AP Macroeconomics Section 5 Practice Test

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.
Northlandia / Southlandia
Investment spending as a percentage of GDP / 25% / 30%
Private savings as a percentage of GDP / 10% / 35%
Capital inflow as a percentage of GDP / 5% / -5%
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 Amazon.com gift certificate
C. / 100 shares of Microsoft stock
D. / an economics textbook
E. / a house
Monetary Aggregates (in billions)
Currency in circulation / $500
Money market funds / 550
Time deposits / 800
Savings deposits / 1110
Checkable bank deposits / 380
Traveler’s checks / 15
American Express gift cards / 25
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.
Assets / Liabilities
Reserves $20,000 / Deposits ______
Loans ______
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.
Assets / Liabilities
Cash in bank vault / $2 million / Checkable deposits $100 million
Deposits at the Federal Reserve / $13 million
Loans / $75 million
Property / $8 million
Bonds / $2 million
Table 25-2: ABC Bank's Balance Sheet

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.

A. / government entity that collects taxes.
B. / government-owned bank
C. / U.S. Treasury Bank
D. / largest private banking corporation in the world.
E. / 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