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WorksheetsAP Macro Unit 4: Financial Sector
Total questions: 84
Worksheet time: 1hrs 26mins
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.
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.
Foreign inflows of financial capital equal investment spending
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
A decrease in private savings
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.
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
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
Means of payment
Unit of account
Store of value
ABC Bank is a commercial bank in Country X. Assume the required reserve ratio is 25%. If ABC Bank sells $20 million worth of government bonds to Country X’s central bank, what will happen to the money supply
The money supply will decrease by a maximum of $80 million.
The money supply will increase by a maximum of $80 million.
The money supply will decrease by a maximum of $5 million.
The money supply will increase by a maximum of $5 million.
Fiat Money
performs the function of money but has no other value or uses
the total collection of assets
performs the function of money and has intrinsic value
anything that is generally accepted in payment for goods and services
Commodity Money
a flow of earnings per unit of time
performs the function of money but has no other value or uses
the total collection of assets
performs the function of money and has intrinsic value
anything that is generally accepted in payment for goods and services
Liquidity
acts as a measurement of value
allows you to store purchasing power for the future
ease with which an asset can be accessed and used as a medium of exchange
used to buy goods and services with no complications of barter system
before trade can occur, each trader has to have something the other wants
A Store of Value
acts as a measurement of value
allows you to store purchasing power for the future
ease with which an asset can be accessed and used as a medium of exchange
used to buy goods and services with no complications of barter system
before trade can occur, each trader has to have something the other wants
Which of the following will most likely occur in an economy if more money is demanded than is supplied?
The amount of investment spending will increase.
Interest rates will increase
The supply of money will decrease
Deflation
The aggregate demand will increase
Fractional reserve banking means that banks are required to
Charge the same interest rate on all their loans
Expand the money supply when requested by the central bank
Insure their deposits against losses and bank runs
Pay a fraction of their interest income in taxes
Keep part of their demand deposits as reserves
If the Federal Reserve raises the discount rate, how are interest rates and real GDP affected?
Interest Rates / Real GDP
Decrease / Decrease
Interest Rates / Real GDP
Increase / Increase
Interest Rates / Real GDP
Decrease / Increase
Interest Rates / Real GDP
Increase / Decrease
Interest Rates / Real GDP
Decrease / No change
To eliminate an inflationary gap, the Federal Reserve might
Increase personal income taxes
Increase in the money supply
Decrease the federal funds rate
Buy bonds on the open market
Sell bonds on the open market
The Federal Reserve can increase the money supply by
Buying financial capital from foreign governments
Buying bonds on the open market
Selling government bonds on the open market
Selling foreign currency in the exchange market
Selling gold on the open market
Which of the following is described as consumers holding money rather than bonds because they expect the interest rate to increase in the future?
Transactions demand money
Asset demand for money
A medium of exchange
Liquidity
The money multiplier
If on receiving a checking deposit of $500 a bank’s excess reserves increased by $400, the required reserve must be:
10%
15%
20%
25%
80%
Assume the required reserve ratio is .2. If a bank initially has no Excess Reserves and $100,000 cash is deposited in the bank, the maximum amount by which this bank may initially increase its loans is
$20,000
$80,000
$100,000
$200,000
$500,000
The Federal Reserve can change the US money supply by changing
Putting more gold in circulation
The prime rate
Velocity of money
Discount rate
Price level
The federal funds rate is the interest rate that
The Fed charges the federal government on its loans
Banks charge one another for short-term loans
Banks charge their best customers
Equalizes the yield on corporate bonds and municipal bonds
Is equal to the nominal rate of inflation minus the real rate of inflation
If the Fed institutes a policy to reduce inflation, which of the following is most likely to increase?
Tax rates
Investment
Government deficits
Interest rates
Real GDP
An economy is in a recessionary output gap. Which of the following combinations of policy actions would definitely move the economy toward long-run equilibrium?
