Financial Sector Review Questions AP Economics Mr. Bordelon.

Financial SectorReview

QuestionsAP EconomicsMr. Bordelon

The savings-investment spending identity says thata. each person in the economy must invest as

much as he or she saves.b. savings and investment spending are always

equal for the economy as a whole.c. savings must equal government investment for

the economy as a whole.d. each person in the economy must save as much

as he or she invests.e. savings plus investment spending equals gross

domestic product.

The savings-investment spending identity says thata. each person in the economy must invest as

much as he or she saves.b. savings and investment spending are always

equal for the economy as a whole.c. savings must equal government investment for

the economy as a whole.d. each person in the economy must save as much

as he or she invests.e. savings plus investment spending equals gross

domestic product.

To help investment spending, the government can:a. lower taxes on consumption, so that disposable

income rises.b. lower taxes on the returns from savings, so that

total savings increase and the interest rate falls.c. raise taxes on the returns from bonds while

lowering taxes on stock dividends.d. lower taxes on investment spending while raising

taxes on savings, so that total tax revenue remains constant.

e. increase the size of the annual budget deficit.

To help investment spending, the government can:a. lower taxes on consumption, so that disposable

income rises.b. lower taxes on the returns from savings, so that

total savings increase and the interest rate falls.c. raise taxes on the returns from bonds while

lowering taxes on stock dividends.d. lower taxes on investment spending while raising

taxes on savings, so that total tax revenue remains constant.

e. increase the size of the annual budget deficit.

Centralia has no trade and no government. GDP = $25 trillion. Consumption spending = $18 trillion.

What is the level of investment spending in Centralia?a. $18 trillionb. $7 trillionc. $25 trilliond. -$7 trillione. $43 trillion

Suppose that there is a new government in Centralia, and it has decided to impose taxes on its citizens in order to spend on infrastructure. Taxes = $2 trillion. Government spending = Taxes. What is the level of private saving in Centralia?

a. $11 trillionb. $7 trillionc. $5 trilliond. $18 trillione. $9 trillion

Suppose that there is a new government in Centralia, and it has decided to impose taxes on its citizens in order to spend on infrastructure. Taxes = $2 trillion. Government spending = Taxes. What is the level of private saving in Centralia?

a. $11 trillionb. $7 trillionc. $5 trilliond. $18 trillione. $9 trillion

If private savings increase:a. the demand for loanable funds will increase,

interest rates will increase, and the amount of borrowing will increase.

b. the demand for loanable funds will decrease, interest rates will decrease, and the amount of borrowing will decrease.

c. the supply of loanable funds will increase, interest rates will decrease, and the amount of borrowing will increase.

d. the supply of loanable funds will decrease, interest rates will increase, and the amount of borrowing will decrease.

e. the supply of loanable funds will increase, interest rates will decrease, and the amount of borrowing will decrease.

If private savings increase:a. the demand for loanable funds will increase,

interest rates will increase, and the amount of borrowing will increase.

b. the demand for loanable funds will decrease, interest rates will decrease, and the amount of borrowing will decrease.

c. the supply of loanable funds will increase, interest rates will decrease, and the amount of borrowing will increase.

d. the supply of loanable funds will decrease, interest rates will increase, and the amount of borrowing will decrease.

e. the supply of loanable funds will increase, interest rates will decrease, and the amount of borrowing will decrease.

Components of the Money System (in billions

Currency $100

Checkable deposits $300

Travelers checks $50

Small-denomination time deposits $700

Money market mutual funds (individuals) $500

Large-denomination time deposits $200

Savings deposits $75

The money supply measured by M1 is:a. $325 billion.b. $450 billion.c. $1,425 billion.d. $1,875 billion.e. $400 billion.

Currency $100

The money supply measured by M1 is:a. $325 billion.b. $450 billion.c. $1,425 billion.d. $1,875 billion.e. $400 billion.

Currency $100

The money supply measured by M2 is:a. $450 billion.b. $1,425 billion.c. $1,725 billion.d. $2,075 billion.e. $1,200 billion.

