Download AP Macroeconomics Review sheet 1. The transactions demand for

AP Macroeconomics
Review sheet
1. The transactions demand for money is most closely related to money functioning as a medium
of exchange.
2. The asset demand for money is most closely related to money functioning as a store of value.
Interest
rate
7%
6
5
4
Asset demand for money
(billions)
$200
300
400
500
3. Refer to the above table. Suppose the transactions demand for money is equal to 20 percent
of the nominal GDP, the supply of money is $800 billion, and the asset demand for money is
that shown in the table. If the nominal GDP is $2000 billion, the equilibrium interest rate is 5
percent.
4. Refer to the above table. If the transactions demand for money is $400 billion, an increase in
the money supply from $800 billion to $900 billion would cause the equilibrium interest rate
to be 4 percent.
5. Refer to the above table. Suppose the transactions demand for money is $300 billion and the
money supply is $700 billion. A decrease in the money supply to $600 billion would cause
the interest rate to rise to 6 percent.
Rate of interest (%)
Sm3 Sm1 Sm2
I
C
D
B
A
G
E
F
H
Dm2
Dm1
Dm3
0
Q3 Q 1 Q 2
Quantity of money
6. Refer to the above graph which shows the supply and demand for money where Dm1 , Dm2 , and
Dm3 represent different demands for money and Sm1 , Sm2 , and Sm3 represent different levels of
the money supply. The initial equilibrium point is A. What will be the new equilibrium point
following an increase in the asset demand for money? C
7. Refer to the above graph which shows the supply and demand for money where Dm1 , Dm2 ,
and Dm3 represent different demands for money and Sm1 , Sm2 , and Sm3 represent different
levels of the money supply. The initial equilibrium point is A. What will be the new
equilibrium point following an increase in the money supply? G
8. When the Federal Reserve buys government securities from commercial banks, 100 percent is
excess reserves.
9. Assume that the required reserve ratio for the commercial banks is 10 percent. If the Federal
Reserve Banks buy $10 billion in government securities from commercial banks we can say
that, as a result of this transaction, the lending ability of the commercial banking system will
increase by $100 billion.
10. If the quantity of money demanded exceeds the quantity supplied the interest rate will rise.
11. Using the information above, what will happen to the price of secondary bonds?
Price will fall.
12. Suppose the ABC bank has excess reserves of $5 million and customers have deposited
checkable deposits of $250 million. If the reserve requirement is 20 percent, what is the size of the
bank's actual reserves? $55 million
13. Assume that a bank initially has no excess reserves. If it receives $5,000 in cash from a depositor and
the bank finds that it can safely lend out $4,500, the reserve requirement must be 10 percent.
14. A commercial bank has checkable-deposit liabilities of $800,000, reserves of $150,000, and a
required reserve ratio of 10 percent. The amount by which a single commercial bank and the amount
by which the banking system can increase loans are respectively, $70,000 and $700,000.
15. A commercial bank has checkable-deposit liabilities of $10 billion, reserves of $3.5 billion, and a
required reserve ratio of 25 percent. The amount by which a single commercial bank and the amount
by which the banking system can increase loans are respectively, $1 billion and $4 billion.
16. A 9 percent increase in the price level decreases the value of a dollar by approximately
8 percent.
(1)
(2)
Interest rate Dt
12%
$800
10
800
8
800
6
800
4
800
2
800
(3)
Da
$ 50
100
150
200
250
300
17. Refer to the above data. If nominal GDP is $1000, and the average dollar is traded four
times a year. What would the money supply be if interest rates were six percent?
$450
18. If the demand for money and the supply of money both decrease, then the new
equilibrium quantity of money will decrease, but the change in the interest rate cannot
be predicted.
19. If the quantity of money supplied exceeds the quantity demanded the interest rate will
decrease.
20. A bond with no expiration has an original price of $40,000 and a fixed annual interest
payment of $5000. If the price of this bond decreases by $5000, the interest rate in effect
will decrease by 1.5 percentage points.