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AP Macroeconomics
Section 5 Practice Test
Multiple Choice
Identify the choice that best completes the statement or answers the question.
1. A stock in a company is:
A. a share of ownership of a company held by a shareholder.
B. an IOU that pays interest.
C. a portion of a firm's profits paid to stock owners.
D. part of private savings.
E. the interest payment on borrowing.
Investment spending as a percentage of GDP
Private savings as a percentage of GDP
Capital inflow as a percentage of GDP
Table 22-1: Investment Spending, Private Spending, and Capital Inflows
2. Use Table 22-1.What is the budget balance as a percentage of GDP in Southlandia?
A. –10%
B. 0%
C. 10%
D. 20%
E. 30%
3. The correct relationship between taxes and private savings is given by:
A. taxes = government spending + private savings.
B. taxes = total spending – consumption – investment – private savings.
C. taxes = total income – consumption – private savings.
D. taxes = consumption + private savings + total income.
E. taxes = private savings
4. Which of the following assets is the MOST liquid?
A. a $50 bill
B. a $50 gift certificate
C. 100 shares of Microsoft stock
D. an economics textbook
E. a house
Monetary Aggregates (in billions)
Currency in circulation
Money market funds
Time deposits
Savings deposits
Checkable bank deposits
Traveler’s checks
American Express gift cards
Table 23-1: Monetary Aggregates
5. Use Table 23-1. Consider the information in the table. M2 should be:
A. $2805 billion.
B. $3340 billion.
C. $3355 billion.
D. $2005 billion.
E. $2830 billion.
6. 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.
Table 25-1: Balance Sheet
7. Use Table 25-1. If the reserve ratio is 25%, loans are:
A. $5,000.
B. $15,000.
C. $60,000.
D. $80,000.
E. $20,000.
Cash in bank vault
$2 million Checkable deposits
Deposits at the Federal Reserve
$13 million
$75 million
$8 million
$2 million
Table 25-2: ABC Bank's Balance Sheet
$100 million
8. Use Table 25-2. Using the information in ABC Bank's Balance sheet, the bank is holding excess reserve of:
A. $17 million.
B. $15 million.
C. $5 million.
D. $25 million.
E. $3 million.
9. Suppose the reserve ratio is 20%. If Holly deposits $1,000 of cash into her checking account and her bank lends
$600 to Freda, the money supply:
A. remains the same.
B. decreases by $1,000.
C. decreases by $600.
D. increases by $600.
E. increases by $1,600
10. The Federal Reserve System is the _______ for the United States.
government entity that collects taxes.
government-owned bank
U.S. Treasury Bank
largest private banking corporation in the world.
central bank
11. The major tools of monetary policy available to the Federal Reserve System include:
A. reserve requirements, margin regulations, and moral suasion.
B. reserve requirements, open-market operations, and the discount rate.
C. open-market operations, margin regulations, and moral suasion.
D. the discount rate, margin regulations, and moral suasion.
E. tax collections, open-market operations and the discount rate.
12. If it looks like a bank won't meet the Federal Reserve Bank's reserve requirement, normally it will first turn to the:
A. other member banks and borrow at the federal funds rate.
B. Federal Reserve and borrow at the discount rate.
C. open market and borrow money there.
D. Congress to borrow funds.
E. Federal Reserve and borrow at the prime rate.
13. The discount rate is the interest rate the Fed charges on loans to:
A. consumers.
B. the federal government.
C. state governments.
D. banks.
E. corporations.
14. If the interest rate on CDs increases from 5% to 10%, the opportunity cost of holding money will ______ and the
quantity demanded of money will ______.
A. remain unchanged; remain unchanged
B. increase; increase
C. decrease; increase
D. decrease; decrease
E. increase; decrease
15. People forgo interest and hold money:
A. because they are required to.
B. to reduce their transactions costs.
C. because there are no substitutes for money.
D. because banks are too risky.
E. to increase the cost of purchasing goods and services.
16. When the short-term interest rate _____, the opportunity cost of holding money _____, and the quantity of money
individuals want to hold _____.
A. falls; falls; falls
B. falls; falls; rises
C. rises; falls; falls
D. rises; falls; rises
E. rises; rises; rises
17. A business will want to borrow to undertake an investment project when the rate of return on that project is:
A. less than the interest rate.
B. greater than the interest rate.
C. greater than the exchange rate.
D. equal to the inflation rate.
E. less than the inflation rate.
18. 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 savers 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.
Figure 29-1: Loanable Funds
19. Use the “Loanable Funds” Figure 29-1. The accompanying graph shows the market for loanable funds in
equilibrium. Which of the following might produce a new equilibrium interest rate of 5% 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 from other nations.
E. Forecasts for future corporate profits are gloomier than expected.
Figure 29-7: Market for Loanable Funds with Government Borrowing
20. Use the “Market for Loanable Funds with Government Borrowing” Figure 29-7. 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
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