AP MACROECONOMICS Test Booklet

Unit 4 HW 4

1.

The graph above shows two aggregate demand curves, AD1 and AD2, and an aggregate supply curve, AS. The shift
in the aggregate demand curve from AD1 to AD2 could be caused by
(A) a decrease in taxes
(B) a decrease in the money supply
(C) an increase in government spending
(D) an increase in consumption spending
(E) an increase in the price level

2. If aggregate demand is growing faster than long-run aggregate supply, the Federal Reserve is most likely to
(A) increase the interest rate on reserve balances
(B) increase bond prices
(C) increase income taxes
(D) decrease the discount rate
(E) decrease the required reserve ratio

3. If a banking system has ample reserves, which of the following is an action taken by the central bank that would
cause a decrease in the cyclical rate of unemployment in the short run?
(A) An increase in the required reserve ratio
(B) An increase in the policy rate
(C) An increase in the discount rate
(D) A decrease in interest on reserves
(E) A decrease in personal income tax rates

4. Assuming the banking system has limited reserves, an increase in the money supply is most likely to have which of
the following short-run effects on real interest rates and real output?

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Real Interest Rates Real Output

(A)
Decrease Decrease

J
Real Interest Rates Real Output
(B)
Decrease Increase

Real Interest Rates Real Output

(C)
Increase Decrease

Real Interest Rates Real Output

(D)
Increase No change

Real Interest Rates Real Output

(E)
No change Increase

5. If the interest rate on short-term government bonds declined as a result of policy actions by a central bank, the
central bank must have
(A) decreased its administered interest rates
(B) decreased the amount of currency in circulation
(C) sold government bonds to commercial banks
(D) increased the supply of bonds
(E) increased the discount rate on loans to commercial banks

6. Which of the following is a monetary policy that can be used to counteract a recession?
(A) Lowering the interest rate paid on reserves
(B) Lowering tax rates
(C) Increasing the required reserve ratio
(D) Increasing the discount rate
(E) Increasing government spending

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7. The purchase of bonds by a central bank will have the greatest effect on real gross domestic product if which of the
following situations exists in the economy?
The banking system has ample reserves, the required reserve ratio is high, and the interest rate has a large
(A)
effect on investment spending.
The banking system has ample reserves, the required reserve ratio is high, and the interest rate has a small
(B)
effect on investment spending.
The banking system has limited reserves, the required reserve ratio is low, and the interest rate has a large
(C)
effect on investment spending.
The banking system has limited reserves, the required reserve ratio is low, and the marginal propensity to
(D)
consume is low.
The banking system has ample reserves, the marginal propensity to consume is high, and the interest rate has
(E)
a small effect on investment spending.

8. If an economy is operating with significant unemployment, a decrease in which of the following will most likely
cause employment to increase and the interest rate to decrease?
(A) The central bank’s administered interest rates
(B) Transfer payments
(C) Income tax rates
(D) Government expenditures
(E) Investment in basic infrastructure

Assuming a banking system with limited reserves, which of the following actions by the central bank reduces the
9.
ability of the banking system to create money?
(A) Decreasing the policy rate
(B) Decreasing the discount rate
(C) Increasing the money supply

9
(D) Increasing the reserve requirement
(E) Buying government bonds on the open market

10. Assuming a banking system with limited reserves, which of the following is most likely to occur when the central
bank 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.

11. A central bank can increase the money supply by

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(A) selling gold reserves to the banks

(B) selling foreign currency holdings
(C) buying government bonds on the open market
(D) buying gold from foreign central banks
(E) borrowing reserves from foreign governments

12. To reduce inflation, the central bank would be most likely to

(A) decrease the reserve requirement
(B) decrease the income tax rates
(C) buy government securities
(D) increase the supply of money
(E) increase its administered interest rates

13. For which of the following sets of unemployment and inflation rates will a central bank be most reluctant to
decrease its administered interest rates?

