AP Macro Unit 4 Review

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?

• Sam will pay a lower nominal interest rate.

• Sam will pay a higher nominal interest rate.

• Sam will pay a lower real interest rate.

• Sam will pay a higher real interest rate.

If the loanable funds market is in equilibrium, then which of the following must be true?

• Government spending equals tax revenues.

• Investment spending equals private savings.

• Foreign inflows of financial capital equal investment spending

• Borrowing equals lending.

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

• An increase in foreign financial capital inflows

• An increase in government spending on highways financed by borrowing

• An investment tax credit for plant and equipment

• A decrease in private savings

Which of the following will happen when interest rates increase in an economy?

• The opportunity cost of holding money will increase.

• Investment spending will increase

• The spending multiplier will decrease.

• The cost of borrowing will decrease.

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?

• The expected real interest rate is 13%

• The expected real interest rate is 9%.

• The nominal interest rate is 9%.

• Lenders are expected to receive an additional 4% on their loaned funds.

Which of the following is a monetary policy action a central bank would implement to control inflation?

• Lower the required reserve ratio

• Lower the discount rate

• Target a lower overnight interbank lending rate

• Sell government bonds to the public

Which of the following will happen if the central bank of a nation purchases government bonds on the open market?

• The monetary base will increase and the money supply will not change.

• The monetary base will increase and the money supply will increase.

• The monetary base will decrease and the money supply will increase.

• The monetary base will decrease and the money supply will not change

Which of the following is considered the most liquid asset?

• Currency

• Real estate

• Bonds

• Stocks

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 is ...

• Medium of exchange

• Means of payment

• Unit of account

• Store of value

ABC Bank is a commercial bank in Country X. Assume the required reserve ratio is 25%. If ABC Bank sells $20 million worth of government bonds to Country X’s central bank, what will happen to the money supply

• The money supply will decrease by a maximum of $80 million.

• The money supply will increase by a maximum of $80 million.

• The money supply will decrease by a maximum of $5 million.

• The money supply will increase by a maximum of $5 million.