Financial Sector
Review
Questions
AP Economics
Mr. Bordelon
The savings-investment spending identity says that
a. each person in the economy must invest as much
as he or she saves.
b. savings and investment spending are always equal
for the economy as a whole.
c. savings must equal government investment for the
economy as a whole.
d. each person in the economy must save as much
as he or she invests.
e. savings plus investment spending equals gross
domestic product.
The savings-investment spending identity says that
a. each person in the economy must invest as much
as he or she saves.
b. savings and investment spending are always equal
for the economy as a whole.
c. savings must equal government investment for the
economy as a whole.
d. each person in the economy must save as much
as he or she invests.
e. savings plus investment spending equals gross
domestic product.
To help investment spending, the government can:
a. lower taxes on consumption, so that disposable
income rises.
b. lower taxes on the returns from savings, so that
total savings increase and the interest rate falls.
c. raise taxes on the returns from bonds while lowering
taxes on stock dividends.
d. lower taxes on investment spending while raising
taxes on savings, so that total tax revenue remains
constant.
e. increase the size of the annual budget deficit.
To help investment spending, the government can:
a. lower taxes on consumption, so that disposable
income rises.
b. lower taxes on the returns from savings, so that
total savings increase and the interest rate falls.
c. raise taxes on the returns from bonds while lowering
taxes on stock dividends.
d. lower taxes on investment spending while raising
taxes on savings, so that total tax revenue remains
constant.
e. increase the size of the annual budget deficit.
Centralia has no trade and no government. GDP =
$25 trillion. Consumption spending = $18 trillion.
What is the level of investment spending in Centralia?
a. $18 trillion
b. $7 trillion
c. $25 trillion
d. -$7 trillion
e. $43 trillion
Centralia has no trade and no government. GDP =
$25 trillion. Consumption spending = $18 trillion.
What is the level of investment spending in Centralia?
a. $18 trillion
b. $7 trillion
c. $25 trillion
d. -$7 trillion
e. $43 trillion
Centralia has no trade and no government. GDP =
$25 trillion. Consumption spending = $18 trillion.
Suppose that there is a new government in Centralia,
and it has decided to impose taxes on its citizens in
order to spend on infrastructure. Taxes = $2 trillion.
Government spending = Taxes. What is the level of
private saving in Centralia?
a.
b.
c.
d.
e.
$11 trillion
$7 trillion
$5 trillion
$18 trillion
$9 trillion
Centralia has no trade and no government. GDP =
$25 trillion. Consumption spending = $18 trillion.
Suppose that there is a new government in Centralia,
and it has decided to impose taxes on its citizens in
order to spend on infrastructure. Taxes = $2 trillion.
Government spending = Taxes. What is the level of
private saving in Centralia?
a.
b.
c.
d.
e.
$11 trillion
$7 trillion
$5 trillion
$18 trillion
$9 trillion
If private savings increase:
a. the demand for loanable funds will increase,
interest rates will increase, and the amount of
borrowing will increase.
b. the demand for loanable funds will decrease,
interest rates will decrease, and the amount of
borrowing will decrease.
c. the supply of loanable funds will increase, interest
rates will decrease, and the amount of borrowing
will increase.
d. the supply of loanable funds will decrease, interest
rates will increase, and the amount of borrowing
will decrease.
e. the supply of loanable funds will increase, interest
rates will decrease, and the amount of borrowing
will decrease.
If private savings increase:
a. the demand for loanable funds will increase,
interest rates will increase, and the amount of
borrowing will increase.
b. the demand for loanable funds will decrease,
interest rates will decrease, and the amount of
borrowing will decrease.
c. the supply of loanable funds will increase, interest
rates will decrease, and the amount of borrowing
will increase.
d. the supply of loanable funds will decrease, interest
rates will increase, and the amount of borrowing
will decrease.
e. the supply of loanable funds will increase, interest
rates will decrease, and the amount of borrowing
will decrease.
Components of the Money System (in billions
Currency
$100
Checkable deposits
$300
Travelers checks
$50
Small-denomination time deposits
$700
Money market mutual funds (individuals)
$500
Large-denomination time deposits
$200
Savings deposits
The money supply measured by M1 is:
a. $325 billion.
b. $450 billion.
c. $1,425 billion.
d. $1,875 billion.
e. $400 billion.
$75
Components of the Money System (in billions
Currency
$100
Checkable deposits
$300
Travelers checks
$50
Small-denomination time deposits
$700
Money market mutual funds (individuals)
$500
Large-denomination time deposits
$200
Savings deposits
The money supply measured by M1 is:
a. $325 billion.
b. $450 billion.
c. $1,425 billion.
d. $1,875 billion.
e. $400 billion.