Unemployment Rate Inflation Rate

(A)
10% 2%

Unemployment Rate Inflation Rate

(B)
10% 5%

Unemployment Rate Inflation Rate

(C)
10% 10%

Unemployment Rate Inflation Rate

(D)
5% 5%

Unemployment Rate Inflation Rate

(E)
5% 10%

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Unit 4 HW 4

14. If a country’s economy is operating below the full-employment level of output at a very low inflation rate, the
central bank of the country is most likely to
pursue an expansionary monetary policy because it is required to do so by law whenever output is below the
(A)
full-employment level
pursue an expansionary fiscal policy because it is required to do so by law whenever output is below the full-
(B)
employment level
(C) lower administered interest rates to generate an increase in output
(D) sell bonds on the open market to generate an increase in output
(E) lower income taxes to generate an increase in output

15. During a mild recession, if policymakers want to reduce unemployment by increasing investment, which of the
following policies would be most appropriate?
(A) Equal increases in government expenditure and taxes
a
(B) An increase in government expenditure only
(C) An increase in transfer payments
(D) An increase in the reserve requirement
(E) A decrease in administered interest rates

16. Changes in which of the following will change the money supply?
(A) number of banks in operation
(B) velocity of money
(C) price level
(D) prime rate
(E) open market operations

17. If the central bank decreases administered interest rates, which of the following will occur?
(A) The price of bonds will increase.
(B) The money supply will decrease.
(C) Total bank reserves will decrease.
(D) Consumption will decrease.
(E) The government will balance its budget.

18. Assuming a banking system with limited reserves, when the central bank buys government securities on the open
market, which of the following will decrease in the short run?
9Interest rates
(A)
(B) Taxes
(C) Investment
(D) The amount of money loaned by banks
(E) The money supply

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19. Expansionary monetary policy can affect the economy through which of the following chains of events?
(A) Increasing the discount rate lowers real interest rates, which raises investment.
(B) Reducing taxes lowers the discount rate, which raises consumption.
(C) Increasing government expenditures lowers nominal interest rates, which raises investment.
(D) Increasing the reserve requirement lowers nominal interest rates, which increases investment.
(E) Decreasing the administered interest rates lowers nominal interest rates, which increases investment.

20. Expansionary monetary policy will most likely cause interest rates and investment to change in which of the
following ways in the short run?

Interest Rates Investment

(A)
Increase Increase

Interest Rates Investment

(B)
Increase Decrease

Interest Rates Investment

(C)
Decrease Increase

Interest Rates Investment

(D)
Decrease Decrease

Interest Rates Investment

(E)
No change Increase

21. Which Federal Reserve action can shift the aggregate demand curve to the left?

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(A) Lowering the federal funds rate

(B) Lowering income taxes
(C) Lowering reserve requirements
(D) Raising interest on reserves
(E) Raising government spending on national defense

22. The Federal Reserve can cause an 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

23.

Assume a country’s banking system has limited reserves. Which event would have caused the shift of the money
supply curve from S1 to S2 in the money market shown above?
(A) The purchase of government bonds on the open market by the central bank
(B) An increase in the required reserve ratio
(C) A short-run increase in output, employment, and income
(D) An increase in general price level in the country
(E) An increase in the supply of the country’s currency in foreign exchange markets

24. The Federal Reserve decreases the federal funds rate by

(A) buying government bonds on the open market
(B) increasing interest on reserves
(C) increasing the discount rate
(D) decreasing the reserve requirement
(E) decreasing its administered interest rates

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25. If the Federal Reserve lowers its administered interest rates, which of the following would most likely occur?
(A) Imports will rise, decreasing the trade deficit.
(B) The rate of saving will increase.
(C) Unemployment and inflation will both increase.
(D) Businesses will purchase more factories and equipment.
(E) The budget deficit will increase.

26. When a central bank conducts open-market bond sales in a banking system with limited reserves, the money supply,
interest rate, and aggregate demand will change in which of the following ways in the short run?

Money Supply Interest Rate Aggregate Demand

(A)
Decrease Increase Decrease

Money Supply Interest Rate Aggregate Demand

(B)
Decrease Decrease Increase

Money Supply Interest Rate Aggregate Demand

(C)
Decrease Increase Increase

Money Supply Interest Rate Aggregate Demand

(D)
Increase Decrease Increase

Money Supply Interest Rate Aggregate Demand

(E)
Increase Decrease Decrease

27. If currently at full employment, which of the following would most likely cause the United States economy to fall
into a recession?

