Name: ________________________________________
Date: __________________________________
AP Macroeconomics Unit 4 Problem Set
Quizzes for Unit 4: For unit 4, you will change your quiz in the following ways:
1.
2.
3.
One question on your quiz must come from units 2 or 3.
One question on your quiz must come from something we are currently learning in this unit.
One question on your quiz must come for something we have already learned in this unit.
Concept Group 1: Money
Video Lessons:
 “Money Supply”: https://www.khanacademy.org/economics-finance-domain/macroeconomics/monetary-systemtopic/money-supply-tutorial/v/money-supply-m0-m1-and-m2
1.
2.
3.
4.
What is money?
Why do we use money?
Define: portability, uniformity, acceptability, durability, stability.
Complete the chart below.
Type of Money
Portability
Uniformity
Acceptability
Durability
Stability
Salt
Large stone
wheels
Cattle
Bars of Gold
Copper coins
Pieces of paper
printed by the
government
(cash)
A personal
check/debit card
5.
What is “commodity money”? Give some examples.
1
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
Define fiat.
What is “fiat money”? Give some examples.
Fully explain the three functions of money.
What is the gold standard?
What currently backs the money supply in most countries?
Define liquidity.
List and define the kinds of money included in M1?
List and define the kinds of money included in M2?
List and define the kinds of money included in M3?
Explain the difference between a credit card and debit card.
Define asset.
Define liability.
Define demand deposit liability.
Define bond.
Define stocks.
Explain the two ways stockholders make money.
Define velocity of money.
Create two formulas that include GDP, money supply, and velocity of money. One formula should solve for GDP, and
one for velocity of money.
24. Define neutrality of money.
Concept Group 2: The Money Market & Basics of Monetary Policy
Video Lessons:

“Monetary and Fiscal Policy”: https://www.khanacademy.org/economics-finance-domain/macroeconomics/aggregatesupply-demand-topic/monetary-fiscal-policy/v/monetary-and-fiscal-policy
25.
26.
27.
28.
29.
30.
31.
32.
33.
Explain the difference between monetary and fiscal policy.
Explain the relationship between interest rates and demand for money.
Draw and fully label a graph that shows the relationship between interest rates and demand for money.
Show what happens to the graph if price level increases? What about if price level decreases?
Define the term federal.
Who is the Federal Reserve (“The Fed”)? How many Federal Reserve banks are there in the US?
Draw a graph that shows the supply of money. Why is this curve vertical?
On the graph, show what happens if money supply increases. What happens to aggregate demand? Why?
On the graph, show what happens if money supply decreases. What happens to aggregate demand? Why?
Concept Group 3: Basics of Monetary Policy—The Demand & Supply of Money
Video Lessons:

“Fractional Reserve Banking”: https://www.khanacademy.org/economics-finance-domain/macroeconomics/monetarysystem-topic/fractional-reserve-banking-tut/v/overview-of-fractional-reserve-banking
34. Draw two graphs—one of the money supply and one of AD/AS—that shows how the government can stimulate the
economy by increasing the money supply.
35. Draw two graphs—one of the money supply and one of AD/AS—that shows how the government can slow the economy
by decreasing the money supply.
36. What are the three options available to the Federal Reserve to shift money supply?
37. Define the reserve requirement/reserve ratio.
38. Define vault cash.
39. Why do banks not like to hold much cash in reserve or in vaults?
40. If the government raises the reserve rate, what happens to a bank’s reserves?
41. If the government lowers the reserve rate, what happens to a bank’s reserves?
42. Explain what happens when you deposit money into a bank. Where does much of your money go?
43. Define “fractional reserve banking.”
44. If banks decide to hold excess reserves, what is the impact?
45. What is the formula for the simple deposit expansion multiplier?
46. If the reserve ratio is 20% and someone deposits $1500 in the bank, how much money can be created through loans?
47. If the reserve ratio is 30% and someone deposits $2500 in the bank, how much money can be created through loans?
48. If the reserve ratio is 50% and someone deposits $2000 in the bank, how much money can be created through loans?
49. If the reserve ratio is 100% and someone deposits $3000 in the bank, how much money can be created through loans?
50. If $1,000 is deposited into a checking account and required reserves increase by $600, the reserve ratio must be what?
51. If $1,000 is deposited into a checking account and excess reserves increase by $600, the reserve ratio must be what?
2
52. If $1,000 is deposited into a checking account and required reserves increase by $400, the reserve ratio must be what?
53. If $1,000 is deposited into a checking account and excess reserves increase by $800, the reserve ratio must be what?
54. A commercial bank holds $100,000 in demand deposit liabilities and $25,000 in reserves. If the required reserve ratio is
20 percent, by how much more could the bank increase its loans? How much more could the entire banking system
increase loans from this bank?
55. A commercial bank holds $200,000 in demand deposit liabilities and $110,000 in reserves. If the required reserve ratio is
50 percent, by how much more could the bank increase its loans? How much more could the entire banking system
increase loans from this bank?
