ap macroeconomics college board questions unit 4

Based on the balance sheets above for three different banks, which of the following is true, if the reserve requirement is 10 percent?

Bank B can increase its loans by $40.

A bank has $800 million in demand deposits and $100 million in reserves. If the reserve requirement is 10 percent, the bank's excess reserves equal

$20 million

A barter economy is different from a money economy in that a barter economy

involves higher costs for each transaction

A commercial bank is facing the conditions given above. If the reserve requirement is 12 percent and the bank does not sell any of its securities, the maximum amount of additional lending this bank can undertake is

$3,000

A commercial bank's ability to create money depends on which of the following?

A fractional reserve banking system

A contraction in the money supply will most likely change the nominal interest rate and aggregate demand in which of the following ways in the short run?

Nominal Interest Rate - Increase

Aggregate Demand - Decrease

All of the following are components of the money supply in the United States EXCEPT

gold bullion

An increase in government spending will affect the demand for money and nominal interest rates in which of the following ways?

Demand for Money - Increase

Nominal Interest Rates - Increase

An increase in inflationary expectations will most likely affect nominal interest rates and bond prices in which of the following ways in the short run?

Nominal Interest Rates - Increase

Bond Prices - Decrease

An increase in money demand will cause which of the following?

A decrease in bond prices

An increase in the money supply is most likely to have which of the following short-run effects on real interest rates and real output?

Real Interest Rates - Decrease

Real Output - Increase

An increase in the money supply will have the greatest effect on real gross domestic product if

the quantity of money demanded is not very sensitive to interest rates

An increase in the price level will most likely cause which of the following?

An increase in the demand for money

An increase in which of the following will cause an increase in the demand for money

The price level

An inflationary gap can be eliminated by all of the following EXCEPT

an increase in the money supply

Assume that Atlantic National Bank has demand deposits of $100,000 and no excess reserves,and that the reserve requirement is 10 percent.A customer withdraws $5,000 from the bank.To meet the reserve requirement, the bank must increase its reserves by

$4,500

Assume that Linda deposits in her checking account the $1,000 cash she was keeping at home for an emergency. If the required reserve ratio is 0.20, what is the maximum change in the money supply from her deposit?

$4,000

Assume that the economy is in equilibrium. If aggregate demand increases, nominal interest rates and bond prices will most likely change in which of the following ways?

Nominal Interest Rates - Increase

Bond Prices - Decrease

Assume that the government finances its spending by borrowing from the public. If the government increases deficit spending, the price of previously issued bonds and the real interest rate will change in which of the following ways?

Price of Bonds - Decrease

Real Interest Rate - Increase

Assume that the nominal interest rate is 10 percent. If the expected inflation rate is 5 percent, the real interest rate is

5%

Assume that the public holds part of its money in cash and the rest in checking accounts. If the central bank lowers the reserve requirement from 16 percent to 8 percent, the money supply will

increase by less than double

Assume that the required reserve ratio is 10 percent, banks keep no excess reserves, and borrowers deposit all loans made by banks. Suppose you have saved $100 in cash at home and decide to deposit it in your checking account. As a result of your deposit, the money supply can increase by a maximum of

$900

Assume that the reserve requirement is 10 percent. Marwa deposits $1 million in cash into her checking account at First Bank. The deposit will initially increase excess reserves at First Bank by

$900,000

Assume that the reserve requirement is 15 percent and that a bank receives a new checking deposit of $200. Which of the following will most likely occur in the bank's balance sheet?

Liabilities: Increase by $200

Required Reserves: Increase by $30

Assume that the reserve requirement is 20 percent, but banks voluntarily keep some excess reserves. A $1 million increase in new reserves will result in

an increase in the money supply of less than $5 million

Assume that the reserve requirement is 20 percent. If a bank initially has no excess reserves and $10,000 cash is deposited in the bank, the maximum amount by which this bank may increase its loans is

$8,000

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.

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

The citizens of the nation increase their savings for retirement.

Commercial banks can create money by

lending excess reserves to customers

During a mild recession, if policymakers want to reduce unemployment by increasing investment, which of the following policies would be most appropriate?

Purchase of government securities by the Federal Reserve

The table gives the value of selected assets and liabilities of a commercial bank's T-account.

What is the maximum amount of new loans the bank could lend with the given amounts of reserves?

$10,000

The table gives the value of selected assets and liabilities of a commercial bank's T-account.

What is the money multiplier?

