AP MACROECONOMICS Test Booklet

Unit 4 MCQs

1. 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
(A) $2,000
(B) $8,000
(C) $10,000
(D) $20,000
(E) $50,000

2. 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 Bond Prices

(A)
Increase Increase

Nominal Interest Rates Bond Prices

(B)
Increase Decrease

Nominal Interest Rates Bond Prices

(C)
Increase Not change

Nominal Interest Rates Bond Prices

(D)
Decrease Increase

Nominal Interest Rates Bond Prices

(E)
Decrease Decrease

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3.

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
(A) $15,000
(B) $12,000
(C) $3,000
(D) $1,800
(E) 0

4. Commercial banks can create money by

(A) transferring depositors' accounts at the Federal Reserve for conversion to cash
(B) buying Treasury bills from the Federal Reserve
(C) sending vault cash to the Federal Reserve
(D) maintaining a 100 percent reserve requirement
(E) lending excess reserves to customers

5. The purchase of bonds by a central bank will have the greatest effect on real gross domestic product if which of the
following situations exists in the economy?
The banking system has ample reserves, the required reserve ratio is high, and the interest rate has a large
(A)
effect on investment spending.
The banking system has ample reserves, the required reserve ratio is high, and the interest rate has a small
(B)
effect on investment spending.
The banking system has limited reserves, the required reserve ratio is low, and the interest rate has a large
(C)
effect on investment spending.
The banking system has limited reserves, the required reserve ratio is low, and the marginal propensity to
(D)
consume is low.
The banking system has ample reserves, the marginal propensity to consume is high, and the interest rate has
(E)
a small effect on investment spending.

6. The required reserve ratio is 0.2 and the central bank sells $1 million in securities. Assuming the banking system
has limited reserves, there are no leakages, and banks do not hold excess reserves, then which of the following is the
change in the money supply?

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(A) An increase of $1 million

(B) An increase of $1.2 million
(C) An increase of $5 million
(D) A decrease of $1.2 million
(E) A decrease of $5 million

7. 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
(A) 2 percent
(B) 3 percent
(C) 8 percent
(D) 15 percent
(E) 25 percent

8. If on receiving a checking deposit of $300 a bank's excess reserves increased by $255, the required reserve ratio
must be
(A) 5%
(B) 15%
(C) 25%
(D) 35%
(E) 45%

Assuming a banking system with limited reserves, which of the following actions by the central bank reduces the
9.
ability of the banking system to create money?
(A) Decreasing the policy rate
(B) Decreasing the discount rate
(C) Increasing the money supply
(D) Increasing the reserve requirement
(E) Buying government bonds on the open market

10. Assuming a banking system with limited reserves, which of the following is most likely to occur when the central
bank buys government bonds on the open market?
(A) The demand for money will decrease.
(B) The government’s debt will decrease.
(C) Interest rates will decrease.
(D) The discount rate will increase.
(E) Investment demand will decrease.

11. A central bank can increase the money supply by

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(A) selling gold reserves to the banks

(B) selling foreign currency holdings
(C) buying government bonds on the open market
(D) buying gold from foreign central banks
(E) borrowing reserves from foreign governments

12. Assume a country’s banking system has limited reserves. If the central bank sells a significant amount of
government securities in the open market, which of the following will occur?
(A) The total amount of loans made by commercial banks will decrease.
(B) The total amount of loans made by commercial banks will increase.
(C) The money supply will increase.
(D) Rates of interest will decrease.
(E) Rates of interest and amount of loans made by commercial banks will remain unchanged.

13. 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?

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Demand for Loans Real Interest Rate

(A)
Increase Increase

Demand for Loans Real Interest Rate

(B)
Increase Decrease

Demand for Loans Real Interest Rate

(C)
Decrease Increase

Demand for Loans Real Interest Rate

(D)
Decrease Decrease

Demand for Loans Real Interest Rate

(E)
Decrease Not change

14. Changes in which of the following will change the money supply?
(A) number of banks in operation
(B) velocity of money
(C) price level
(D) prime rate
(E) open market operations

15. Which of the following would lead to an increase in nominal interest rates?

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(A) An expansionary monetary policy accompanied by an increase in the demand for money
(B) An expansionary monetary policy accompanied by a decrease in the demand for money
(C) An expansionary monetary policy conducted without any change in the demand for money
(D) A contractionary monetary policy accompanied by an increase in the demand for money
(E) A contractionary monetary policy accompanied by a decrease in the demand for money

16. An increase in the demand for loanable funds could be best explained by which of the following?
(A) There is a decrease in investment spending.
(B) There is an increase in the government’s budget surplus.
(C) Firms are optimistic about the future performance of the country’s economy.
(D) Domestic investors seek higher returns by investing in foreign financial assets.
(E) The economy is facing political instability.