56. A commercial bank holds $800,000 in demand deposit liabilities and $200,000 in reserves. If the required reserve ratio is
10 percent, by how much more could the bank increase its loans? How much more could the entire banking system
increase loans from this bank?
57. If there is a recession, what should the Fed do in terms of the reserve ratio? Explain what the results of this action will be.
58. If there is inflation, what should the Fed do in terms of the reserve ratio? Explain what the results of this action will be.
59. Explain what the discount rate is.
60. If there is a recession, what should the Fed do in terms of the discount rate? Explain what the results of this action will
be.
61. If there is inflation, what should the Fed do in terms of the discount rate? Explain what the results of this action will be.
62. Define bond.
63. Define securities.
64. Explain what open market operations are.
65. If there is a recession, what should the Fed do in terms of open market operations? Explain what the results of this action
will be.
66. If there is inflation, what should the Fed do in terms of open market operations? Explain what the results of this action
will be.
67. Suppose the Federal Reserve buys $500,000 worth of securities from the securities dealers on the open market. If the
reserve requirement is 25 percent and the banks hold no excess reserves, what will happen to the total money supply?
68. Suppose the Federal Reserve sells $200,000 worth of securities from the securities dealers on the open market. If the
reserve requirement is 25 percent and the banks hold no excess reserves, what will happen to the total money supply?
69. Explain what the federal funds rate is.
70. How is the Federal funds rate established?
71. How does the Fed influence the federal funds rate?
72. If the Fed wanted to decrease the federal funds rate, then they should…
73. If the Fed wanted to increase the federal funds rate, then they should…
74. Which is the most widely used monetary policy by the Fed?
75. Draw a graph of AD and AS with a Keynesian, classical, and intermediate range. If the economy is in the horizontal
range of the curve, what happens to inflation and real GDP if the Fed engages in expansionary monetary policy?
76. Draw a graph of AD and AS with a Keynesian, classical, and intermediate range. If the economy is in the classical range
of the curve, what happens to inflation and real GDP if the Fed engages in expansionary monetary policy?
77. Complete the chart below.
If the country is
experiencing a(n)…
then the Fed will want
to _____ the money
supply…
in order to ______
interest rates…
which will ______
investment and new
purchases…
and _____
unemployment.
recessionary gap
inflationary gap
78. Complete the chart below.
If the government’s goal is
to…
then the Fed should ___ the
discount rate…
____ government securities
in the open market…
and ____ the reserve ratio.
then the money supply will
_____
and interest rates will
______
and the price of government
securities will _____.
increase aggregate demand
Thus, the government is
engaging in ____ monetary
policy, so
3
79. Complete the chart below.
If the government’s goal is
to…
then the Fed should ___ the
discount rate…
____ government securities
in the open market…
and ____ the reserve ratio.
then the money supply will
_____
and interest rates will
______
and the price of government
securities will _____.
decrease aggregate demand
Thus, the government is
engaging in ____ monetary
policy, so
80. Complete the chart below:
Type of Monetary Policy
Impact on Price Level
Impact on Real Output
Expansionary
Contracitonary
81. Complete the chart below:
Country is
experiencing…
Recessionary Gap
Recessionary Gap
Recessionary Gap
Recessionary Gap
Inflationary Gap
Inflationary Gap
Inflationary Gap
Inflationary Gap
Government’s
goal is to…
Increase AD as
quickly as
possible
Increase AD
and have a
balanced
budget
Increase AD
without
congressional
action
Increase AD
without action
from the Fed
Decrease AD
as quickly as
possible
Decrease AD
and have a
balanced
budget
Decrease AD
without
congressional
action
Decrease AD
without action
from the Fed
Spending
Taxes
Reserve Ratio
Government
Securities
Discount Rate
4
Concept Group 4: Loanable Funds
Video Lessons:
 “Loanable Funds & Crowding Out”: https://www.youtube.com/watch?v=hucfTz4sPfU
82.
83.
84.
85.
86.
87.
88.
89.
90.
91.
92.
93.
What are interest rates?
What is the formula for real interest rates?
What is the formula for nominal interest rates?
You lend out $100 with 20% interest and inflation is 10%. What is the nominal interest rate? What is the real interest
rate? Who benefits from this, the lender or the borrower? Why?
You lend out $100 with 10% interest and inflation is 20%. What is the nominal interest rate? What is the real interest
rate? Who benefits from this, the lender or the borrower? Why?
What is the loanable funds market?
Draw a graph of the loanable funds market? Explain how this graph differs from the money market.
What are the shifters of the demand of loanable funds?
What are the shifters of the supply of loanable funds?
Define crowding out.
Explain how deficit spending causes crowding out.
Complete the chart below.
Scenario
a.
b.
Demand of
Loanable
Funds
Supply of
Loanable
Funds
Graph
Impact on
Real Interest
Rates
Impact on
Quantity of
Loanable
Funds
Due to expanded
technology
education,
opportunities to
start technology
companies are
expanding.
The government
increases deficit
spending
significantly in
order to combat a
recession.
c.
The MPS
decreases
significantly.
d.
Chinese investors
began to invest
heavily in the US
economy.
e.
The government
cuts spending
significantly, and
is currently
running a surplus.