5

ABC Bank is a commercial bank in Country X. Assume the required reserve ratio is 25% and banks in Country X keep no excess reserves. If ABC Bank sells $20 million worth of government bonds to Country X's central bank, what will happen to the money supply after all adjustments are made in the banking system?

The money supply will increase by a maximum of $80 million.

Expansionary fiscal policy will most likely result in

an increase in nominal interest rates

Expansionary monetary policy can affect the economy through which of the following chains of events?

Buying bonds increases the money supply, which lowers the interest rate.

Expansionary monetary policy will most likely cause interest rates and investment to change in which of the following ways in the short run?

Interest Rates - Decrease

Investment - Increase

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 describes which function of money?

Unit of account

If a central bank significantly increases its sales of government bonds, it is most likely responding to which of the following?

Rising price levels

If a commercial bank has no excess reserves and the reserve requirement is 10 percent, what is the value of new loans this single bank can issue if a new customer deposits $10,000 ?

$9,000

If a country's economy is operating below the full-employment level of output at a very low inflation rate, the central bank of the country is most likely to

lower the discount rate and buy bonds on the open market to generate an increase in output

If aggregate demand is growing faster than long-run aggregate supply, the Federal Reserve is most likely to

sell securities on the open market

If an economy is operating with significant unemployment, an increase in which of the following will most likely cause employment to increase and the interest rate to decrease?

Purchases of government bonds by the central bank

If investors feel that business conditions will deteriorate in the future, the demand for loans and real interest rate in the loanable funds market will change in which of the following ways in the short run?

Demand for Loans - Decrease

Real Interest Rate - Decrease

If on receiving a checking deposit of $300 a bank's excess reserves increased by $255, the required reserve ratio must be

15%

If the central bank buys government bonds from individuals on the open market and banks do not loan out any excess reserves created by the open market purchase, which of the following will happen?

The money supply will increase.

If the central bank conducts an open-market purchase of bonds, which of the following will occur?

The price of bonds will increase.

If the central bank raises the required reserve ratio, the money multiplier and the money supply will change in which of the following ways?

Money Multiplier - Decrease

Money Supply - Decrease

If the Federal Reserve institutes a policy to reduce inflation, which of the following is most likely to increase?

Interest rates

If the Federal Reserve lowers the reserve requirement, which of the following would most likely occur?

Businesses will purchase more factories and equipment.

If the Federal Reserve pursues a contractionary monetary policy, output and the price level will change in which of the following ways in the short run?

Output - Decrease

Price Level - Decrease

If the Federal Reserve sells a significant amount of government securities in the open market, which of the following will occur?

The total amount of loans made by commercial banks will decrease.

If the interest rate on short-term government bonds declined as a result of open market operations by a central bank, the central bank must have

purchased government bonds

If the public's desire to hold money as currency increases, what will the impact be on the banking system?

Banks would be less able to expand credit.

If the required reserve ratio is 0.2, a $1 billion increase in bank reserves can lead to an increase in M1 of at most

$5 billion

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

$120 million

If the reserve requirement is 20 percent, the existence of $100 worth of excess reserves in the banking system can lead to a maximum expansion of the money supply equal to

$500

If the reserve requirement is 10 percent and the central bank sells $10,000 in government bonds on the open market, the money supply will

decrease by a maximum of $100,000

If the reserve requirement is 25 percent and banks hold no excess reserves, an open market sale of $400,000 of government securities by the Federal Reserve will

decrease the money supply by up to $1.6 million

In the country of Agronomia, banks charge 10 percent interest on all loans. If the general price level has been increasing at the rate of 4 percent per year, the real rate of interest in Agronomia is

6%

In the narrowest definition of money, M1, savings accounts are excluded because they are

not a medium of exchange

In the short run, an expansionary monetary policy would most likely result in which of the following changes in the price level and real gross domestic product (GDP) ?

Price Level - Increase

Real GDP - Increase

In the short run, government deficit spending will most likely

raise nominal interest rates

In the short run, which of the following would occur to bond prices and interest rates if a central bank bought bonds through open-market operations?

Bond Prices - Increase

Interest Rates - Decrease

Last year both a borrower and a lender expected an inflation rate of 3 percent when they signed a long-term loan agreement with fixed nominal interest rates of 5 percent. If the actual inflation rate were lower than expected, then which of the following would be true?

The lender would benefit.

The table below gives the value of various monetary measures, in millions of dollars.

Cash in Circulation$100

Cash in Bank Vaults$2

Bank Reserves$10

Demand Deposits$1,000

Traveler's Checks$20

Based on the table above, what is the value of M1, a measure of the money supply?

