Financial Sector Review Questions

1. Financial SectorReview Questions AP Economics Mr. Bordelon

2. The savings-investment spending identity says that a. each person in the economy must invest as much as he or she saves. • savings and investment spending are always equal for the economy as a whole. • savings must equal government investment for the economy as a whole. • each person in the economy must save as much as he or she invests. • savings plus investment spending equals gross domestic product.

3. The savings-investment spending identity says that a. each person in the economy must invest as much as he or she saves. • savings and investment spending are always equal for the economy as a whole. • savings must equal government investment for the economy as a whole. • each person in the economy must save as much as he or she invests. • savings plus investment spending equals gross domestic product.

4. To help investment spending,the government can: • lower taxes on consumption, so that disposable income rises. • lower taxes on the returns from savings, so that total savings increase and the interest rate falls. • raise taxes on the returns from bonds while lowering taxes on stock dividends. • lower taxes on investment spending while raising taxes on savings, so that total tax revenue remains constant. • increase the size of the annual budget deficit.

5. To help investment spending,the government can: • lower taxes on consumption, so that disposable income rises. • lower taxes on the returns from savings, so that total savings increase and the interest rate falls. • raise taxes on the returns from bonds while lowering taxes on stock dividends. • lower taxes on investment spending while raising taxes on savings, so that total tax revenue remains constant. • increase the size of the annual budget deficit.

6. Centralia has no trade and no government. GDP = $25 trillion. Consumption spending = $18 trillion. What is the level of investment spending in Centralia? • $18 trillion • $7 trillion • $25 trillion • -$7 trillion • $43 trillion

7. Centralia has no trade and no government. GDP = $25 trillion. Consumption spending = $18 trillion. What is the level of investment spending in Centralia? • $18 trillion • $7 trillion • $25 trillion • -$7 trillion • $43 trillion

8. Centralia has no trade and no government. GDP = $25 trillion. Consumption spending = $18 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? • $11 trillion • $7 trillion • $5 trillion • $18 trillion • $9 trillion

9. Centralia has no trade and no government. GDP = $25 trillion. Consumption spending = $18 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? • $11 trillion • $7 trillion • $5 trillion • $18 trillion • $9 trillion

10. If private savings increase: • the demand for loanable funds will increase, interest rates will increase, and the amount of borrowing will increase. • the demand for loanable funds will decrease, interest rates will decrease, and the amount of borrowing will decrease. • the supply of loanable funds will increase, interest rates will decrease, and the amount of borrowing will increase. • the supply of loanable funds will decrease, interest rates will increase, and the amount of borrowing will decrease. • the supply of loanable funds will increase, interest rates will decrease, and the amount of borrowing will decrease.

11. If private savings increase: • the demand for loanable funds will increase, interest rates will increase, and the amount of borrowing will increase. • the demand for loanable funds will decrease, interest rates will decrease, and the amount of borrowing will decrease. • the supply of loanable funds will increase, interest rates will decrease, and the amount of borrowing will increase. • the supply of loanable funds will decrease, interest rates will increase, and the amount of borrowing will decrease. • the supply of loanable funds will increase, interest rates will decrease, and the amount of borrowing will decrease.

12. The money supply measured by M1 is: $325 billion. $450 billion. $1,425 billion. $1,875 billion. $400 billion.

13. The money supply measured by M1 is: $325 billion. $450 billion. $1,425 billion. $1,875 billion. $400 billion.

14. The money supply measured by M2 is: $450 billion. $1,425 billion. $1,725 billion. $2,075 billion. $1,200 billion.

15. The money supply measured by M2 is: $450 billion. $1,425 billion. $1,725 billion. $2,075 billion. $1,200 billion.

16. Suppose you transfer $500 from your checking account to your savings account. With this transaction M1 _____ and M2 _____. • increased; stayed the same • stayed the same; increased • decreased; increased • increased; decreased • decreased; stayed the same

17. Suppose you transfer $500 from your checking account to your savings account. With this transaction M1 _____ and M2 _____. • increased; stayed the same • stayed the same; increased • decreased; increased • increased; decreased • decreased; stayed the same

18. When a waiter deposits his cash tips into his savings account: • M2 increases. • M1 decreases. • M2 decreases. • M1 increases. • Neither M1 or M2 change.

19. When a waiter deposits his cash tips into his savings account: • M2 increases. • M1 decreases. • M2 decreases. • M1 increases. • Neither M1 or M2 change.

20. “Tuition at University of Florida is $16,000 per year.” Which function of money does this statement best illustrate? • store of value • medium of exchange • unit of account • means of deferred payment • near money

21. “Tuition at University of Florida is $16,000 per year.” Which function of money does this statement best illustrate? • store of value • medium of exchange • unit of account • means of deferred payment • near money

22. Suppose the required reserve ratio was 10% and then it increased to 20%, this would: • result in a drop in the money multiplier from 10 to 5. • increase the amount of excess reserves available. • result in an increase in the money multiplier from 5 to 10. • have no impact on the money multiplier. • result in an increase in the money multiplier from 10 to 20.

