money supply