$75
Components of the Money System (in billions
Currency
$100
Checkable deposits
$300
Travelers checks
$50
Small-denomination time deposits
$700
Money market mutual funds (individuals)
$500
Large-denomination time deposits
$200
Savings deposits
The money supply measured by M2 is:
a. $450 billion.
b. $1,425 billion.
c. $1,725 billion.
d. $2,075 billion.
e. $1,200 billion.
$75
Components of the Money System (in billions
Currency
$100
Checkable deposits
$300
Travelers checks
$50
Small-denomination time deposits
$700
Money market mutual funds (individuals)
$500
Large-denomination time deposits
$200
Savings deposits
The money supply measured by M2 is:
a. $450 billion.
b. $1,425 billion.
c. $1,725 billion.
d. $2,075 billion.
e. $1,200 billion.
$75
Suppose you transfer $500 from your checking
account to your savings account. With this
transaction M1 _____ and M2 _____.
a. increased; stayed the same
b. stayed the same; increased
c. decreased; increased
d. increased; decreased
e. decreased; stayed the same
Suppose you transfer $500 from your checking
account to your savings account. With this
transaction M1 _____ and M2 _____.
a. increased; stayed the same
b. stayed the same; increased
c. decreased; increased
d. increased; decreased
e. decreased; stayed the same
When a waiter deposits his cash tips into his savings
account:
a. M2 increases.
b. M1 decreases.
c. M2 decreases.
d. M1 increases.
e. Neither M1 or M2 change.
When a waiter deposits his cash tips into his savings
account:
a. M2 increases.
b. M1 decreases.
c. M2 decreases.
d. M1 increases.
e. Neither M1 or M2 change.
“Tuition at University of Florida is $16,000 per year.”
Which function of money does this statement best
illustrate?
a. store of value
b. medium of exchange
c. unit of account
d. means of deferred payment
e. near money
“Tuition at University of Florida is $16,000 per year.”
Which function of money does this statement best
illustrate?
a. store of value
b. medium of exchange
c. unit of account
d. means of deferred payment
e. near money
Suppose the required reserve ratio was 10% and then
it increased to 20%, this would:
a. result in a drop in the money multiplier from 10 to 5.
b. increase the amount of excess reserves available.
c. result in an increase in the money multiplier from 5
to 10.
d. have no impact on the money multiplier.
e. result in an increase in the money multiplier from 10
to 20.
Suppose the required reserve ratio was 10% and then
it increased to 20%, this would:
a. result in a drop in the money multiplier from 10 to 5.
b. increase the amount of excess reserves available.
c. result in an increase in the money multiplier from 5
to 10.
d. have no impact on the money multiplier.
e. result in an increase in the money multiplier from 10
to 20.
Suppose a bank receives a $5,000 deposit, and the
reserve ratio is 25%. Based on this deposit alone, the
bank can loan out:
a. $4,500.
b. $4,000.
c. $3,750.
d. $3,500.
e. $2,500.
Suppose a bank receives a $5,000 deposit, and the
reserve ratio is 25%. Based on this deposit alone, the
bank can loan out:
a. $4,500.
b. $4,000.
c. $3,750.
d. $3,500.
e. $2,500.
Suppose that there are no excess reserves in the
banking system and the current amount of demand
deposits are equal to $100,000. Now the monetary
authorities lower the required reserve ratio from 10% to
5%. Which of the following will likely follow?
a. The amount of excess reserves in the banking
system will fall.
b. The amount of excess reserves in the banking
system will remain the same.
c. The money creating potential of the banking
system will decline.
d. The money creating potential of the banking
system will rise.
e. The amount of required reserves in the banking
system will rise.
Suppose that there are no excess reserves in the
banking system and the current amount of demand
deposits are equal to $100,000. Now the monetary
authorities lower the required reserve ratio from 10% to
5%. Which of the following will likely follow?
a. The amount of excess reserves in the banking
system will fall.
b. The amount of excess reserves in the banking
system will remain the same.
c. The money creating potential of the banking
system will decline.
d. The money creating potential of the banking
system will rise.
e. The amount of required reserves in the banking
system will rise.
Suppose a bank does not hold excess reserves and
the reserve ratio is 20%. If Melanie deposits $1,000 of
cash into her checking account and the bank lends
$600 to Freda, the bank can lend an additional:
a. $400.
b. $200.
c. $1,000.
d. $5,000.
e. $600.
Suppose a bank does not hold excess reserves and
the reserve ratio is 20%. If Melanie deposits $1,000 of
cash into her checking account and the bank lends
$600 to Freda, the bank can lend an additional:
a. $400.
b. $200.
c. $1,000.
d. $5,000.
e. $600.
Assets
Liabilities
Reserves $20,000
Loans
Deposits
_________
If the reserve ratio is 25%, deposits are:
a. $5,000.
b. $15,000.
c. $60,000.
d. $80,000.
e. $100,000.
