AP Macroeconomics
CH 28, 30, 33 TEST REVIEW
Mr. Kelley
NAME________________________________________________
PART I: Multiple Choice
1. Which of the following is an example of Fiscal Policy?
A. Increasing Government expenditures to build highways
B. Increasing the money supply to increase income
C. Decreasing the discount rate to lower unemployment and inflation
D. Decreasing the federal funds rate to stimulate investment
E. Decreasing the reserve ratio to increase bank reserves
2. The Federal Reserve can cause in increase in interest rates in an attempt to
A. Reduce inflation
B. Reduce cyclical unemployment
C. Reduce structural unemployment
D. Increase aggregate demand
E. Increase investment spending
3. Which of the following is most likely to occur when the Federal Reserve buys
government bonds on the open market?
A. The demand for money will decrease
B. The government’s debt will decrease
C. Interest rates will decrease
D. The discount rate will increase
E. Investment demand will decrease
AP Macroeconomics
CH 28, 30, 33 TEST REVIEW
Mr. Kelley
4. Expansionary monetary policy can affect the economy through which of the following
chains of events?
A. Increasing the discount rate lowers the real interest rate, which raises
investment
B. Reducing taxes lowers the discount rate, which raises consumption
C. Increasing government expenditure lowers the interest rate, which raises
investment
D. Increasing the reserve requirement decreases the interest rate, which increases
investment
E. Buying bonds increases the money supply, which lowers the interest rate
5. Suppose the Federal Reserve is committed to keeping the nominal interest rate fixed.
To maintain the interest rate target in the face of an expansionary fiscal policy, the
Federal Reserve can do which of the following?
A. Increase the prime rate
B. Increase the discount rate
C. Increase the federal funds rate
D. Engage in open-market purchases
E. Engage in open-market sales
6. Which of the following actions can the Fed take to decrease the equilibrium interest
rate?
A. Increase the money supply
B. Increase the money demand
C. Decrease the money supply
D. Decrease the money demand
E. Both A. and D.
7. Which of the following is a goal of monetary policy?
A. Zero inflation
B. Deflation
C. Price stability
D. Increased potential output
E. Decreased actual RGDP
AP Macroeconomics
CH 28, 30, 33 TEST REVIEW
Mr. Kelley
8. Which of the following fiscal policies is expansionary?
Taxes
A. increase by $100 million
B. decrease by $100 million
C. increase by $100 million
D. decrease by $100 million
E. both A. and D.
Government spending
increase by $100 million
decrease by $100 million
decrease by $100 million
increase by $100 million
9. The cyclically adjusted budget deficit is an estimate of what the budget balance would
be if RDGP were
A. Greater than potential output
B. Equal to nominal GDP
C. Equal to potential output
D. Falling
E. Calculated during a recession
10. A business will decide whether or not to borrow money to finance a project based on
a comparison of the interest rate and the __________ from the project
A. Expected revenue
B. Profit
C. Rate of return
D. Cost generated
E. Demand generated
11. The ______________ adjusts every day to make the quantity of money demanded
equal to the quantity of money supplied
A. RGDP
B. quantity of money
C. the inflation rate
D. the nominal interest rate
E. potential GDP
AP Macroeconomics
CH 28, 30, 33 TEST REVIEW
Short Answer
1. What are the benefits of holding money?
2. What is the opportunity cost of holding money? Explain.
Mr. Kelley
AP Macroeconomics
CH 28, 30, 33 TEST REVIEW
Mr. Kelley
FRQ
1. Consider the information provided below for the hypothetical country of Ryakiddinme.
All figures are in Millions of Dollars
Tax revenues: $2,000
Government purchases of goods and services: $1,500
Government transfers: $1,000
Real GDP: $20,000
Potential Output: $18,000
a. Given the relationship between RDGP and potential GDP, is the current situation of the
budget in Ryakiddinme appropriate based on what we have learned about fiscal
policy?
b. Explain your answer in c., above.
c. How does Ryakiddinme’s cyclically adjusted budget deficit compare with its actual
budget deficit?
AP Macroeconomics
CH 28, 30, 33 TEST REVIEW
Mr. Kelley
2. Draw a correctly labeled graph showing equilibrium in the loanable funds market.
2i. On the above graph, draw in the effect of each of the following on the appropriate
curve. (label your new curve from 3a as Sa or Da, your new curve from 3b as Sb or Db
etc.
a. There is an increase in capital inflows into the economy
b. The government increases borrowing
AP Macroeconomics
CH 28, 30, 33 TEST REVIEW
Mr. Kelley
3. Assume that the United States economy is currently in a recession in a short-run
equilibrium.
To balance the federal budget, suppose that the government decides to raise income
taxes while maintaining the current level of government spending.
(a) Assume that the Federal Reserve uses monetary policy to stimulate the economy.
Using a correctly labeled graph of the money market, show how this monetary policy
affects nominal interest rates.
3(b) Now assume instead that the government and the Federal Reserve take no policy
action in response to the recession.
(i) In the long run, will the short-run aggregate supply increase, decrease, or remain
unchanged? Explain.