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(A) An increase in welfare payments

(B) An increase in exports
(C) A decrease in savings by consumers
(D) A decrease in the required reserve ratio
(E) An increase in administered interest rates

28. Assume a country’s banking system has limited reserves. To counteract a recession, the central bank should
(A) raise the reserve requirement and the discount rate
(B) sell securities on the open market and raise the discount rate
(C) sell securities on the open market and lower the discount rate
(D) buy securities on the open market and raise the discount rate

&(E) buy securities on the open market and lower the discount rate

29. In the short run, a tight monetary policy tends to cause

(A) a decrease in the interest rate and a decrease in prices
(B) a decrease in the interest rate and an increase in private investment
(C) a decrease in prices and an increase in private investment
(D) an increase in the interest rate and an increase in private investment
(E) an increase in interest rate and a decrease in private investment

30. Which of the following occurs as investment becomes more responsive to changes in the interest rate?

&
(A) Monetary policy becomes more effective at changing real gross domestic product.
(B) Fiscal policy becomes more effective at changing real gross domestic product.
(C) Monetary policy becomes more effective at changing interest rates.
(D) Fiscal policy becomes more effective at changing interest rates.
(E) There is no change in the effectiveness of either monetary or fiscal policy.

31. Which of the following accurately describes the difference between how open market operations are used in a
banking system with limited reserves compared to a banking system with ample reserves?

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In a banking system with limited reserves, open market operations are used to maintain sufficient reserves,
(A) whereas in a banking system with ample reserves, open market operations are used to indirectly influence the
nominal interest rate by changing the money supply.
In a banking system with limited reserves, open market operations are used to indirectly influence the
(B) nominal interest rate by changing the money supply, whereas in a banking system with ample reserves, open
market operations are used to maintain sufficient reserves.
In a banking system with limited reserves, open market operations are used to directly adjust the nominal
(C) interest rate, whereas in a banking system with ample reserves, open market operations are used to indirectly
influence the nominal interest rate by changing the money supply.
In a banking system with limited reserves, open market operations are used to indirectly influence the
(D) nominal interest rate by changing the money supply, whereas in a banking system with ample reserves, open
market operations are used to directly adjust the nominal interest rate.
In a banking system with limited reserves, open market operations are a non-operational monetary policy
(E) tool, whereas in a banking system with ample reserves, open market operations are an operational monetary
policy tool.

32. Assuming a banking system with limited reserves, which of the following is a monetary policy action a central bank
would implement to control inflation?
(A) Target a lower overnight interbank lending rate
(B) Sell government bonds to the public
9Lower the discount rate
(C)
(D) Lower the required reserve ratio
(E) Increase the monetary base

33. When an economy is operating below the full-employment level of output, an appropriate monetary policy would be
to decrease which of the following?
(A) Income tax rates
(B) Transfer payments
(C) Government bond purchases
(D) Administered interest rates
(E) Government expenditures on goods and services

34. Assume the banking system in Nation K has limited reserves. Which of the following would most likely lead to a
decrease in nominal interest rates in Nation K?
(A) The central bank in Nation K buys government securities.
(B) The central bank in Nation K increases the required reserve ratio.
(C) The government of Nation K decreases income taxes.
(D) The government of Nation K increases unemployment benefits.
(E) The government of Nation K increases spending.

35. Open market operations refer to which of the following activities?

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(A) The buying and selling of stocks in the stock market

(B) The loans made by the central bank to member commercial banks
(C) The buying and selling of government securities by the central bank
(D) The government's purchases and sales of municipal bonds
(E) The government's contribution to net exports

36. Which of the following government policies can reduce the rate of inflation in the short run?
(A) Providing investment tax credits for businesses
(B) Reducing personal income tax rates
(C) Increasing administered interest rates
D
(D) Decreasing the reserve requirement
(E) Decreasing the discount rate

37. Assuming a banking system with limited reserves, which of the following is a monetary policy aimed at increasing
the equilibrium interest rate in the money market?
(A) Raising taxes
(B) Lowering the discount rate
(C) Lowering the federal funds rate
(D) Selling bonds on the open market
(E) Lowering the required reserve ratio