______
Assets
Liabilities
Reserves $20,000
Loans
Deposits
_________
If the reserve ratio is 25%, deposits are:
a. $5,000.
b. $15,000.
c. $60,000.
d. $80,000.
e. $100,000.
______
Assets
Liabilities
Reserves $20,000
Loans
Deposits
_________
If the reserve ratio is 25%, loans are:
a. $5,000.
b. $15,000.
c. $60,000.
d. $80,000.
e. $100,000.
______
Assets
Liabilities
Reserves $20,000
Loans
Deposits
_________
If the reserve ratio is 25%, loans are:
a. $5,000.
b. $15,000.
c. $60,000.
d. $80,000.
e. $100,000.
______
If the Fed increases the discount rate:
a. the money supply is likely to decrease.
b. the money supply is likely to increase.
c. the money supply is not likely to change.
d. the federal funds rate must decrease.
e. nominal interest rates will fall.
If the Fed increases the discount rate:
a. the money supply is likely to decrease.
b. the money supply is likely to increase.
c. the money supply is not likely to change.
d. the federal funds rate must decrease.
e. nominal interest rates will fall.
Suppose that the reserve ratio is 10% when the Fed
buys $11,000 of U.S. Treasury bills from the banking
system. If the banking system does NOT want to hold
any excess reserves, _____ will be added to the money
supply.
a. $666,667
b. $110,000
c. $250,000
d. $1,000,000
e. $1,100,000
Suppose that the reserve ratio is 10% when the Fed
buys $11,000 of U.S. Treasury bills from the banking
system. If the banking system does NOT want to hold
any excess reserves, _____ will be added to the money
supply.
a. $666,667
b. $110,000
c. $250,000
d. $1,000,000
e. $1,100,000
If the Federal Reserve wants to increase the money
supply, it will:
a. sell U.S. Treasury bills.
b. cut taxes across the board.
c. lower the reserve requirement.
d. increase the discount rate.
e. increase the federal funds rate.
If the Federal Reserve wants to increase the money
supply, it will:
a. sell U.S. Treasury bills.
b. cut taxes across the board.
c. lower the reserve requirement.
d. increase the discount rate.
e. increase the federal funds rate.
The federal funds rate is the rate:
a. a private borrower would pay a bank for a loan.
b. one bank would pay another bank for a loan.
c. a bank would pay the Federal Reserve for a loan.
d. the Federal Reserve would pay to borrow money
from government.
e. the government would pay to borrow money from
the Federal Reserve.
The federal funds rate is the rate:
a. a private borrower would pay a bank for a loan.
b. one bank would pay another bank for a loan.
c. a bank would pay the Federal Reserve for a loan.
d. the Federal Reserve would pay to borrow money
from government.
e. the government would pay to borrow money from
the Federal Reserve.
If the Fed conducts an open-market purchase:
a. bank reserves decrease and the money supply
decreases.
b. bank reserves increase and the money supply
increases.
c. bank reserves decrease and the money supply
increases.
d. bank reserves increase and the money supply
decreases.
e. bank reserves increase and the money supply does
not change.
If the Fed conducts an open-market purchase:
a. bank reserves decrease and the money supply
decreases.
b. bank reserves increase and the money supply
increases.
c. bank reserves decrease and the money supply
increases.
d. bank reserves increase and the money supply
decreases.
e. bank reserves increase and the money supply does
not change.
If during 2007 the interest rate on 1-month Treasury bills
was 2.5% and during 2008 the interest rate on 1-month
Treasury bills was 2%, one could conclude that:
a. the opportunity cost of holding money decreased.
b. the opportunity cost of holding money became
negative.
c. the opportunity cost of holding money increased.
d. the opportunity cost of holding money did not
change.
e. the opportunity cost of holding money is zero both
in 2007 and 2008.
If during 2007 the interest rate on 1-month Treasury bills
was 2.5% and during 2008 the interest rate on 1-month
Treasury bills was 2%, one could conclude that:
a. the opportunity cost of holding money decreased.
b. the opportunity cost of holding money became
negative.
c. the opportunity cost of holding money increased.
d. the opportunity cost of holding money did not
change.
e. the opportunity cost of holding money is zero both
in 2007 and 2008.
If the aggregate price level doubles, then:
a. the money supply will also double.
b. neither the money demand nor the money supply
will rise.
c. both the money demand and money supply will
rise proportionally.
d. the money demand at any given interest rate will
also double.
e. the money demand at any given interest rate will
decline by half.
If the aggregate price level doubles, then:
a. the money supply will also double.
b. neither the money demand nor the money supply
will rise.
c. both the money demand and money supply will
rise proportionally.
d. the money demand at any given interest rate will
also double.
e. the money demand at any given interest rate will
decline by half.
