AP Macroeconomics – Unit 4 Challenge Quiz

Suppose the Federal Reserve engages in a contractionary open market operation by selling $500 million in government securities. What is the expected effect on the money supply, the federal funds rate, and the velocity of money?

• Money supply increases, federal funds rate decreases, velocity decreases

• Money supply decreases, federal funds rate increases, velocity increases

• Money supply increases, federal funds rate increases, velocity decreases

• Money supply decreases, federal funds rate increases, velocity decreases

Which of the following monetary policies would be the most effective in counteracting an inflationary gap, assuming price stickiness in the short run?

• Decreasing the reserve requirement and lowering the discount rate

• Selling government bonds and raising the federal funds rate target

• Buying government bonds while keeping the discount rate unchanged

• Reducing income taxes to stimulate aggregate demand

Suppose banks hold excess reserves due to low confidence in lending. Which monetary policy tool is most effective in incentivizing banks to increase lending?

• Raising the discount rate

• Increasing the reserve requirement

• Lowering the interest paid on excess reserves

• Selling government securities

Milton Friedman and other monetarists argue that discretionary monetary policy often fails due to which of the following reasons?

• The crowding-out effect from government borrowing

• The time lags associated with monetary policy implementation

• The inability of the money supply to influence inflation in the long run

• The Phillips curve’s breakdown during periods of stagflation

If the Federal Reserve pursues a contractionary monetary policy by selling bonds, what is the likely impact on the value of the U.S. dollar in foreign exchange markets and the trade balance?

• The U.S. dollar depreciates, and the trade deficit widens

• The U.S. dollar appreciates, and net exports decrease

• The U.S. dollar depreciates, and net exports increase

• The U.S. dollar appreciates, and the trade deficit shrinks

In the classical theory of interest rates, an increase in government borrowing without a change in the money supply will likely lead to which of the following?

• A decrease in real interest rates due to higher saving

• An increase in real interest rates due to crowding out

• A decrease in nominal interest rates due to the Fisher effect

• No change in interest rates due to monetary neutrality

Assume the economy is in a liquidity trap where nominal interest rates are at or near zero. Which of the following monetary policy tools is most likely to be ineffective?

• Open market purchases of government securities

• Forward guidance signaling long-term rate expectations

• Large-scale asset purchases (quantitative easing)

• Increasing government spending through deficit financing

Suppose the required reserve ratio is 10%, but banks choose to hold an additional 5% in excess reserves. If the Fed injects $200 million into the banking system, what is the maximum potential expansion of the money supply?

• $1 billion

• $2 billion

• $800 million

• $1.33 billion

Assume the velocity of money is stable, and real GDP grows at an average annual rate of 3%. If the central bank wants to maintain stable prices, what should be the approximate target growth rate of the money supply according to the Quantity Theory of Money?

• 0%

• 3%

• 5%

• 7%

If the Federal Reserve unexpectedly tightens monetary policy by raising interest rates, how would this likely impact the stock market and long-term bond prices?

• Stock prices increase, bond prices decrease

• Stock prices decrease, bond prices increase

• Stock prices decrease, bond prices decrease

• Stock prices increase, bond prices increase