38. Which of the following sequences of events would occur if the Federal Reserve implemented contractionary
monetary policy?
Interest rates increase, investment and consumption spending decrease, aggregate demand decreases, and
(A)
output and prices decrease.
Interest rates increase, investment and consumption spending decrease, aggregate demand increases, and
(B)
output and prices decrease.
Interest rates increase, investment and consumption spending increase, aggregate demand decreases, and
(C)
output and prices decrease.
Interest rates decrease, investment and consumption spending decrease, aggregate demand decreases, and
(D)
output and prices decrease.
Interest rates decrease, investment and consumption spending decrease, aggregate demand decreases, and
(E)
output and prices increase.

39. Assume a country’s banking system has limited reserves. To counter a recession, the central bank might pursue
which of the following actions?
(A) Increasing reserve requirements and selling securities on the open market
(B) Increasing capital gains tax and selling securities on the open market
(C) Decreasing reserve requirements and increasing the discount rate
(D) Decreasing the discount rate and buying securities on the open market
(E) Decreasing the capital gains tax and selling securities on the open market

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40. Which of the following will lead to a decrease in a nation’s money supply in a country where the banking system
has limited reserves?
(A) A decrease in income tax rates
(B) A decrease in the discount rate
(C) An open market purchase of government securities by the central bank
(D) An increase in reserve requirements
Q
(E) An increase in government expenditures on goods and services

41. All of the following changes will shift the investment demand curve to the right EXCEPT
(A) a decrease in the corporate income tax rate
(B) an increase in the productivity of new capital goods
(C) an increase in the real interest rate
(D) an increase in corporate profits
(E) an increase in real gross domestic product

42. An increase in government spending with no change in taxes leads to a

(A) lower income level
(B) lower price level
(C) smaller money supply
(D) higher interest rate
8
(E) higher bond price

43. Assume that the government finances its spending by borrowing from the public. If the government increases deficit
spending, the price of previously issued bonds and the real interest rate will change in which of the following ways?

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Price of Bonds Real Interest Rate

(A)
Decrease Decrease

Price of Bonds Real Interest Rate

(B)
Decrease Increase

Price of Bonds Real Interest Rate

(C)
Increase Decrease

Price of Bonds Real Interest Rate

(D)
Increase No change

Price of Bonds Real Interest Rate

(E)
Increase Increase

44. If businesses become optimistic about the profitability of investments in an economy, which of the following will
happen in the loanable funds market in the short run?
(A) The supply and demand for loanable funds will increase.
(B) The supply and demand for loanable funds will decrease.
(C) The demand for loanable funds by the private sector will decrease.

9
(D)
(E)
The real interest rate will increase.
The real interest rate will decrease.

45. If investors feel that business conditions will deteriorate in the future, the demand for loans and real interest rate in
the loanable funds market will change in which of the following ways in the short run?

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Demand for Loans Real Interest Rate

(A)
Increase Increase

Demand for Loans Real Interest Rate

(B)
Increase Decrease

Demand for Loans Real Interest Rate

(C)
Decrease Increase

Demand for Loans Real Interest Rate

(D)
Decrease Decrease

Demand for Loans Real Interest Rate

(E)
Decrease Not change

46. Assume an open economy has a balanced budget and a balanced capital and financial account (CFA). Which of the
following independently occurring changes in the country’s budget and CFA will have the largest positive effect on
its long-run economic growth rate?

Change in the Budget Change in the CFA

A Move into deficit Move into deficit
B Move into deficit Move into surplus
C Move into surplus Move into deficit
D Move into surplus No change
E Move into surplus Move into surplus

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(A) A
(B) B
(C) C
(D) D
(E) E

47. An increase in the demand for loanable funds could be best explained by which of the following?
(A) There is a decrease in investment spending.
(B) There is an increase in the government’s budget surplus.

P
(C) Firms are optimistic about the future performance of the country’s economy.
(D) Domestic investors seek higher returns by investing in foreign financial assets.
(E) The economy is facing political instability.

48. Which of the following will most likely result in a lower real interest rate in a nation?
(A) The nation provides an investment tax credit to new businesses.
(B) The citizens of the nation increase their savings for retirement.
(C) The nation is experiencing political instability and economic risk.
(D) The nation’s central bank sells government bonds in the open market.
(E) The nation’s government increases its borrowing to finance spending on capital projects.

