AP Macro Review
Unit 4
Financial Sector
1. Jay wants to buy a new drum set for his band.
He goes to two music stores over the weekend
to compare prices. For Jay, money is functioning
as:
a) A unit of account
b) A medium of change
c) A store of value
d) A checkable deposit
e) M2 money
2. Which of the following would be
considered a major component of the
money supply M1?
a)
b)
c)
d)
e)
Money market accounts
Checkable deposits
Bonds
Savings deposits
All of the above
3. Jacob transfers $2,000 from his savings account to
his checking account. What effect will this transfer
have on the M1, M2, and M3 money supply?
a) M1 will increase, M2 decrease, and M3 will have
no change
b) M1 will increase, M2 and M3 will remain the
same
c) M1 will increase, M2 will remain the same, and
M3 will decrease
d) M1 will increase, M2 will increase, and M3 will
increase
e) The answer cannot be determined, because the
total checkable deposits in the economy is not
given.
4. The main function of the Federal
Open Market Committee is:
a) Buying and selling of securities to control the
money supply
b) Monitoring the Federal Reserve banks
c) Monitoring the checkable deposits of
commercial banks
d) Buying and selling government bonds
e) Monitoring the fluctuations in the money
supply
5. Consumers will tend to purchase more
goods and services using credit if:
a) Interest rates are increased
b) Interest rates are decreased
c) The marginal propensity to save (MPS) is
decreased
d) The marginal propensity to consume (MPC) is
increased
e) None of the above
6. The most important function of the
Federal Reserve System is:
a)
b)
c)
d)
Controlling the money supply
Issuing currency
Lending money to commercial banks
Overseeing the transactions between
commercial banks and consumers
e) Informing the U.S. government of
fluctuations in the money supply
7. Which of the following reflects the two
components of the demand for money?
a)
b)
c)
d)
e)
Stocks and bonds
Checkable deposits and savings accounts
Buying and selling of government securities
Transactions demand and asset demand
All of the above
8. A stock is:
a)
b)
c)
d)
A claim of ownership in a business
A certificate of indebtedness
Traded in a closed market system
A guarantee of future prices to be traded on
the stock market
e) All of the above
9. A bond is:
a) Used if a business wants to raise money by
borrowing money to be repaid plus a specific
rate of interest
b) A claim of ownership in a business
c) Not traded on the stock market
d) Rarely used in a free market system
e) All of the above
10. The best explanation of the
quantity theory of money would be:
a) That it measures the maximum amount of new
checking deposits that can be created by a single
dollar in excess reserves
b) The interest rate paid on short-term loans
c) Nominal GDP is equal to the quantity of money
d) The average number of times a dollar is spent in
a year
e) The amount of money determines the price
level
11. What is the one effect an increase in
the money supply will have on the
economy?
a) It will raise the price level and have no effect on
real GDP.
b) It will raise the price level and have an effect on
real GDP.
c) It will lower the price level and have no effect on
real GDP.
d) It will lower the price level and have an effect on
real GDP.
e) It will raise the price level and affect nominal
GDP.
12. If Jack deposits $500, and the
reserve ratio is 10%, what will result?
a)
b)
c)
d)
e)
$5,000 in money creation
$5,000 in money destruction
$500 in money creation
$550 in money destruction
$50 in money creation
13. All of the following are ways the
Federal Reserve can change the money
supply EXCEPT:
a)
b)
c)
d)
e)
Buying government securities
Selling government securities
Changing current tax rates
Changing the reserve ratio
Changing the discount rate
14. The Federal Reserve System is:
a) Responsible for establishing monetary and
fiscal policy
b) Responsible for establishing fiscal policy only
c) The central bank of the United States
d) Only allowed to set interest rates
e) Only allowed to buy government securities
15. If the Federal Reserve lowered the
reserve ratio to 5%, what would be the
money multiplier?
a)
b)
c)
d)
e)
20
10
5
50
25
16. All of the following will increase
the money supply EXCEPT:
a) The Federal Reserve buying government
securities
b) The Federal Reserve decreasing the reserve
ratio
c) The Federal Reserve increasing the reserve
ratio
d) A decrease in the discount rate
e) A decrease in taxes
17. The value of a bond will decrease
if:
a) Interest rates increase
b) Interest rates decrease
c) A person does not cash the bond when it
matures
d) The Federal Reserve decides to sell
government securities
e) The Federal Reserve decides to buy
government securities
Answer Key
1)
2)
3)
4)
5)
6)
7)
8)
9)
10)
11)
12)
13)
14)
15)
16)
17)
B
B
B
A
B
A
D
A
A
E
A
A
C
C
A
C
A