A decrease in government spending and an increase in income taxes
A decrease in the money supply and an increase in income taxes
A decrease in income taxes and an increase in the money supply
Who is in charge of Monetary Policy
The Government
The Federal Reserve System
The states
The Department of the Treasury
An expansionary policy means that the Fed is attempting to
increase the size of the nation's money supply
decrease the size of the nation's money supply
A contractionary policy means that the Fed is attempting to
increase the size of the nation's money supply
decrease the size of the nation's money supply
In order to close a recessionary (negative output) gap, the Fed should use...
an expansionary policy
a contractionary policy
In order to close an inflationary (positive output) gap, the Fed should use...
an expansionary policy
a contractionary policy
Which of the following combinations of monetary policy actions would definitely cause a decrease in aggregate demand?
Discount rate/Open market operations/Reserve requirement
Decrease/Buy bonds/Decrease
Decrease/Sell bonds/Decrease
Increase/Buy bonds/Increase
Increase/Sell bonds/Decrease
Increase/Sell bonds/Increase
What will happen to the supply of money and the equilibrium nominal interest rate if the Federal Reserve buys government securities?
Supply/Interest rate
Increase/Increase
Increase/Decrease
Decrease/Decrease
Decrease/Increase
Decrease/remain unchanged
If aggregate demand growth is outpacing aggregate supply growth, the FED is most likely to
Increase the Interest Rate on Reserves
Decrease the Reserve Ratio
Increase their purchases of bonds
Decrease the discount rate
A bank has $15,000 in total reserves and $100,000 in demand deposits. The reserve requirement is 12%. How much additional lending can this bank take on?
$15,000
$12,000
$3,000
$0
Expansionary or Contractionary: lower the reserve requirement
expansionary
contractionary
If investors feel that businesses will suffer hard times in the future, which of the following will happen to the loanable funds market?
Increase in supply
Decrease in supply
Increase in demand
Decrease in demand
If demand for loanable funds falls...
Real interest rates will rise
Real interest rates will fall
Stagflation will occur
The average value of 401(k)s will decrease
The FED can increase interest rates in order to
Reduce inflation
Reduce cyclical unemployment
Reduce structural unemployment
Increase aggregate demand
Increase liquidity in banks
Government increasing deficit spending will cause which of the following in the loanable funds market?
Increase in demand
Decrease in supply
Decrease in demand
Increase in supply
Either an increase in demand or a decrease in supply
Fiat Money
a flow of earnings per unit of time
performs the function of money but has no other value or uses
the total collection of assets
performs the function of money and has intrinsic value
anything that is generally accepted in payment for goods and services
Commodity Money
a flow of earnings per unit of time
performs the function of money but has no other value or uses
the total collection of assets
performs the function of money and has intrinsic value
anything that is generally accepted in payment for goods and services
Money
a flow of earnings per unit of time
performs the function of money but has no other value or uses
the total collection of assets
performs the function of money and has intrinsic value
anything that is generally accepted in payment for goods and services
Liquidity
acts as a measurement of value
allows you to store purchasing power for the future
ease with which an asset can be accessed and used as a medium of exchange
used to buy goods and services with no complications of barter system
before trade can occur, each trader has to have something the other wants
A Unit of Account
acts as a measurement of value
allows you to store purchasing power for the future
ease with which an asset can be accessed and used as a medium of exchange
used to buy goods and services with no complications of barter system
before trade can occur, each trader has to have something the other wants
A Medium of Exchange
acts as a measurement of value
allows you to store purchasing power for the future
ease with which an asset can be accessed and used as a medium of exchange
used to buy goods and services with no complications of barter system
before trade can occur, each trader has to have something the other wants
A Store of Value
acts as a measurement of value
allows you to store purchasing power for the future
ease with which an asset can be accessed and used as a medium of exchange
used to buy goods and services with no complications of barter system
before trade can occur, each trader has to have something the other wants
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 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 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.
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
A decrease in private savings
An increase in the equilibrium nominal interest rate could be caused by which of the following changes?
An increase in the money supply
An increase in real income
A decrease in the amount of cash the public wants to hold
A decrease in the price level
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.
Foreign inflows of financial capital equal investment spending
Borrowing equals lending.
