AP Macro Unit 4 Review

Which of the following measures the opportunity cost of holding currency?

• The nominal wage rate

• The increase in the demand for money

• The forgone interest on alternative assets

• The average income tax rates

If the Federal Reserve lowers its administered interest rates, which of the following would most likely occur?

• Imports will rise, decreasing the trade deficit.

• The rate of saving will increase.

• Unemployment and inflation will both increase.

• Businesses will purchase more factories and equipment.

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

• It rises when interest rates rise, because the return from holding money increases.

• It falls when interest rates rise, because the opportunity cost of holding money increases.

• It remains constant when interest rates rise, as long as inflation remains constant.

• It falls when the money supply increases, as long as inflation remains constant.

The federal funds rate is the interest rate that

• the Federal Reserve charges the federal government on its loans

• banks charge one another for short-term loans

• banks charge their best customers

• is equal to the inflation rate

Which of the following is a determinant of the amount of money the commercial banking system can create?

• The marginal propensity to consume

• The marginal propensity to save

• The total number of banks

• The reserve requirement

Which of the following accurately describes the federal funds rate?

• The interest rate that banks charge state governments

• The interest rate that banks charge other banks for overnight loans

• The interest rate on personal loans

• The interest rate on government bonds

Open market operations refer to which of the following activities?

• The buying and selling of stocks in the stock market

• The loans made by the central bank to member commercial banks

• The buying and selling of government securities by the central bank

• The government's contribution to net exports

To reduce inflation, the central bank would be most likely to

• decrease the reserve requirement

• decrease the income tax rates

• buy government securities

• increase its administered interest rates

Which of the following best describes the money multiplier effect?

• A) The process by which banks create money through lending

• B) The increase in money supply due to government spending

• C) The reduction in money supply due to increased taxes

• D) The stabilization of money supply through open market operations

What is the primary tool used by the Federal Reserve to control inflation?

• A) Adjusting the federal funds rate

• B) Changing the tax rates

• C) Increasing government spending

• D) Regulating the stock market