AP Macro Unit 4

Money is anything that:

• serves as a medium of exchange for goods and services.
• can be converted into silver with relatively little loss in value.
• can be converted into gold with relatively little loss in value.
• that is traded in the stock market.

Which of the following statements describes a function of money?

I. Money is a medium of exchange.

II. Money is a store of value.

III. Money is a unit of account.

IV. Money is a factor of production.

• I and IV only.

• I, II and IV only.

• II, III and IV only.

• I, II, and III only.

A reserve ratio is the:

• proportion of cash and security reserves the bank needs to hold.
• fraction of deposits that the bank is required to hold.
• loan to deposit ratio in the bank's balance sheet.
• money belonging to the bank's largest depositors.

Suppose an economy has $200,000 of demand deposits and $40,000 of excess reserves with a 10% required reserve ratio. If the monetary authorities raise the required reserve ratio to 20%, then which of the following will likely follow?

• The excess reserves will rise by 10%.
• The excess reserves will fall by 10%.
• There will be no more excess reserves in the system.
• Excess reserves will decrease by $20,000.

Suppose the banking system does NOT hold excess reserves and the reserve ratio is 20%. If Sam deposits $500 of cash into his checking account, the banking system can create a total change to the money supply of

• $5,000.

• $2,000.

• $2,500.

• $400.

The major tools of monetary policy available to the Federal Reserve System include:

• reserve requirements, margin regulations, and moral suasion.
• reserve requirements, open-market operations, and the discount rate.
• open-market operations, margin regulations, and moral suasion.
• the discount rate, margin regulations, and moral suasion.

The discount rate is the interest rate the Fed charges on loans to:

• consumers.
• the federal government.
• state governments.
• banks.

To _______ the money supply, the Fed could ________.

• increase; lower the reserve requirements
• decrease; lower the discount rate
• increase; raise the federal funds rate
• decrease; conduct open-market purchases

If the reserve ratio is 25%, and the money supply increases by $100,000. The initial change in the money supply by Federal Reserve was:

• $2500.

• $10,000.

• $4000.

• $25,000.

The federal funds rate is the rate:

• a private borrower would pay a bank for a loan.
• one bank would pay another bank for a loan.
• a bank would pay the Federal Reserve for a loan.
• the Federal Reserve would pay to borrow money from government.