AP MACROECONOMICS Test Booklet

1. In a country whose banking system has limited reserves, which of the following actions by the central bank
increases the money supply?
(A) Buying government bonds on the open market
(B) Selling government bonds on the open market
(C) Increasing the reserve requirement
(D) Increasing the discount rate
(E) Increasing the federal funds rate

Assuming a banking system with limited reserves, which of the following actions by the central bank reduces the
2.
ability of the banking system to create money?
(A) Decreasing the policy rate
(B) Decreasing the discount rate
(C) Increasing the money supply
(D) Increasing the reserve requirement
(E) Buying government bonds on the open market

3. Assume a country’s banking system has limited reserves. In the short run, which of the following would occur to the
price of previously issued bonds and interest rates if a central bank bought bonds through open-market operations?

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Bond Prices Interest Rates

(A)
No change Increase

Bond Prices Interest Rates

(B)
Increase Increase

Bond Prices Interest Rates

(C)
Increase Decrease

Bond Prices Interest Rates

(D)
Decrease Increase

Bond Prices Interest Rates

(E)
Decrease Decrease

4. 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.

5. 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?

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(A) The central bank’s administered interest rates

(B) Transfer payments
(C) Income tax rates
(D) Government expenditures
(E) Investment in basic infrastructure

6. 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

7. 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.

8. 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

9. 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
(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

10. Expansionary monetary policy can affect the economy through which of the following chains of events?

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(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.

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

12. 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

13. 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

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

15. An increase in administered interest rates will most likely change the nominal interest rate and aggregate demand in
which of the following ways in the short run?

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Nominal Interest Rate Aggregate Demand

(A)
Increase Decrease

Nominal Interest Rate Aggregate Demand

(B)
Increase Increase

Nominal Interest Rate Aggregate Demand

(C)
Increase Not change

Nominal Interest Rate Aggregate Demand

(D)
Decrease Decrease

Nominal Interest Rate Aggregate Demand

(E)
Decrease Increase

16. 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.

17. 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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18. 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
(C) Lower the discount rate
(D) Lower the required reserve ratio
(E) Increase the monetary base

19. 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

20. 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?
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.

21. 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) Decreasing the reserve requirement
(E) Decreasing the discount rate

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22. 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

23. 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

24. 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.

25. Assuming a banking system with limited reserves, which of the following set of events is most likely to follow
when a central bank sells securities in the open market?
(A) An increase in the money supply, a decrease in interest rates, and an increase in aggregate demand
(B) An increase in the money supply, an increase in interest rates, and a decrease in aggregate demand
An increase in interest rates, an increase in the government budget deficit, and a movement toward trade
(C)
surplus
(D) A decrease in the money supply, an increase in interest rates, and a decrease in aggregate demand
(E) A decrease in the money supply, a decrease in interest rates, and a decrease in aggregate demand

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26.

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

27. Assume a country’s banking system has limited reserves. When the central bank sells government bonds on the
open market, which of the following will most likely increase?
(A) Bank reserves
(B) Price of bonds
(C) Money supply
(D) Nominal interest rates
(E) The required reserve ratio

28. The table below shows monetary assets for a banking sector at the end of a year.

Monetary Assets Value (in millions)

Monetary Base
Currency in Circulation
M1

Based on the data provided, what is the value of total reserves held by depository institutions?

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

29. Fred Jones withdraws in cash from his savings account. What immediate effect does this transaction have
on the monetary aggregate measures of and ?
(A) will increase; will decrease
(B) will increase; will not change
(C) will decrease; will not change
(D) will not change; will decrease
(E) will not change; will not change

30. The narrowest definition of money, M1, includes which of the following
(A) savings accounts
(B) bank reserves
(C) government bonds
(D) certificates of deposit
(E) credit cards

The table below gives the value of various monetary measures, in millions of dollars.

Cash in Circulation
Certificates of Deposit
Bank Reserves
Demand Deposits
Savings Deposits

31. Based on the table above, what is the value of , a measure of the money supply?
(A)
(B)
(C)
(D)
(E)

32. Based on the table above, what is the value of the monetary base?

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

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