Currency $100

The money supply measured by M2 is:a. $450 billion.b. $1,425 billion.c. $1,725 billion.d. $2,075 billion.e. $1,200 billion.

Suppose you transfer $500 from your checking account to your savings account. With this transaction M1 _____ and M2 _____.a. increased; stayed the sameb. stayed the same; increasedc. decreased; increasedd. increased; decreasede. decreased; stayed the same

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.

“Tuition at University of Florida is $16,000 per year.” Which function of money does this statement best illustrate?a. store of valueb. medium of exchangec. unit of accountd. means of deferred paymente. near money

Suppose the required reserve ratio was 10% and then it increased to 20%, this would:a. result in a drop in the money multiplier from 10

to 5.b. increase the amount of excess reserves

available.c. result in an increase in the money multiplier from

5 to 10.d. have no impact on the money multiplier.e. result in an increase in the money multiplier from

10 to 20.

Suppose the required reserve ratio was 10% and then it increased to 20%, this would:a. result in a drop in the money multiplier from 10

to 5.b. increase the amount of excess reserves

available.c. result in an increase in the money multiplier from

5 to 10.d. have no impact on the money multiplier.e. result in an increase in the money multiplier from

10 to 20.

Suppose a bank receives a $5,000 deposit, and the reserve ratio is 25%. Based on this deposit alone, the bank can loan out:a. $4,500.b. $4,000.c. $3,750.d. $3,500.e. $2,500.

Suppose that there are no excess reserves in the banking system and the current amount of demand deposits are equal to $100,000. Now the monetary authorities lower the required reserve ratio from 10% to 5%. Which of the following will likely follow?a. The amount of excess reserves in the banking

system will fall.b. The amount of excess reserves in the banking

system will remain the same.c. The money creating potential of the banking

system will decline.d. The money creating potential of the banking

system will rise.e. The amount of required reserves in the banking

system will rise.

Suppose that there are no excess reserves in the banking system and the current amount of demand deposits are equal to $100,000. Now the monetary authorities lower the required reserve ratio from 10% to 5%. Which of the following will likely follow?a. The amount of excess reserves in the banking

system will fall.b. The amount of excess reserves in the banking

system will remain the same.c. The money creating potential of the banking

system will decline.d. The money creating potential of the banking

system will rise.e. The amount of required reserves in the banking

system will rise.

Suppose a bank does not hold excess reserves and the reserve ratio is 20%. If Melanie deposits $1,000 of cash into her checking account and the bank lends $600 to Freda, the bank can lend an additional:a. $400.b. $200.c. $1,000.d. $5,000.e. $600.

Assets Liabilities

Reserves $20,000 Deposits ______

Loans _________If the reserve ratio is 25%, deposits are:a. $5,000.b. $15,000.c. $60,000.d. $80,000.e. $100,000.

Assets Liabilities

Loans _________If the reserve ratio is 25%, deposits are:a. $5,000.b. $15,000.c. $60,000.d. $80,000.e. $100,000.

Assets Liabilities

Loans _________If the reserve ratio is 25%, loans are:a. $5,000.b. $15,000.c. $60,000.d. $80,000.e. $100,000.

Assets Liabilities

Loans _________If the reserve ratio is 25%, loans are:a. $5,000.b. $15,000.c. $60,000.d. $80,000.e. $100,000.

If the Fed increases the discount rate:a. the money supply is likely to decrease.b. the money supply is likely to increase.c. the money supply is not likely to change.d. the federal funds rate must decrease.e. nominal interest rates will fall.

Suppose that the reserve ratio is 10% when the Fed buys $11,000 of U.S. Treasury bills from the banking system. If the banking system does NOT want to hold any excess reserves, _____ will be added to the money supply.a. $666,667b. $110,000c. $250,000d. $1,000,000e. $1,100,000

If the Federal Reserve wants to increase the money supply, it will:a. sell U.S. Treasury bills.b. cut taxes across the board.c. lower the reserve requirement.d. increase the discount rate.e. increase the federal funds rate.

