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AP Macroeconomics Unit 4: Financial Sector

12 questions

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Unit 4: Financial Sector

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Question 1

A bank has $500 million in deposits and a required reserve ratio of 10%. If the bank holds only required reserves, what is the maximum amount the bank can lend?

A.$500 millionB.$50 millionC.$450 millionD.$4,500 million

Question 2

Which of the following correctly describes the Federal Reserve's policy tools for controlling the money supply?

A.Open market operations, the discount rate, and the required reserve ratio.B.Government spending, taxation, and the discount rate.C.Open market operations, the prime rate, and income tax rates.D.The exchange rate, open market operations, and government spending.

Question 3

The required reserve ratio is 20%. If the Fed injects $1,000 in new reserves into the banking system, what is the maximum potential expansion of the money supply?

A.$1,000B.$5,000C.$200D.$10,000

Question 4

Expansionary monetary policy is expected to increase real GDP in the short run through which transmission mechanism?

A.↑ Money supply → ↓ interest rates → ↑ investment → ↑ AD → ↑ real GDPB.↑ Money supply → ↑ interest rates → ↑ saving → ↑ investment → ↑ real GDPC.↑ Money supply → ↓ taxes → ↑ disposable income → ↑ consumption → ↑ real GDPD.↑ Money supply → ↑ government spending → ↑ AD → ↑ real GDP

Question 5

Which of the following is classified as M1 money supply?

A.A 6-month certificate of deposit (CD)B.Demand deposits (checking accounts)C.Money market mutual fund shares held by householdsD.U.S. Treasury bills

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Question 6

A bank's T-account shows: Assets — Reserves $40M, Loans \$ 160M; Liabilities — Deposits $200M. The required reserve ratio is 15%. How much can this bank lend in additional loans?

A.$10 millionB.$30 millionC.$160 millionD.$0 (the bank is already at its lending limit)

Question 7

The Federal Reserve conducts open market operations by purchasing government securities. What is the immediate effect on the money supply and interest rates?

A.Money supply decreases; interest rates rise.B.Money supply increases; interest rates fall.C.Money supply increases; interest rates rise.D.Money supply decreases; interest rates fall.

Question 8

If the nominal interest rate is 7% and the expected inflation rate is 4%, what is the real interest rate?

A.11%B.3%C.4%D.7%

Question 9

Which of the following best describes the role of the money market diagram in macroeconomics?

A.It shows how the price level is determined by the interaction of AD and AS.B.It determines the nominal interest rate through the interaction of money supply and money demand.C.It shows how commercial banks create money through the fractional reserve process.D.It illustrates the trade-off between inflation and unemployment.

Question 10

The interest rate on bonds and the price of bonds have an inverse relationship. If the Federal Reserve conducts open market sales of bonds, what happens to bond prices and interest rates?

A.Bond prices rise; interest rates fall.B.Bond prices fall; interest rates rise.C.Bond prices and interest rates both rise.D.Bond prices fall; interest rates fall.

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Question 11

The Fed raises the discount rate. How does this tool of monetary policy affect commercial bank lending?

A.Banks borrow more from the Fed, increasing reserves and expanding lending.B.Banks borrow less from the Fed, reducing reserves and contracting lending.C.Banks immediately reduce their required reserve ratio.D.Banks increase open market purchases of government securities.

Question 12

In the money market, an increase in real GDP will shift money demand because:

A.Higher GDP reduces the need to hold money for transactions.B.Higher GDP increases the volume of transactions, raising the demand for money.C.Higher GDP causes the Fed to expand money supply automatically.D.Higher GDP lowers the opportunity cost of holding money.

AP Macroeconomics Unit 4: Financial Sector — Free with Answer Explanations | Test Practice Hub