AP Macroeconomics, Chapters 29 and 30 Practice Test

Multiple Choice
Identify the choice that best completes the statement or answers the question.
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1. Suppose that all banks keep only the minimum reserves required by law and that there are no currency drains.
The legal reserve requirement is 5%. If Gina deposits the $2,000 that she received as a graduation gift from
her parents into her bank account, the maximum increase in the total money supply will be
a. $38,000
b. $3,800
c. $10,000
d. $100,000
2. Which of the following groups would most likely gain from unanticipated inflation?
a. Landlords who own apartments in cities with rent controls.
b. Individuals who have fixed retirement incomes.
c. Individuals who have borrowed money at fixed interest rates.
d. Banks that have loaned all excess reserves at a fixed interest rate.
3. M1 includes
a. currency.
c. travelers' checks.
b. demand deposits.
d. All of the above are correct.
4. An appropriate fiscal policy to combat a recession would be to increase which of the following?
a. Interest rates.
c. Taxes.
b. The money supply
d. Government spending.
5. Which of the following is most likely to occur if the Fed engages in omo to reduce inflation?
a. A decrease in interest rates.
c. An increase in the money supply.
b. A decrease in reserves in banks.
d. An increase in exports.
6. Which Federal Reserve action can shift the aggregate demand curve to the left?
a. Lowering the federal funds rate.
c. Lowering reserve requirements.
b. Lowering income taxes.
d. Raising the discount rate.
7. Which of the following policy choices represents a combination of fiscal and monetary policies designed to
bring the economy out of a recession?
a. Decreasing both taxes and the money supply.
b. Increasing both taxes and the money supply.
c. Increasing government spending and decreasing the federal funds rate.
d. Increasing both taxes and the discount rate.
8. Which of the following does the Federal Reserve not do?
a. conduct monetary policy
c. convert Fed Reserve Notes into gold
b. act as a lender of last resort
d. serve as a bank regulator
9. The Federal Open Market Committee is made up of
a. 5 Federal Reserve Regional Bank Presidents and all the members of the Board of Governors.
b. 5 Federal Reserve Regional Bank Presidents and 5 members of the Board of Governors.
c. 12 Federal Reserve Regional Bank Presidents and all the members of the Board of Governors.
d. 12 Federal Reserve Regional Bank Presidents and 5 members of the Board of Governors.
10. When the Fed conducts open-market sales,
a. it sells Treasury securities, which increases the money supply.
b. it sells Treasury securities, which decreases the money supply.
c. it borrows from member banks, which increases the money supply.
d. it lends money to member banks, which decreases the money supply.
11. When the Fed conducts open-market purchases,
a. it buys Treasury securities, which increases the money supply.
b. it buys Treasury securities, which decreases the money supply.