Sam pays monthly installments on a five-year fixed interest rate auto loan. If the 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.
Bank A keeps no excess reserves. Assume Bank A receives $50 million dollars from the FED buying their bonds. The required reserve ratio is 20%. What is the maximum possible change in the money supply in the banking system that could result from the $50 million OMO?
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.
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.
Assume Country X is at full-employment and in long-run equilibrium. Which of the following will happen if Country X’s central bank conducts a contractionary monetary policy?
The economy will be in a recessionary gap; the price level will decrease, and the real output level will increase.
The economy will be in a recessionary gap; the price level and the real output level will decrease.
The economy will be in an inflationary gap; the price level and the real output level will increase.
If the legal reserve requirement is 25%, the value of the money multiplier is
2
4
5
10
1
When money is used as a standard of value, 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.
Which of the following are true statements about the federal funds rate?
I. It is the same thing as the discount rate.
II. It is the interest rate that banks charge each other for short-term loans.
III. It is influenced by open market operations.
I only
II only
III only
I and II only
II and III only
Suppose the Federal Reserve buys $400,000 worth of securities from the securities dealers on the open market. If the reserve requirement is 20% 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 contract by $800,000.
It will expand by $2,000,000.
It will expand by $800,000.
A commercial bank holds $500,000 in demand deposit liabilities and $120,000 in reserves. If the required reserve ratio is 20%, which of the following is the maximum amount by which this single commercial bank and the maximum amount by which the banking system can increase loans?
Amount created by a single bank/Amount created by banking system
$5,000/$25,000
$20,000/$80,000
$20,000/$100,000
$30,000/$150,000
$120,000/$500,000
To reduce inflation, the Federal Reserve could:
expand the money supply in order to raise interest rates, which increases investment.
expand the money supply in order to lower interest rates, which increases investment.
contract the money supply in order to lower interest rates, which increases investment.
contract the money supply in order to raise interest rates, which decreases investment.
buy bonds and decrease the discount rate to encourage borrowing.
Reserves, the money supply, and interest rates are most likely to change in which of the following ways when the Federal Reserve sells bonds?
Reserves/Money Supply/Interest rates
Increase/Increase/Increase
Increase/Increase/Decrease
Decrease/Increase/Decrease
Decrease/Decrease/Increase
Decrease/Decrease/Decrease
Which of the following actions by the Federal Reserve will result in an increase in banks' excess reserves?
buying bonds on the open market
selling bonds on the open market
increasing the discount rate
increasing the reserve requirement
increasing the federal funds rate
Aggregate demand and aggregate supply analysis suggests that, in the short run, an expansionary monetary policy will shift
the aggregate demand curve to the left
the aggregate supply curve to the left
the aggregate demand curve to the right
the aggregate supply curve to the right
both the aggregate demand and supply curves to the left
Which of the following combinations of monetary policy actions would definitely cause a decrease in aggregate demand?
Discount rate/Open market operations/Reserve requirement
Decrease/Buy bonds/Decrease
Decrease/Sell bonds/Decrease
Increase/Buy bonds/Increase
Increase/Sell bonds/Decrease
Increase/Sell bonds/Increase
The real interest rate is simply stated as the
price of borrowed money in the future.
inflation rate minus the CPI.
nominal interest rate over time.
nominal interest rate minus the expected inflation rate.
nominal interest rate plus the expected inflation rate.
What is the present value of $110 paid one year from now if the interest rate is 10%?
$121
$110
$100
$99
$11
Expansionary monetary policy results in which of the following in the short run?
I. The money supply increases.
II. The nominal interest rate decreases.
III. The real interest rate decreases.
IV. Bond prices decrease.
I and II only
I, II, and III
I, II, and IV
III and IV only
IV only
Which of the following best explains why the money demand curve is downward sloping?
High interest rates lead to less investment.
Banks charge higher nominal interest rates on loans when price level increases.
Higher interest rates encourage people to exchange money for other interest-bearing assets.
Households need to hold money for daily transactions.
Households demand less money because of the use of debit cards.
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
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 other answers