$1,120 million

Cash in Circulation$100

Cash in Bank Vaults$2

Bank Reserves$10

Demand Deposits$1,000

Traveler's Checks$20

Based on the table above, what is the value of the monetary base?

$110 million

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 increase.

Which of the following will shift the aggregate demand curve in the direction shown in the diagram above?

A decrease in the overnight interbank lending rate

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

Sell government bonds to the public

The amount of money that the public wants to hold is $10 billion. With a monetary base of $2 billion and a money multiplier of 4, which of the following will most likely occur?

The nominal interest rate will increase.

If the interest rate on loans before adjusting for inflation is 9%, and the expected inflation rate is 4%, then which of the following must be true?

The nominal interest rate is 9%.

One way in which the Federal Reserve works to change the United States money supply is by changing the

discount rate

Open market operations refer to which of the following activities?

The buying and selling of government securities by the Federal Reserve

Open market operations take place when the

central bank buys or sells government bonds

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 real interest rate.

Which of the following changes in the loanable funds market will decrease the equilibrium real interest rate?

An increase in foreign financial capital inflows

Suppose that all banks keep only the minimum reserves required by law and that there are no currency drains. The legal reserve requirement is 10 percent. If Maggie deposits the $100 bill she received as a graduation gift from her grandmother into her checking account, the maximum increase in the total money supply will be

$900

Suppose that the central bank buys $100 worth of bonds on the open market. Assume that the required reserve ratio is 10 percent, banks keep no excess reserves, and there are no cash leakages. After banks have made all adjustments, reserves, demand deposits, and loans will increase by which of the following?

Reserves - $100

Demand Deposits - $1,000

Loans - $900

Suppose that the Federal Reserve buys $400 billion worth of government securities from the public. If the required reserve ratio is 20 percent, the maximum increase in the money supply is

$2,000 billion

Suppose the required reserve ratio is 20 percent and a single bank with no excess reserves receives a $100 deposit from a new customer. The bank now has excess reserves equal to

$80

The aggregate demand curve is downward sloping because an increase in the general price level will cause the demand for money, interest rates, and investment to change in which of the following ways?

Demand for Money - Increase

Interest Rates - Increase

Investment - Decrease

The amount of money that the public wants to hold in the form of cash will

decrease if interest rates increase

The annual inflation rate is expected to be 5 percent over the next 3 years. Juan plans to take out a 3-year loan to purchase an automobile. If Juan decides not to take out the loan if the real interest rate exceeds 3 percent, the highest nominal interest rate he is willing to pay is

8 percent

An increase in the equilibrium nominal interest rate could be caused by which of the following changes?

An increase in real income

The demand for money increases when national income increases because

spending on goods and services increases

The federal funds rate is the interest rate that

banks charge one another for short-term loans

The Federal Reserve can cause an increase in interest rates in an attempt to

reduce inflation

The Federal Reserve can increase the money supply by

buying government bonds on the open market

The Federal Reserve decreases the federal funds rate by

buying government bonds on the open market

The table above shows the current entries in the T-account of XYZ Bank. Kim purchases a bond issued by the Federal Reserve Bank for $50,000 and pays for the bond by drawing on her company's account at XYZ Bank. What is the effect of Kim's purchase of the bond on the required and excess reserves of XYZ Bank and the total money supply?

Required - Decrease

Excess - Decrease

Money Supply - Decrease

The graph above shows two aggregate demand curves, AD1 and AD2, and an aggregate supply curve, AS. The shift in the aggregate demand curve from AD1 to AD2 could be caused by

a decrease in the money supply

In the United States, which event would have caused the shift of the money supply curve from S1 to S2 in the money market shown above?

The purchase of government bonds on the open market by the Federal Reserve

If the loanable funds market is in equilibrium, then which of the following must be true?

Borrowing equals lending.

The loanable funds market is best described as bringing together

savers and borrowers

The money demand curve is downward sloping because

people hold less money as the opportunity cost of holding money rises

The money demanded for the purpose of purchasing goods and services is known as

a transactions demand

The money-creating ability of the banking system will be less than the maximum amount indicated by the money multiplier when

people hold a portion of their money in the form of currency

Which of the following best describes the nominal interest rate on a mortgage loan that a bank offers to a customer?

It is the interest rate charged by the bank.

The purchase of bonds by the Federal Reserve will have the greatest effect on real gross domestic product if which of the following situations exists in the economy?

The required reserve ratio is low, and the interest rate has a large effect on investment spending.

The real interest rate earned is the

cost of borrowing adjusted for the rate of change in the price level