17. 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?

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Output Price Level

(A)
Increase Increase

Output Price Level

(B)
Increase No change

Output Price Level

(C)
Increase Decrease

Output Price Level

(D)
Decrease Decrease

Output Price Level

(E)
Decrease Increase

18. During a mild recession, if policymakers want to reduce unemployment by increasing investment, which of the
following policies would be most appropriate?
(A) Equal increases in government expenditure and taxes
(B) An increase in government expenditure only
(C) An increase in transfer payments
(D) An increase in the reserve requirement
(E) A decrease in administered interest rates

19. The federal funds rate is the interest rate that

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(A) the Federal Reserve charges the federal government on its loans
(B) banks charge one another for short-term loans
(C) banks charge their best customers
(D) equalizes the yield on government bonds and corporate bonds
(E) is equal to the inflation rate

20. Assuming a banking system with limited reserves, when the central bank buys government securities on the open
market, which of the following will decrease in the short run?
(A) Interest rates
(B) Taxes
(C) Investment
(D) The amount of money loaned by banks
(E) The money supply

21. Country H’s current domestic output is lower than its potential domestic output. Assume that the central bank now
decreases its administered interest rates. What will be the short-run effects of the central bank’s action on cyclical
unemployment and real income?
(A) Cyclical unemployment will increase, and real income will increase.
(B) Cyclical unemployment will increase, and real income will decrease.
(C) Cyclical unemployment will remain the same, and real income will increase.
(D) Cyclical unemployment will remain the same, and real income will decrease.
(E) Cyclical unemployment will decrease, and real income will increase.

22. An increase in government spending with no change in taxes leads to a

(A) lower income level
(B) lower price level
(C) smaller money supply
(D) higher interest rate
(E) higher bond price

23. If the Federal Reserve institutes a policy to reduce inflation, which of the following is most likely to increase?
(A) Tax rates
(B) Investment
(C) Government spending
(D) Interest rates
(E) Gross domestic product

24. Which of the following would be true if the actual rate of inflation were less than the expected rate of inflation?

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(A) Inflation had been underpredicted.

(B) The real interest rate had exceeded the nominal interest rate.
(C) The real interest rate had been negative.
(D) People who borrowed funds at the nominal interest rate during this time period would lose.
(E) The economy would expand because of the increased investment and spending.

25. Assuming a banking system with limited reserves, which of the following set of events is most likely to follow
when a central bank sells securities in the open market?
(A) An increase in the money supply, a decrease in interest rates, and an increase in aggregate demand
(B) An increase in the money supply, an increase in interest rates, and a decrease in aggregate demand
An increase in interest rates, an increase in the government budget deficit, and a movement toward trade
(C)
surplus
(D) A decrease in the money supply, an increase in interest rates, and a decrease in aggregate demand
(E) A decrease in the money supply, a decrease in interest rates, and a decrease in aggregate demand

26. Which of the following would be included as a liability on a commercial bank’s balance sheet?
(A) Consumer loans
(B) Demand deposits
(C) Net worth
(D) Bank reserves
(E) Treasury bonds

27. Expansionary monetary policy can affect the economy through which of the following chains of events?
(A) Increasing the discount rate lowers real interest rates, which raises investment.
(B) Reducing taxes lowers the discount rate, which raises consumption.
(C) Increasing government expenditures lowers nominal interest rates, which raises investment.
(D) Increasing the reserve requirement lowers nominal interest rates, which increases investment.
(E) Decreasing the administered interest rates lowers nominal interest rates, which increases investment.