49. In the short run, government deficit spending will most likely
(A) raise the unemployment rate
(B) lower the inflation rate
(C) raise nominal interest rates
(D) lower private savings
(E) raise net exports

50. An increase in investment demand for capital goods accompanied by an increase in household savings will result in
which of the following in the market for loanable funds?
The demand curve for loanable funds will shift to the right along an unchanged supply curve, increasing the
(A)
quantity supplied of funds and the real interest rate.
The demand and supply curves of loanable funds will shift to the right, causing a decrease in the real interest
(B)
rate.
The equilibrium real interest rate will increase, but the impact on the quantity of loanable funds is
(C)
indeterminate.
The equilibrium quantity of loanable funds will increase, but the impact on the real interest rate is
(D)
indeterminate.
(E) There will be a surplus of funds in the market for loanable funds.

51. When there is excess demand in the loanable funds market, which of the following will occur?

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(A) National savings will exceed investment spending.

(B) The economy will remain at full employment.

9(C) Real interest rates will increase.

(D) An inflationary gap will exist.
(E) The money supply will increase.

52. In the country of Peirce, government spending decreased while the level of private savings increased. How will
these changes affect the real interest rate and interest-sensitive spending in the short run?
(A) The real interest rate will increase, and interest-sensitive spending will decrease.
(B) The real interest rate will increase, and the effect on interest-sensitive spending is indeterminate.
(C) The real interest rate will decrease, and interest-sensitive spending will increase.
(D) The real interest rate will decrease, and the effect on interest-sensitive spending is indeterminate.
(E) The effect on the real interest rate and interest-sensitive spending is indeterminate.

53. Which of the following changes would most likely cause an increase in interest rates in the short run?
(A) A decrease in reserve requirements
(B) An increase in trade deficits
(C) An open market purchase of government bonds

0
(D)
(E)
An increase in government spending financed by borrowing
An increase in the price of bonds

54. If the federal government reduces its budget deficit when the economy is close to full employment, which of the
following will most likely result?
(A) Inflation will increase.
(B) Tax revenues will increase.
(C) Interest rates will decrease.
(D) Unemployment will decrease.
(E) The international value of the dollar will increase.

55. Which of the following will cause an increase in the equilibrium real interest rate?
(A) An increase in investment demand
(B) An increase in national saving
(C) An increase in the government budget surplus
(D) A decrease in the government budget deficit
(E) The purchase of government bonds by the central bank

56. Which of the following is most likely to increase the real interest rate in Country Z ?

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(A) Country Z’s central bank purchases government securities from banks and citizens.
(B) Country Z reduces government expenditures.

9
(C) Country Z is viewed as having increased political and economic risk.
(D) Country Z’s citizens increase their savings in anticipation of needed retirement income.
(E) Country Z introduces a tax on consumption goods.

57. Which of the following will increase physical capital formation in an economy in the long run?
(A) A decrease in financial capital inflows
(B) A decrease in frictional unemployment
(C) An increase in unemployment benefits
(D) An increase in interest rates

O(E) An increase in total savings

58. The loanable funds market is best described as bringing together

(A) savers and borrowers
(B) investors and borrowers
(C) financial institutions and investors
(D) savers and lenders
(E) banks and savers

59. Which of the following changes in the loanable funds market will decrease the equilibrium real interest rate?
(A) A decrease in private savings
(B) A decrease in the expected inflation rate
(C) An increase in government spending on highways financed by borrowing
(D) An increase in foreign financial capital inflows
(E) An investment tax credit for plant and equipment

60. If the loanable funds market is in equilibrium, then which of the following must be true?
(A) Government spending equals tax revenues.
(B) Investment spending equals national savings.
(C) Investment spending equals private savings.
(D) Borrowing equals lending.
(E) Foreign inflows of financial capital equal investment spending.

61. Which of the following will increase the supply of loanable funds?

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(A) An increase in household saving

(B) An increase in open market sales by the central bank
(C) An increase in government spending
(D) An increase in transfer payments
(E) An increase in investment demand

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