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c. banks buy Treasury securities from Fed, which increases the money supply.
d. banks buy Treasury securities from the Fed, which decreases the money supply.
In a 100-percent reserve banking system, if people decided to decrease the amount of currency they held by
increasing the amount they held in checkable deposits
a. M1 would increase.
c. M1 would not change.
b. M1 would decrease.
d. M1 might rise or fall.
Suppose a bank has a 10% rr, $4,000 in deposits, and has loaned out all it can given the reserve requirement.
a. It has $40 in reserves and $3,960 in loans. c. It has $444 in reserves and $3,556 in loans.
b. It has $400 in reserves and $3,600 in loans. d. None of the above is correct.
When the average price level increase by 10 percent in a given year, which of the following must increase by
10 percent for real output to remain constant?
a. Real national income.
c. Real interest rates.
b. Nominal national income.
d. The international value of currency.
Which of the following lists two things that both increase the money supply?
a. lower the discount rate, raise the reserve requirement ratio
b. lower the discount rate, lower the reserve requirement ratio
c. raise the discount rate, raise the reserve requirement ratio
d. raise the discount rate, lower the reserve requirement ratio
Which of the following lists two things that both increase the money supply?
a. make open market purchases, raise the reserve requirement ratio
b. make open market purchases, lower the reserve requirement ratio
c. make open market sales, raise the reserve requirement ratio
d. make open market sales, lower the reserve requirement ratio
Which of the following actions would have the combined effect of raising the money supply and raising the
money multiplier?
a. The Fed sells bonds and raises the reserve requirement ratio.
b. The Fed sells bonds and lowers the reserve requirement ratio.
c. The Fed buys bonds and raises the reserve requirement ratio.
d. The Fed buys bonds and lowers the reserve requirement ratio.
In a fractional reserve banking system, a decrease in reserve requirements
a. increases both the money multiplier and the money supply.
b. decreases both the money multiplier and the money supply.
c. increases the money multiplier, but decreases the money supply.
d. decreases the money multiplier, but increases the money supply.
In 1991 the Fed lowered the reserve requirement ratio from 12% to 10%. Cetris Paribus, this should have
a. increased both the money multiplier and the money supply.
b. decreased both the money multiplier and the money supply.
c. increased the money multiplier and decreased the money supply.
d. decreased the money multiplier and increased the money supply.
Other things the same, if the Fed raises the discount rate, then banks choose to borrow
a. more from the Fed so reserves increase.
c. less from the Fed so reserves increase.
b. more from the Fed so reserves decrease. d. less from the Fed so reserves decrease.
Stagflation is most likely caused by
a. An increase in aggregate demand.
b. A decrease in aggregate demand.
c. A large decrease in the money supply.
d. A large increase in the money supply and declining GDP.
Assume that the nominal interest rate is 10%. If the expected inflation rate is 5%, the real interest rate is
a. 10 percent.
b. 5 percent.
c. 15 percent.
d. 2 percent.

____ 23. If people decide to hold less currency relative to deposits, the money supply
a. falls. The Fed could lessen the impact of this by buying Treasury bonds.
b. falls. The Fed could lessen the impact of this by selling Treasury bonds.
c. rises. The Fed could lessen the impact of this by buying Treasury bonds.
d. rises. The Fed could lessen the impact of this by selling Treasury bonds.
____ 24. Today, bank runs are
a. uncommon because of the high required reserve ratio.
b. uncommon because of FDIC deposit insurance.
c. common because of the low required reserve ratio.
d. common because the FDIC is nearly bankrupt.
____ 25. Suppose that the Federal Reserve buys $400 billion worth of government securities from the public. If the
required reserve ratio is 20 percent, the maximum increase in the money supply is
a. $1,600 billion.
b. $1,800 billion.
c. $2,000 billion.
d. $4,000 billion.
____ 26. The Federal Funds rate is the interest rate
a. the Federal Reserves charges for loans it makes to the federal government.
b. the Federal Reserve charges banks for short-term loans.
c. banks charge each other for short-term loans of reserves.
d. on newly issued one-year Treasury bonds.
____ 27. When an economy is operating below the full-employment level of output, an appropriate monetary policy
would be to increase which of the following?
a. The discount rate.
b. The required reserve ratio.
c. The international value of the dollar.
d. Open market purchases of government bonds.
____ 28. Deflation
a. increases the ability to pay debts and raises the value of money.
b. increases the ability to pay debts and lowers the value of money.
c. reduces the ability to pay debts and raises the value of money.
d. reduces the ability to pay debts and lowers the value of money.
____ 29. The quantity theory of money
a. is a fairly recent addition to economic theory.
b. can explain both moderate inflation and hyperinflation.
c. argues that inflation is caused by too little money in the economy.
d. All of the above are correct.
____ 30. When the price level rises, the number of dollars needed to buy a representative basket of goods
a. increases, and so the value of money rises.
b. increases, and so the value of money falls.
c. decreases, and so the value of money rises.
d. decreases, and so the value of money falls
____ 31. Money demand refers to
a. the total quantity of financial assets that people want to hold.
b. how much income people want to make per year.
c. how much wealth people want to hold in liquid form.
d. how much currency the Federal Reserve decides to print.
____ 32. The Federal Reserve decreases the federal funds rate by
a. Decreasing the reserve requirement.
b. Decreasing the discount rate.
c. Increasing the discount rate
d. Buying government bonds on the open market.