28. The Federal Reserve can cause an increase in interest rates in an attempt to
(A) reduce inflation
(B) reduce cyclical unemployment
(C) reduce structural unemployment
(D) increase aggregate demand
(E) increase investment spending

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

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(A) paper money

(B) gold bullion
(C) checkable deposits
(D) coins
(E) demand deposits

30. Assume a country’s banking system has limited reserves. To counteract a recession, the central bank should
(A) raise the reserve requirement and the discount rate
(B) sell securities on the open market and raise the discount rate
(C) sell securities on the open market and lower the discount rate
(D) buy securities on the open market and raise the discount rate
(E) buy securities on the open market and lower the discount rate

31. If currently at full employment, which of the following would most likely cause the United States economy to fall
into a recession?
(A) An increase in welfare payments
(B) An increase in exports
(C) A decrease in savings by consumers
(D) A decrease in the required reserve ratio
(E) An increase in administered interest rates

32. 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
(A) an increase in the money supply of $5 million
(B) an increase in the money supply of less than $5 million
(C) a decrease in the money supply of $1 million
(D) a decrease in the money supply of $5 million
(E) a decrease in the money supply of more than $5 million

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33.

A country’s economy is in equilibrium at point . Which of the following policies would be most effective to
reduce the price level in the short run?
(A) Increasing the minimum wage
(B) Increasing government expenditures
(C) Increasing interest on reserves
(D) Decreasing the required reserve ratio
(E) Decreasing income tax rates

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

(A) an increase in personal income taxes
(B) an increase in the money supply
(C) an increase in interest rates
(D) a decrease in government spending
(E) a decrease in net exports

35. If the Federal Reserve lowers its administered interest rates, which of the following would most likely occur?
(A) Imports will rise, decreasing the trade deficit.
(B) The rate of saving will increase.
(C) Unemployment and inflation will both increase.
(D) Businesses will purchase more factories and equipment.
(E) The budget deficit will increase.

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

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(A) Banks would be more able to reduce unemployment.

(B) Banks would be more able to decrease aggregate supply.
(C) Banks would be less able to decrease aggregate supply.
(D) Banks would be more able to expand credit.
(E) Banks would be less able to expand credit.

37. Assume a country’s banking system has limited reserves. 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 central bank will
(A) increase the money supply by up to $1.6 million
(B) decrease the money supply by up to $1.6 million
(C) increase the money supply by up to $300,000
(D) increase the money supply by up to $100,000
(E) decrease the money supply by up to $100,000

38. 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
(A) $20
(B) $80
(C) $100
(D) $400
(E) $500

39. 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
(A)
Required Reserves: Increase by $170
Liabilities: Increase by $200
(B)
Required Reserves: Increase by $30
Liabilities: Increase by $200
(C)
Required Reserves: Not change
Liabilities: Decrease by $200
(D)
Required Reserves: Decrease by $30
Liabilities: Decrease by $200
(E)
Required Reserves: Decrease by $170

40. The demand for money increases when national income increases because
(A) spending on goods and services increases
(B) interest rates increase
(C) the budget deficit increases
(D) the money supply increases
(E) the public becomes more optimistic about the future

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41. Open market operations refer to which of the following activities?

(A) The buying and selling of stocks in the stock market
(B) The loans made by the central bank to member commercial banks
(C) The buying and selling of government securities by the central bank
(D) The government's purchases and sales of municipal bonds
(E) The government's contribution to net exports

42. The money-creating ability of the banking system will be less than the maximum amount indicated by the money
multiplier when
(A) interest rates are high
(B) the velocity of money is rising
(C) people hold a portion of their money in the form of currency
(D) the unemployment rate is low
(E) the government's budget is in deficit

43. Which of the following is most likely to increase if the public decides to increase its holdings of currency?
(A) The interest rate
(B) The price level
(C) Disposable personal income
(D) Employment
(E) The reserve requirement

44. The real value of the United States dollar is determined by

(A) federal regulations regarding purchasing power
(B) the value of the gold backing the dollar
(C) the goods and services it will buy
(D) the money multiplier
(E) the marginal propensity to consume

45. Which of the following will most likely occur in an economy if more money is demanded than is supplied?
(A) The amount of investment spending will increase.
(B) Interest rates will decrease.
(C) Interest rates will increase.
(D) The demand curve for money will shift to the left.
(E) The demand curve for money will shift to the right.

