AP Macro - Unit 4 Review

The M1 definition of money includes which of the following?

• currency

• savings accounts

• small time deposits

• money market accounts

• stocks

If the legal reserve requirement is 25%, the value of the money multiplier is

• 2

• 4

• 5

• 10

• 1

When money is used as a standard of value, a person is:

• earning more money than before.

• purchasing a necessity.

• making a financial transaction.

• making price comparisons among products.

• writing a check for groceries.

Which of the following are true statements about the federal funds rate?

I. It is the same thing as the discount rate.

II. It is the interest rate that banks charge each other for short-term loans.

III. It is influenced by open market operations.

• I only

• II only

• III only

• I and II only

• II and III only

Suppose the Federal Reserve buys $400,000 worth of securities from the securities dealers on the open market. If the reserve requirement is 20% and the banks hold no excess reserves, what will happen to the total money supply?

• It will be unchanged.

• It will contract by $2,000,000.

• It will contract by $800,000.

• It will expand by $2,000,000.

• It will expand by $800,000.

All of the following are financial assets except:

• loans.

• stocks.

• bonds.

• bank deposits.

• required reserves.

A commercial bank holds $500,000 in demand deposit liabilities and $120,000 in reserves. If the required reserve ratio is 20%, which of the following is the maximum amount by which this single commercial bank and the maximum amount by which the banking system can increase loans?

Amount created by a single bank/Amount created by banking system

• $5,000/$25,000

• $20,000/$80,000

• $20,000/$100,000

• $30,000/$150,000

• $120,000/$500,000

Which of the following does the Federal Reserve use most often to combat a recession?

• Selling securities

• Buying securities

• Reducing the reserve requirement

• Increasing the discount rate

• Increasing the federal funds rate

To reduce inflation, the Federal Reserve could:

• expand the money supply in order to raise interest rates, which increases investment.

• expand the money supply in order to lower interest rates, which increases investment.

• contract the money supply in order to lower interest rates, which increases investment.

• contract the money supply in order to raise interest rates, which decreases investment.

• buy bonds and decrease the discount rate to encourage borrowing.

Reserves, the money supply, and interest rates are most likely to change in which of the following ways when the Federal Reserve sells bonds?

Reserves/Money Supply/Interest rates

• Increase/Increase/Increase

• Increase/Increase/Decrease

• Decrease/Increase/Decrease

• Decrease/Decrease/Increase

• Decrease/Decrease/Decrease