____ 33. Which of the following is NOT a function of money?

a. A standard of deferred payment.
c. A store of value.
b. A unit if account.
d. A medium of exchange.
____ 34. When an economy is at full-employment, which of the following will most likely create demand-pull inflation
in the short run?
a. An increase in the discount rate.
c. A decrese in the real rate of interest
b. An increase in personal income taxes
d. A decrease in the money supply.
____ 35. The money supply in Tazland is $100 billion. Nominal GDP is $800 billion and real GDP is $200 billion.
What are the price level and velocity in Tazland?
a. the price level and velocity are both 8
c. the price level and velocity are both 4
b. the price level is 8 and velocity is 4
d. the price level is 4 and velocity is 8
____ 36. Which of the following is not implied by the quantity equation?
a. If velocity is stable, an increase in the money supply creates a proportional increase in
nominal output.
b. If velocity is stable and money is neutral, an increase in the money supply creates a
proportional increase in the price level.
c. With constant money supply and output, an increase in velocity creates an increase in the
price level.
d. With constant money supply and velocity, an increase in output creates a proportional
increase in the price level.
____ 37. Suppose that the United States unexpectedly decided to pay off its debt by printing new money. Which of the
following would happen?
a. People who held money would feel poorer.
b. Prices would rise.
c. People who had lent money at a fixed interest rate would feel poorer.
d. All of the above are correct.
____ 38. High and unexpected inflation has a greater cost
a. for those who borrow than those who save.
b. for those who hold a little money than for those who hold a lot of money.
c. for those whose wages increase by as much as inflation, than those who are paid a fixed
nominal wage.
d. for banks who lend at fixed interest rates than savers who save at flexible interest rates
Short Answer
39. Why did farmers in the late 1800s dislike deflation (2 Points)?

AP Macroeconomics, Chapters 29 and 30 Practice Test

Answer Section
MULTIPLE CHOICE
1. ANS: A
AP Exam Question # 54 from 2008 practice exam
PTS: 1
DIF: 1
MSC: Definitional
2. ANS: C
Question # 2, 2008 AP Practice Exam

REF: 29-1

TOP: Medium of exchange

PTS: 1
DIF: 1
MSC: Definitional
3. ANS: D
PTS: 1
TOP: M1
MSC: Definitional
4. ANS: D
Question # 8, 2008 AP Practice Exam

REF: 29-1

TOP: Commodity money

DIF: 1

REF: 29-1

PTS: 1
DIF: 1
MSC: Definitional
5. ANS: B
Question # 12, 2008 AP Practice Exam

REF: 29-1

TOP: M1 | M2

PTS: 1
DIF: 1
MSC: Definitional
6. ANS: D
Question # 13, 2008 AP Practice Exam

REF: 29-1

TOP: Credit cards

PTS: 1
DIF: 2
MSC: Definitional
7. ANS: C
Question # 16, 2008 AP Practice Exam

REF: 29-1

TOP: M1

PTS: 1
DIF: 1
MSC: Definitional
8. ANS: C
PTS: 1
TOP: Federal Reserve
9. ANS: A
PTS: 1
TOP: Federal Open Market Committee
10. ANS: B
Textbook question

REF: 29-1

TOP: Currency holdings

DIF:
MSC:
DIF:
MSC:

REF: 29-2

PTS:
MSC:
11. ANS:
TOP:
12. ANS:

REF: 29-1

TOP: Open-market operations

DIF: 1
MSC: Definitional
DIF: 2

REF: 29-1

1
DIF: 1
Definitional
A
PTS: 1
Open-market operations
C
PTS: 1

1
Definitional
2
Definitional

REF: 29-2

REF: 29-3

TOP: Reserves
MSC: Applicative
13. ANS: B
PTS: 1
TOP: Reserves
MSC: Applicative
14. ANS: B
Question # 21, 2008 AP Practice Exam