If the interest rate is above the equilibrium rate, there
will be an _____ money and the interest rate will _____.
a. excess demand for; rise
b. excess supply of; fall
c. excess demand for; fall
d. excess supply of; rise
e. excess supply of: remain the same
If the interest rate is above the equilibrium rate, there
will be an _____ money and the interest rate will _____.
a. excess demand for; rise
b. excess supply of; fall
c. excess demand for; fall
d. excess supply of; rise
e. excess supply of: remain the same
If the rate of interest is below the equilibrium rate,
there will be an _____ money and the interest rate will
_____.
a. excess demand for; rise
b. excess supply of; fall
c. excess demand for; fall
d. excess supply of; rise
e. excess supply of; remain the same
If the rate of interest is below the equilibrium rate,
there will be an _____ money and the interest rate will
_____.
a. excess demand for; rise
b. excess supply of; fall
c. excess demand for; fall
d. excess supply of; rise
e. excess supply of; remain the same
If the Federal Reserve wants to lower the interest rate,
it will:
a. decrease the money supply.
b. increase the money supply.
c. increase the money demand.
d. mandate a lower interest rate.
e. decrease the money demand.
If the Federal Reserve wants to lower the interest rate,
it will:
a. decrease the money supply.
b. increase the money supply.
c. increase the money demand.
d. mandate a lower interest rate.
e. decrease the money demand.
In the market for loanable funds, suppose the current
interest rate is 5%. At a rate of 5%, investors wish to
borrow $100 million and saves wish to save $125
million. We would expect:
a. the interest rate to fall as there is currently a
shortage of loanable funds.
b. the interest rate to rise as there is currently a surplus
of loanable funds.
c. the interest rate to rise as there is currently a
shortage of loanable funds.
d. the interest rate to fall as there is currently a surplus
of loanable funds.
e. the interest rate to remain the same as the
loanable funds market is in equilibrium.
In the market for loanable funds, suppose the current
interest rate is 5%. At a rate of 5%, investors wish to
borrow $100 million and saves wish to save $125
million. We would expect:
a. the interest rate to fall as there is currently a
shortage of loanable funds.
b. the interest rate to rise as there is currently a surplus
of loanable funds.
c. the interest rate to rise as there is currently a
shortage of loanable funds.
d. the interest rate to fall as there is currently a surplus
of loanable funds.
e. the interest rate to remain the same as the
loanable funds market is in equilibrium.
Which of the following might produce a new equilibrium interest rate
of 8% and a new equilibrium quantity of loanable funds of $150?
a. Consumers have increased consumption as a fraction of
disposable income.
b. Businesses have become more optimistic about the return on
investment spending.
c. The federal government has a budget surplus rather than a
budget deficit.
d. There has been an increase in capital inflows fro other nations.
e. Forecasts for future corporate profits are gloomier than
expected.
Which of the following might produce a new equilibrium interest rate
of 8% and a new equilibrium quantity of loanable funds of $150?
a. Consumers have increased consumption as a fraction of
disposable income.
b. Businesses have become more optimistic about the return on
investment spending.
c. The federal government has a budget surplus rather than a
budget deficit.
d. There has been an increase in capital inflows fro other nations.
e. Forecasts for future corporate profits are gloomier than
expected.
If a one-year project costs $100,000 and is expected
to return the firm $105,000, then the rate of return of
the project is:
a. 4.8%.
b. 5%.
c. $5,000.
d. $105,000.
e. 105%.
If a one-year project costs $100,000 and is expected
to return the firm $105,000, then the rate of return of
the project is:
a. 4.8%.
b. 5%.
c. $5,000.
d. $105,000.
e. 105%.
According to the accompanying figure, after an increase in
government borrowing, the new equilibrium interest rate will rise
from _____ and the amount of private savings will _____.
a. 6% to 8%; stay the same
b. 6% to 8%; rise
c. 6% to 8%; fall
d. 6% to 8%; be indeterminate
e. 6% to 10%; rise
According to the accompanying figure, after an increase in
government borrowing, the new equilibrium interest rate will rise
from _____ and the amount of private savings will _____.
a. 6% to 8%; stay the same
b. 6% to 8%; rise
c. 6% to 8%; fall
d. 6% to 8%; be indeterminate
e. 6% to 10%; rise
Higher rates of interest tend to _____ the quantity of
loanable funds demanded, and lower rates of interest
tend to _____ it.
a. increase; reduce
b. reduce; reduce
c. increase; increase
d. reduce; increase
e. have no effect; increase
Higher rates of interest tend to _____ the quantity of
loanable funds demanded, and lower rates of interest
tend to _____ it.
a. increase; reduce
b. reduce; reduce
c. increase; increase
d. reduce; increase
e. have no effect; increase