46. Which of the following is true of the quantity of money demanded?

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(A) It rises when interest rates rise, because the return from holding money increases.
(B) It falls when interest rates rise, because the opportunity cost of holding money increases.
(C) It remains constant when interest rates rise, as long as inflation remains constant.
(D) It rises when interest rates rise, as long as inflation is declining.
(E) It falls when the money supply increases, as long as inflation remains constant.

47. 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
(A) 14%
(B) 10%
(C) 6%
(D) 4%
(E) 2.5%

48. Which of the following government policies can reduce the rate of inflation in the short run?
(A) Providing investment tax credits for businesses
(B) Reducing personal income tax rates
(C) Increasing administered interest rates
(D) Decreasing the reserve requirement
(E) Decreasing the discount rate

49. Under a fractional reserve banking system, banks are required to

(A) keep part of their demand deposits as reserves
(B) expand the money supply when requested by the central bank
(C) insure their deposits against losses and bank runs
(D) pay a fraction of their interest income in taxes
(E) charge the same interest rate on all their loans

50. 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
(A) $20
(B) $100
(C) $300
(D) $500
(E) $750

51. Assuming the banking system has limited reserves, 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?

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Real Interest Rates Real Output

(A)
Decrease Decrease

Real Interest Rates Real Output

(B)
Decrease Increase

Real Interest Rates Real Output

(C)
Increase Decrease

Real Interest Rates Real Output

(D)
Increase No change

Real Interest Rates Real Output

(E)
No change Increase

52. Under which of the following conditions would a restrictive monetary policy be most appropriate?
(A) High inflation
(B) High unemployment
(C) Full employment with stable prices
(D) Low interest rates
(E) A budget deficit

53. Which of the following most undermines the ability of a nation’s currency to store value?

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(A) A decrease in the purchasing power of the currency

(B) The use of credit and debit cards as mediums of exchange
(C) An increase in the prices of federal bonds
(D) Appreciation of the currency in the international money market
(E) An increase in the supply of foreign currencies in the international money market

54. 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 ?
(A) $100,000
(B) $90,333
(C) $10,000
(D) $9,000
(E) $1,000

55. Bank is a commercial bank in Country . Assume the required reserve ratio is and banks in Country
keep no excess reserves. If Maria deposits in cash at Bank, what will happen to the money supply
after all adjustments are made in the banking system?
(A) The money supply will increase by a maximum of .
(B) The money supply will increase by a maximum of .
(C) The money supply will increase by a maximum of .
(D) The money supply will increase by a maximum of .
(E) The money supply will increase by a maximum of .

56. Which of the following changes will necessarily occur as a result of an increase in the nominal interest rate?
(A) The money demand curve will shift to the left.
(B) The money demand curve will shift to the right.
(C) The money supply curve will shift to the left.
(D) The quantity of money supplied will decrease.
(E) The quantity of money demanded will decrease.

57. Which of the following will most likely result in a lower real interest rate in a nation?
(A) The nation provides an investment tax credit to new businesses.
(B) The citizens of the nation increase their savings for retirement.
(C) The nation is experiencing political instability and economic risk.
(D) The nation’s central bank sells government bonds in the open market.
(E) The nation’s government increases its borrowing to finance spending on capital projects.

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

58. What is the maximum amount of new loans the bank could lend with the given amounts of reserves?
(A) $10,000
(B) $20,000
(C) $30,000
(D) $50,000
(E) $70,000

59. What is the money multiplier?

(A) 1
(B) 2
(C) 4
(D) 5
(E) 20

60. Which of the following is true for bonds but not for stocks?
(A) Bonds are the least liquid form of assets.
(B) Bonds represent partial ownership in a company.
(C) Bonds earn variable rates of return.
(D) Bonds are interest-bearing assets.
(E) Bonds have zero opportunity cost.

61. 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?