5
Scenario
f.
Due to a lack of
consumer
confidence, new
business
opportunities are
limited.
g.
Due to a
diplomatic crisis,
Brazilian investors
are barred from
investing in the
US.
h.
The government
lowers the income
tax significantly.
Demand of
Loanable
Funds
Supply of
Loanable
Funds
Graph
Impact on
Real Interest
Rates
Impact on
Quantity of
Loanable
Funds
FRQ Practice
94. 2015 #1
6
95. 2014 #1
96. 2014 #2
7
97. 2012 #1
98. 2011 #3
8
99. 2011B #1
100. 2010 #2
101. 2010B #2
9
MULTIPLE CHOICE PRACTICE
1.
All of the following are true regarding money except
(A)
(B)
(C)
(D)
(E)
2.
Which of the following is true regarding the balance sheet of a commercial bank?
(A)
(B)
(C)
(D)
(E)
3.
A bank places $300 of deposits in reserve
A bank borrows $4,000 from another commercial bank
A bank borrows $10,000 from the country’s central bank
A bank lends out $5,000 of its excess reserves
A bank buys $7,000 of US Treasuries with excess reserves
The required reserve ratio is 10% and the central bank sells $2 million in bonds to banks. If banks loan out all of their
excess reserves, what will happen to the money supply?
(A)
(B)
(C)
(D)
(E)
7.
An increase in nominal interest rates
An increase in the demand for money
An increase in investment
An increase in the reserve requirement
An increase in demand deposits
Which of the following is the best example of fractional reserve banking?
(A)
(B)
(C)
(D)
(E)
6.
High interest rates lead to less investment
Banks charge higher nominal interest rates on loans when price level increases
Higher interest rates encourage people to exchange money for other interest-bearing assets
Households need to hold money for daily transactions
Households demand less money because of their use of debit cards
A decrease in the supply of money will cause which of the following?
(A)
(B)
(C)
(D)
(E)
5.
Banks make a profit when the value of their assets are greater than the value of their liabilities
Loans given to consumers are considered a liability
Demand deposits are considered a liability
Savings accounts are considered an asset
Loans from the Federal Reserve are considered an asset
Which of the following bet explains why the money demand curve is downward sloping?
(A)
(B)
(C)
(D)
(E)
4.
Money is used as a medium of exchange
Commodity money is used more than fiat money today
Inflation erodes money’s ability to serve as a store of value
Money measures relative values when it serves as a unit of account
They money system is more efficient than the barter system
It will decrease by $2 million
It will decrease by $10 million
It will decrease by $20 million
It will increase by $10 million
It will increase by $20 million
Suppose that all banks hold no excess reserves and the reserve requirement is 20%. If Paula deposits $200 she earned for
babysitting in the bank, what is the maximum increase in the total money supply?
(A)
(B)
(C)
(D)
(E)
$200
$400
$800
$1,000
$1,200
10
8.
Which of the following is true regarding the central bank’s use of open market operations?
(A)
(B)
(C)
(D)
(E)
9.
Open market operations always result in inflation
Decreasing the discount rate will increase the money supply
Investment will increase when the central bank sells bonds
Interest rates will decrease when the central bank buys bonds
Aggregate demand will decrease when the central bank buys bonds
Which of the following is an appropriate monetary policy used by a central bank to reduce inflation?
(A)
(B)
(C)
(D)
(E)
Decreasing government expenditures
Increasing consumer income taxes
Decreasing the reserve requirement
Decreasing the discount rate
Selling government securities
10. Which of the following combined policies is the most effective in decreasing unemployment?
Taxes
Discount Rate
Reserve Requirement
(A)
Decrease
Decrease
Decrease
(B)
Decrease
Decrease
Increase
(C)
Decrease
Increase
Increase
(D)
Increase
Increase
Decrease
(E)
Increase
Increase
Decrease
11. The Federal Reserve can increase the federal funds rate most effectively by
(A)
(B)
(C)
(D)
(E)
Selling government bonds
Buying government bonds
Increasing the discount rate
Decreasing the discount rate
Decreasing the reserve requirement
12. If businesses predict that the economy will improve and sales will increase in the future, which of the following will
occur in the loanable funds market?
Expected
Actual
(A)
2%
-4%
(B)
2%
6%
(C)
12%
-6%
(D)
-2%
-6%
(E)
-2%
4%
13. If businesses predict that the economy will improve and sales will increase in the future, which of the following will
occur in the loanable funds market?
Demand for Loans
Real Interest Rate
(A)
Increase
Decrease
(B)
Increase
Increase
(C)
No change
Increase
(D)
Decrease
No change
(E)
Decrease
Increase
11
14. Which of the following is the best example of the crowing-out effect?
(A)
(B)
(C)
(D)
(E)
The government changes laws regulating banks
The Federal Reserve buys bonds increasing private investment
Deficit spending leads to a higher national debt
Deficit spending results in high interest rates that decrease private investment
Public sector borrowing increases the supply of loanable funds
ANSWERS
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
B
C
C
A
D
C
C
D
E
A
A
A
B
D
12