The federal funds rate is the rate:a. a private borrower would pay a bank for a loan.b. one bank would pay another bank for a loan.c. a bank would pay the Federal Reserve for a loan.d. the Federal Reserve would pay to borrow money

from government.e. the government would pay to borrow money

from the Federal Reserve.

The federal funds rate is the rate:a. a private borrower would pay a bank for a loan.b. one bank would pay another bank for a loan.c. a bank would pay the Federal Reserve for a loan.d. the Federal Reserve would pay to borrow money

from government.e. the government would pay to borrow money

from the Federal Reserve.

If the Fed conducts an open-market purchase:a. bank reserves decrease and the money supply

decreases.b. bank reserves increase and the money supply

increases.c. bank reserves decrease and the money supply

increases.d. bank reserves increase and the money supply

decreases.e. bank reserves increase and the money supply

does not change.

If the Fed conducts an open-market purchase:a. bank reserves decrease and the money supply

decreases.b. bank reserves increase and the money supply

increases.c. bank reserves decrease and the money supply

increases.d. bank reserves increase and the money supply

decreases.e. bank reserves increase and the money supply

does not change.

If during 2007 the interest rate on 1-month Treasury bills was 2.5% and during 2008 the interest rate on 1-month Treasury bills was 2%, one could conclude that:a. the opportunity cost of holding money

decreased.b. the opportunity cost of holding money became

negative.c. the opportunity cost of holding money increased.d. the opportunity cost of holding money did not

change.e. the opportunity cost of holding money is zero

both in 2007 and 2008.

If during 2007 the interest rate on 1-month Treasury bills was 2.5% and during 2008 the interest rate on 1-month Treasury bills was 2%, one could conclude that:a. the opportunity cost of holding money

decreased.b. the opportunity cost of holding money became

negative.c. the opportunity cost of holding money increased.d. the opportunity cost of holding money did not

change.e. the opportunity cost of holding money is zero

both in 2007 and 2008.

If the aggregate price level doubles, then:a. the money supply will also double.b. neither the money demand nor the money

supply will rise.c. both the money demand and money supply will

rise proportionally.d. the money demand at any given interest rate will

also double.e. the money demand at any given interest rate will

decline by half.

If the aggregate price level doubles, then:a. the money supply will also double.b. neither the money demand nor the money

supply will rise.c. both the money demand and money supply will

rise proportionally.d. the money demand at any given interest rate will

also double.e. the money demand at any given interest rate will

decline by half.

If the interest rate is above the equilibrium rate, there will be an _____ money and the interest rate will _____.a. excess demand for; riseb. excess supply of; fallc. excess demand for; falld. excess supply of; risee. excess supply of: remain the same

If the rate of interest is below the equilibrium rate, there will be an _____ money and the interest rate will _____.a. excess demand for; riseb. excess supply of; fallc. excess demand for; falld. excess supply of; risee. excess supply of; remain the same

If the Federal Reserve wants to lower the interest rate, it will:a. decrease the money supply.b. increase the money supply.c. increase the money demand.d. mandate a lower interest rate.e. decrease the money demand.

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 saves 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.

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 saves 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.

Which of the following might produce a new equilibrium interest rate of 8% 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 fro other nations.e. Forecasts for future corporate profits are gloomier than expected.

Which of the following might produce a new equilibrium interest rate of 8% 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 fro other nations.e. Forecasts for future corporate profits are gloomier than expected.

If a one-year project costs $100,000 and is expected to return the firm $105,000, then the rate of return of the project is:a. 4.8%.b. 5%.c. $5,000.d. $105,000.e. 105%.

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 sameb. 6% to 8%; risec. 6% to 8%; falld. 6% to 8%; be indeterminatee. 6% to 10%; rise

Higher rates of interest tend to _____ the quantity of loanable funds demanded, and lower rates of interest tend to _____ it.a. increase; reduceb. reduce; reducec. increase; increased. reduce; increasee. have no effect; increase

Financial Sector Review Questions AP Economics Mr. Bordelon.

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