1. AP Macro Review
Unit 4
Financial Sector

2. 1. Jay wants to buy a new drum set for his band
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 unit of account
A medium of change
A store of value
A checkable deposit
M2 money

3. 2. Which of the following would be considered a major component of the money supply M1?
Money market accounts
Checkable deposits
Bonds
Savings deposits
All of the above

4. M1 will increase, M2 decrease, and M3 will have no change
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?
M1 will increase, M2 decrease, and M3 will have no change
M1 will increase, M2 and M3 will remain the same
M1 will increase, M2 will remain the same, and M3 will decrease
M1 will increase, M2 will increase, and M3 will increase
The answer cannot be determined, because the total checkable deposits in the economy is not given.

5. 4. The main function of the Federal Open Market Committee is:
Buying and selling of securities to control the money supply
Monitoring the Federal Reserve banks
Monitoring the checkable deposits of commercial banks
Buying and selling government bonds
Monitoring the fluctuations in the money supply

6. 5. Consumers will tend to purchase more goods and services using credit if:
Interest rates are increased
Interest rates are decreased
The marginal propensity to save (MPS) is decreased
The marginal propensity to consume (MPC) is increased
None of the above

7. 6. The most important function of the Federal Reserve System is:
Controlling the money supply
Issuing currency
Lending money to commercial banks
Overseeing the transactions between commercial banks and consumers
Informing the U.S. government of fluctuations in the money supply

8. 7. Which of the following reflects the two components of the demand for money?
Stocks and bonds
Checkable deposits and savings accounts
Buying and selling of government securities
Transactions demand and asset demand
All of the above

9. 8. A stock is: 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
All of the above

10. 9. A bond is:
Used if a business wants to raise money by borrowing money to be repaid plus a specific rate of interest
A claim of ownership in a business
Not traded on the stock market
Rarely used in a free market system
All of the above

11. 10. The best explanation of the quantity theory of money would be:
That it measures the maximum amount of new checking deposits that can be created by a single dollar in excess reserves
The interest rate paid on short-term loans
Nominal GDP is equal to the quantity of money
The average number of times a dollar is spent in a year
The amount of money determines the price level

12. 11. What is the one effect an increase in the money supply will have on the economy?
It will raise the price level and have no effect on real GDP.
It will raise the price level and have an effect on real GDP.
It will lower the price level and have no effect on real GDP.
It will lower the price level and have an effect on real GDP.
It will raise the price level and affect nominal GDP.

13. 12. If Jack deposits $500, and the reserve ratio is 10%, what will result?
$5,000 in money creation
$5,000 in money destruction
$500 in money creation
$550 in money destruction
$50 in money creation

14. 13. All of the following are ways the Federal Reserve can change the money supply EXCEPT:
Buying government securities
Selling government securities
Changing current tax rates
Changing the reserve ratio
Changing the discount rate

15. 14. The Federal Reserve System is:
Responsible for establishing monetary and fiscal policy
Responsible for establishing fiscal policy only
The central bank of the United States
Only allowed to set interest rates
Only allowed to buy government securities

16. 15. If the Federal Reserve lowered the reserve ratio to 5%, what would be the money multiplier?20 10 5 50 25

17. 16. All of the following will increase the money supply EXCEPT:
The Federal Reserve buying government securities
The Federal Reserve decreasing the reserve ratio
The Federal Reserve increasing the reserve ratio
A decrease in the discount rate
A decrease in taxes

18. 17. The value of a bond will decrease if:
Interest rates increase
Interest rates decrease
A person does not cash the bond when it matures
The Federal Reserve decides to sell government securities
The Federal Reserve decides to buy government securities

19. Answer Key B A D E C