AP Economics Unit 4 Practice questions

Q1. Assume that a country’s government increases borrowing. What will most likely happen to the prices of previously issued bonds and the price level in the short run?

Bond prices will decrease price level will increase

Q2. Which of the following is true of the quantity of money demanded

-It falls when interest rates rise because the opportunity cost of holding money increases.

Q3.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 

Q4.Of the following, the most liquid asset is

Currency

Q5.Which of the following measures the opportunity cost of holding currency?

-The forgone interest rate on alternative assets 

Q6.Which of the following is true about inflation and interest rates?

-If theres no actual or expected inflation, the nominal and real interest rates are equal

Q7.When Stephanie took out a one-year fixed-rate loan, she expected to pay a real interest rate of 3 percent. At the end of the year, the real interest rate had fallen to 2 percent. Which of the following could have caused the decrease in the real interest rate?

The actual inflation rate was greater than the expected inflation rate.

Q8.If both the nominal interest rate and the expected inflation rate increase, what will happen to the real interest rate?

It will decrease if the expected inflation rate increase by more than the nominal interest rate.

Q9.Which of the following statements about inflation is true?

-The expected inflation rate is the difference between the nominal and real interest rates

Q10.Suppose that the real interest rate is equal to seven percent and the expected inflation rate is currently three percent. If an oil crisis in the Middle East increases the expected inflation rate to four percent, the new nominal interest rate is equal to

11%

Q11.Fred Jones withdraws $1,000 in cash from his savings account. What immediate effect does this transaction have on the monetary aggregate measures of M1M1 and M2M2

M1 increases. M2 No change 

Q12. 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

Q13.Pat deposits a portion of her wages into a personal savings account every week. The saved money can be considered to be primarily a

Store of value

Q14.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 

Q15.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%

Q16.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

Q17.Banks create money when

They make loans

Q18.Assume that banks hold no excess reserves. A decrease in the required reserve ratio will cause total reserves in banks, the money multiplier, and the money supply to change in which of the following ways?

Total reserves: No change. Money multiplier:Increase. Money supply: Increase

Q19.A bank has $200 million in demand deposits and $150 million in reserves. The reserve ratio is 20 percent. What is the maximum amount of loans the bank can make from its reserves?

$110 Million

Q20.Which of the following is a defining characteristic of a fractional reserve banking system?

The fact that banks retain an amount of bank reserves that is less than the amount of customer demand deposits

Q21.If the required reserve ratio is 10 percent, what is the maximum change in the money supply from John’s deposit of $50,000 cash into his checking account?

$450,000

Q22. Which of the following is true when interest rates rise?

The opportunity cost of holding cash increases

Q23.Ms. Smith withdraws $1,000 from her safe and deposits the money in a bank. If the bank holds no excess reserves and the reserve requirement is 10 percent, how will this deposit increase the bank’s required reserves and the bank’s loans?

-Required reserves: $100. Loans:$900

Q24. Banks expand the money supply when

They make loans

Q25.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?

-Money supply will increase by a maximum of $80 million

Q26.A commercial bank’s ability to create money depends on which of the following?

-A fractional reserve banking system 

Q27. The demand curve for money shifts to the right when

Nominal gross domestic product increases

Q28.Which of the following will most likely result in an increase in aggregate demand?

An open-market purchase of government bonds by the central bank 

Q29.Which of the following will occur in the money market when the aggregate price level increases?

The demand for money will increase and nominal interest rates will increase

Q30.Which of the following shifts the money demand curve to the right?

An increase in price level

Q31An open-market operation by a country’s central bank to reduce the unemployment rate would be to

Buy bonds to decrease the interest rate and to increase aggregate demand

Q32.An increase in the equilibrium nominal interest rate could be caused by which of the following changes

An increase in real income

Q33.To decrease the money supply, a country’s central bank can do which of the following?

-Sell government bonds

Q34.In the short run, a reduction in the money supply will cause

-A leftward shift in the aggregate demand curve

Q35. In the short run, a tight monetary policy tends to cause

Increase in interest rate and a decrease in private investment

Q36.Which of the following will cause an increase in the equilibrium real interest rate?

An increase in investment demand

Q37.When there is excess demand in the loanable funds market, which of the following will occur?

Real interest rates will increase 

Q38.Which of the following policy actions will directly increase the money supply?

The central bank purchases government bonds on the open market.

Q39.Which of the following results when the Federal Reserve sells bonds to commercial banks?

-The money supply decreases

Q40.If businesses become optimistic about the profitability of investments in an economy, which of the following will happen in the loanable funds market in the short run?

The real interest rate will increase.