23. Suppose the required reserve ratio was 10% and then it increased to 20%, this would: • result in a drop in the money multiplier from 10 to 5. • increase the amount of excess reserves available. • result in an increase in the money multiplier from 5 to 10. • have no impact on the money multiplier. • result in an increase in the money multiplier from 10 to 20.

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

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

26. 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? • The amount of excess reserves in the banking system will fall. • The amount of excess reserves in the banking system will remain the same. • The money creating potential of the banking system will decline. • The money creating potential of the banking system will rise. • The amount of required reserves in the banking system will rise.

27. 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? • The amount of excess reserves in the banking system will fall. • The amount of excess reserves in the banking system will remain the same. • The money creating potential of the banking system will decline. • The money creating potential of the banking system will rise. • The amount of required reserves in the banking system will rise.

28. 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: • $400. • $200. • $1,000. • $5,000. • $600.

29. 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: • $400. • $200. • $1,000. • $5,000. • $600.

30. If the reserve ratio is 25%, deposits are: $5,000. $15,000. $60,000. $80,000. $100,000.

31. If the reserve ratio is 25%, deposits are: $5,000. $15,000. $60,000. $80,000. $100,000.

32. If the reserve ratio is 25%, loans are: $5,000. $15,000. $60,000. $80,000. $100,000.

33. If the reserve ratio is 25%, loans are: $5,000. $15,000. $60,000. $80,000. $100,000.

34. If the Fed increases the discount rate: • the money supply is likely to decrease. • the money supply is likely to increase. • the money supply is not likely to change. • the federal funds rate must decrease. • nominal interest rates will fall.

35. If the Fed increases the discount rate: • the money supply is likely to decrease. • the money supply is likely to increase. • the money supply is not likely to change. • the federal funds rate must decrease. • nominal interest rates will fall.

36. 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. • $666,667 • $110,000 • $250,000 • $1,000,000 • $1,100,000

37. 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. • $666,667 • $110,000 • $250,000 • $1,000,000 • $1,100,000

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

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

40. The federal funds rate is the rate: • a private borrower would pay a bank for a loan. • one bank would pay another bank for a loan. • a bank would pay the Federal Reserve for a loan. • the Federal Reserve would pay to borrow money from government. • the government would pay to borrow money from the Federal Reserve.

41. The federal funds rate is the rate: • a private borrower would pay a bank for a loan. • one bank would pay another bank for a loan. • a bank would pay the Federal Reserve for a loan. • the Federal Reserve would pay to borrow money from government. • the government would pay to borrow money from the Federal Reserve.

42. If the Fed conducts an open-market purchase: • bank reserves decrease and the money supply decreases. • bank reserves increase and the money supply increases. • bank reserves decrease and the money supply increases. • bank reserves increase and the money supply decreases. • bank reserves increase and the money supply does not change.

43. If the Fed conducts an open-market purchase: • bank reserves decrease and the money supply decreases. • bank reserves increase and the money supply increases. • bank reserves decrease and the money supply increases. • bank reserves increase and the money supply decreases. • bank reserves increase and the money supply does not change.

44. 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: • the opportunity cost of holding money decreased. • the opportunity cost of holding money became negative. • the opportunity cost of holding money increased. • the opportunity cost of holding money did not change. • the opportunity cost of holding money is zero both in 2007 and 2008.

45. 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: • the opportunity cost of holding money decreased. • the opportunity cost of holding money became negative. • the opportunity cost of holding money increased. • the opportunity cost of holding money did not change. • the opportunity cost of holding money is zero both in 2007 and 2008.

46. If the aggregate price level doubles, then: • the money supply will also double. • neither the money demand nor the money supply will rise. • both the money demand and money supply will rise proportionally. • the money demand at any given interest rate will also double. • the money demand at any given interest rate will decline by half.

47. If the aggregate price level doubles, then: • the money supply will also double. • neither the money demand nor the money supply will rise. • both the money demand and money supply will rise proportionally. • the money demand at any given interest rate will also double. • the money demand at any given interest rate will decline by half.

48. If the interest rate is above the equilibrium rate, there will be an _____ money and the interest rate will _____. • excess demand for; rise • excess supply of; fall • excess demand for; fall • excess supply of; rise • excess supply of: remain the same

49. If the interest rate is above the equilibrium rate, there will be an _____ money and the interest rate will _____. • excess demand for; rise • excess supply of; fall • excess demand for; fall • excess supply of; rise • excess supply of: remain the same

50. If the rate of interest is below the equilibrium rate, there will be an _____ money and the interest rate will _____. • excess demand for; rise • excess supply of; fall • excess demand for; fall • excess supply of; rise • excess supply of; remain the same