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(A) Store of value

(B) Medium of exchange
(C) Means of payment
(D) Unit of account
(E) Store of wealth

62. Which of the following is considered the most liquid asset?

(A) Stocks
(B) Bonds
(C) Currency
(D) Real estate
(E) Commodities

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

Cash in Circulation
Certificates of Deposit
Bank Reserves
Demand Deposits
Savings Deposits

63. Based on the table above, what is the value of , a measure of the money supply?
(A)
(B)
(C)
(D)
(E)

64. Based on the table above, what is the value of the monetary base?
(A)
(B)
(C)
(D)
(E)

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65. The diagram shows the effect of a monetary policy action on aggregate demand.

Which of the following will shift the aggregate demand curve in the direction shown in the diagram above?
(A) A decrease in the money supply
(B) A decrease in the monetary base
(C) A decrease in the policy rate
(D) An increase in the required reserve ratio
(E) The sale of bonds to the private sector by the central bank

66. Assuming a banking system with limited reserves, which of the following is a monetary policy action a central bank
would implement to control inflation?
(A) Target a lower overnight interbank lending rate
(B) Sell government bonds to the public
(C) Lower the discount rate
(D) Lower the required reserve ratio
(E) Increase the monetary base

67. 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?
(A) The monetary base will increase.
(B) The nominal interest rate will increase.
(C) The money multiplier will increase.
(D) The money demand curve will shift right.
(E) Spending will increase.

68. 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?

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(A) Lenders are expected to receive an additional 4% on their loaned funds.

(B) Borrowers are expected to pay an additional 4% on their borrowed funds.
(C) The expected real interest rate is 9%.
(D) The expected real interest rate is 13%.
(E) The nominal interest rate is 9%.

69. Which of the following accurately describes the difference between how open market operations are used in a
banking system with limited reserves compared to a banking system with ample reserves?
In a banking system with limited reserves, open market operations are used to maintain sufficient reserves,
(A) whereas in a banking system with ample reserves, open market operations are used to indirectly influence the
nominal interest rate by changing the money supply.
In a banking system with limited reserves, open market operations are used to indirectly influence the
(B) nominal interest rate by changing the money supply, whereas in a banking system with ample reserves, open
market operations are used to maintain sufficient reserves.
In a banking system with limited reserves, open market operations are used to directly adjust the nominal
(C) interest rate, whereas in a banking system with ample reserves, open market operations are used to indirectly
influence the nominal interest rate by changing the money supply.
In a banking system with limited reserves, open market operations are used to indirectly influence the
(D) nominal interest rate by changing the money supply, whereas in a banking system with ample reserves, open
market operations are used to directly adjust the nominal interest rate.
In a banking system with limited reserves, open market operations are a non-operational monetary policy
(E) tool, whereas in a banking system with ample reserves, open market operations are an operational monetary
policy tool.

70. Which of the following will happen when interest rates increase in an economy?
(A) The cost of borrowing will decrease.
(B) The spending multiplier will decrease.
(C) Investment spending will increase.
(D) The price of previously issued bonds will increase.
(E) The opportunity cost of holding money will increase.

71. 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?
(A) Sam will pay a lower nominal interest rate.
(B) Sam will pay a higher nominal interest rate.
(C) Sam will pay a lower real interest rate.
(D) Sam will pay a higher real interest rate.
(E) Sam will pay higher monthly installments.

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

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(A) A decrease in private savings

(B) A decrease in the expected inflation rate
(C) An increase in government spending on highways financed by borrowing
(D) An increase in foreign financial capital inflows
(E) An investment tax credit for plant and equipment

73. An increase in the equilibrium nominal interest rate could be caused by which of the following changes?
(A) An increase in the monetary base
(B) An increase in the money supply
(C) An increase in real income
(D) A decrease in the amount of cash the public wants to hold
(E) A decrease in the price level

74. If the loanable funds market is in equilibrium, then which of the following must be true?
(A) Government spending equals tax revenues.
(B) Investment spending equals national savings.
(C) Investment spending equals private savings.
(D) Borrowing equals lending.
(E) Foreign inflows of financial capital equal investment spending.

75. Which of the following best describes the nominal interest rate on a mortgage loan that a bank offers to a customer?
(A) It is the real interest rate divided by the price level.
(B) It is the real interest rate minus the expected inflation rate.
(C) It is the interest rate charged by the bank.
(D) It is the interest rate charged by the bank minus the expected inflation rate.
(E) It is the interest rate charged by the bank minus the interest rate the bank pays to its depositors.

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