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# 4.9 MC Answers and Review

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## Answers and Review for Multiple Choice Practice on The Financial Sector

โSTOP ! โ Before you look at the answers, make sure you gave this practice quiz a try so you can assess your understanding of the concepts covered in Unit 4. Click here for the practice questions: AP Macro Unit 4 Multiple Choice Questions.

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Facts about the test: The AP Macroeconomics exam has 70 multiple choice questions and you will be given 1 hour to complete the section. That means it should take you around 8 minutes to complete 10 questions.

*The following questions were not written by College Board and, although they cover information outlined in theย AP Macroeconomics Course and Exam Description, the formatting on the exam may be different.

1. Which of the following are true regarding bonds?
A. There is no opportunity cost in owning a bond.
B. All bonds earn the same amount of interest.
C. Bonds are interest-bearing assets.
D. The bondholder owns part of a company.
Answer: Bonds become income in the future because of the interest they earn; their interest rate is locked in and earns interest until the maturity of the bond.
๐ Study AP Macroeconomics, Unit 4.1: Financial Assets ย

2. A tourist in Japan pays for food with the country's currency, the yen. The price of all purchases is determined by the number of yen needed to buy the goods. The use of Yen to express the price of a good is which function of money?
A. store of wealth
B. store of value
C. unit of account
D. means of payment
Answer: The three functions of money are medium of exchange, store of value, and unit of account. The unit of account function helps us understand the value of a good or service. For example, a cheeseburger costs \$6 - this price allows us to understand the value of a cheeseburger. (If the price of a certain cheeseburger was \$4,000, the consumer would know something isn't right.)
๐ Study AP Macroeconomics, Unit 4.3: Definition, Measurement, and Functions of Money

3.ย  Of the following assets, which is the most liquid?
A. stocks
B. currency
C. bonds
D. real estate
Answer: Currency, along with demand deposits, are the most liquid assets because they can be directly used to pay for goods and services. For example, you could go to the store with dollars (our currency in the USA) and pay for a bag of chips. You would not go to the store with stock certificates or real estate deeds to pay for your goods; these are not accepted as a means of payment.
๐ Study AP Macroeconomics, Unit 4.1: Financial Assets

4. If the central bank wanted to control inflation, which of the following policies would it implement?
A. decrease government spending
B. increase investment spending
C. decrease the required reserve ratio
D. sell government bonds to the public
Answer: If the Federal Reserve sells government bonds to the public, it would decrease the money supply. This would, in turn, increase nominal interest rates, decrease interest-sensitive spending, decrease aggregate demand, and eventually decrease inflation.
๐ Study AP Macroeconomics, Unit 4.6: Monetary Policy

5. Which of the following would lead to an increase in the equilibrium real interest rate in the loanable funds market?
A. an increase in private savings
B. A decrease in foreign financial capital inflows
C. a decrease in taxable purchases
D. a decrease in the expected inflation rate
Answer: The increase in foreign financial capital inflows shifts the supply of loanable funds to the right, which then decreases the equilibrium real interest rate.
๐ Study AP Macroeconomics, Unit 4.2: Nominal vs. Real Interest Rates

6. If bank reserves are \$20 million, demand deposits are \$5 million, currency in circulation is \$2 million, and savings bonds are \$1 million, calculate the monetary base.
A. \$20 million
B. \$22 million
C. \$25 million
D. \$28 million
Answer: Monetary base = bank reserves + cash in circulation; \$20 million + \$2 million = \$22 million
๐ Study AP Macroeconomics, Unit 4.5: The Money Market

7. All of the following are part of the M1 money supply except:
A. traveler's checks
B. currency in circulation
C. checkable deposits
D. bonds
Answer: M1 supply: currency in circulation, travelers' checks, checkable deposits
๐ Study AP Macroeconomics, Unit 4.3: Definition, Measurement, and Functions of Money

8. When the loanable funds market is in equilibrium,
A. the interest rate is greater than the demand
B. borrowing equals lending
C. supply equals demand
D. investment spending equals consumer spending
Answer: The loanable funds market is made up of government, domestic private investment, and savings and capital flows.
๐ Study AP Macroeconomics, Unit 4.7: The Loanable Funds Market

9. Which of the following changes will definitely occur if the nominal interest rate increases?
A. the money supply curve will shift to the right
B. the money demand curve will shift to the right
C. the money supply curve will shift to the left
D. the money demand curve will shift to the left
Answer: When the nominal interest rate increases, it causes a movement up and to the left along the money demand curve. This results in a decrease in the quantity demanded of money.
๐ Study AP Macroeconomics, Unit 4.2: Nominal vs. Real Interest Rates

10. When a bank received a deposit \$10,000 and holds \$2,000 in required reserves, the required reserve ratio must be
A. 0.2
B. 5%
C. 10%
D. 15%
๐ Study AP Macroeconomics, Unit 4.4: Banking and the Expansion of the Money Supply

11. The required reserve ratio expresses the relationship between a bank's required reserves and its
A. owner's equity
B. loans
C. government securities
D. demand deposits
Answer: The required reserve ratio = required reserves/demand deposits.
๐ Study AP Macroeconomics, Unit 4.4: Banking and the Expansion of the Money Supply

12. The U.S. Federal Reserve can change the U.S. money supply by changing the
A. amount of gold in circulation
B. discount rate
C. supply of private loans
D. price level
Answer: The discount rate makes it cheaper or more expensive for banks to borrow money from the central bank, which in turn can affect the money supply.
๐ Study AP Macroeconomics, Unit 4.6: Monetary Policy

13. If a bank borrows money from another bank, it would pay which of the following?
A. The federal funds rate
B. the discount rate
C. the equilibrium rate
D. the level rate
Answer: Also known as an overnight rate/overnight loan, the federal funds rate is the interest rate that banks charge other banks for lending them excess cash from their reserve balances on an overnight basis.
๐ Study AP Macroeconomics, Unit 4.6: Monetary Policy

14. A commercial bank is able to create money because of our
A. gold standard
B. equilibrium interest rate
C. invisible hand system
D. fractional reserve banking system
Answer: The fractional reserve banking system allows banks to hold portions of deposits on the side (required reserves) and loan out the rest (excess reserves), creating "new money" in the process.
๐ Study AP Macroeconomics, Unit 4.4: Banking and the Expansion of the Money Supply

15. If an economy is experiencing a recession and the central bank wants to reduce unemployment by increasing investment, the central bank could
A. sell government securities
B. print more money
C. decrease the gold standard
๐ Study AP Macroeconomics, Unit 4.4: Banking and the Expansion of the Money Supply

• ๐คConnect with other students studying AP Macro with Hours

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๐ธUnit 1 โ Basic Economic Concepts
๐Unit 2 โ Economic Indicators & the Business Cycle
๐ฒUnit 3 โ National Income & Price Determination
๐ฐUnit 4 โ Financial Sector
โ๏ธUnit 5 โ Long-Run Consequences of Stabilization Policies
๐Unit 6 โ Open Economy - International Trade & Finance
๐Exam Skills: MCQ/FRQ