DIF: 1

REF: 29-3

PTS: 1
DIF: 1
MSC: Applicative
ANS: B
PTS: 1
TOP: Monetary tools
ANS: B
PTS: 1
TOP: Monetary tools
ANS: D
PTS: 1
TOP: Monetary tools
ANS: A
PTS: 1
TOP: Reserve requirement
ANS: A
PTS: 1
TOP: Reserve requirement
ANS: D
PTS: 1
TOP: Discount rate
ANS: D
Question # 27, 2008 AP Practice Exam

REF: 29-3

TOP: Money multiplier

DIF:
MSC:
DIF:
MSC:
DIF:
MSC:
DIF:
MSC:
DIF:
MSC:
DIF:
MSC:

REF: 29-3

PTS: 1
DIF: 1
MSC: Definitional
22. ANS: B
Question # 28, 2008 AP Practice Exam

REF: 29-3

15.
16.
17.
18.
19.
20.
21.

2
Definitional
2
Definitional
2
Analytical
2
Interpretive
2
Interpretive
1
Definitional

PTS: 1
DIF: 2
REF: 29-3
TOP: Money multiplier and excess reserves
23. ANS: D
PTS: 1
DIF: 3
TOP: Money multiplier and currency holdings
24. ANS: B
PTS: 1
DIF: 1
TOP: Bank runs
MSC: Definitional
25. ANS: C
Question # 31, 2008 AP Practice Exam
PTS: 1
DIF: 1
REF: 29-3
TOP: Federal Deposit Insurance Corporation
26. ANS: C
PTS: 1
DIF: 1
TOP: Federal funds rate
MSC: Definitional
27. ANS: D
Question # 39, 2008 Practice Exam
PTS:
MSC:
28. ANS:
TOP:
29. ANS:

1
DIF: 1
Definitional
C
PTS: 1
U.S. inflation
B
PTS: 1

REF: 29-3
REF: 29-3
REF: 29-3
REF: 29-2
REF: 29-3

TOP: Stock market crash of 1987

MSC:
REF:
MSC:
REF:

Applicative
29-3
Applicative
29-3

MSC: Definitional
REF: 29-3

REF: 30-1

TOP: Inflation rate

DIF: 2
MSC: Interpretive
DIF: 1

REF: 30-1
REF: 30-1

TOP: Quantity theory

30. ANS: B
PTS: 1
TOP: Value of money
31. ANS: C
PTS: 1
TOP: Money demand
32. ANS: D
Question # 45, 2008 AP Practice Exam

MSC:
DIF:
MSC:
DIF:
MSC:

PTS: 1
DIF: 2
MSC: Analytical
33. ANS: A
Question # 49, 2008 AP Practice Exam

REF: 30-1

TOP: Money market

PTS: 1
DIF: 2
MSC: Analytical
34. ANS: C
Question # 50, 2008 AP Practice Exam

REF: 30-1

TOP: Money market

35.
36.
37.
38.

PTS:
MSC:
ANS:
TOP:
ANS:
TOP:
ANS:
TOP:
ANS:
TOP:

Definitional
1
Definitional
1
Definitional

1
DIF: 1
REF: 30-1
Definitional
D
PTS: 1
DIF: 2
Quantity equation
MSC: Analytical
D
PTS: 1
DIF: 2
Quantity equation
MSC: Analytical
D
PTS: 1
DIF: 1
Inflation costs
MSC: Applicative
D
PTS: 1
DIF: 2
Redistributional effects of unexpected inflation

REF: 30-1
REF: 30-1

TOP: Price level

REF: 30-1
REF: 30-1
REF: 30-1
REF: 30-2
MSC: Interpretive

SHORT ANSWER
39. ANS:
Most had large nominal debts. The decrease in the price level meant that they received less for what they
produced and so made it harder to pay off the debts whose real value rose as prices fell.
PTS: 1
MSC: Analytical

DIF: 2

REF: 30-1

TOP: Deflation