AP Macro AP Macro Money and Inflation 3

Question 1

The real interest rate is best calculated as:

Accepted Answer

Nominal interest rate − inflation rate

Answer

Nominal interest rate × inflation rate

Answer

Nominal interest rate + inflation rate

Answer

Inflation rate ÷ nominal interest rate

Question 2

An increase in the velocity of money, all else equal, would most likely lead to:

Accepted Answer

An increase in the price level or nominal GDP

Answer

A decrease in the price level

Answer

An increase in real GDP

Answer

A decrease in nominal GDP

Question 3

Which policy tool is the Federal Reserve most likely to use to reduce high inflation?

Accepted Answer

Raise the federal funds rate target to reduce borrowing and spending

Answer

Decrease the reserve requirement to expand lending

Answer

Increase government spending to boost supply

Answer

Purchase Treasury bonds in open market operations

Question 4

Built-in (wage-price) inflation occurs when:

Accepted Answer

Workers demand higher wages due to past inflation, causing firms to raise prices further

Answer

The central bank expands the money supply rapidly

Answer

A supply shock reduces the availability of key inputs

Answer

Government deficit spending increases aggregate demand

Question 5

The GDP deflator differs from the CPI in that the GDP deflator:

Accepted Answer

Covers all goods and services produced domestically, not just a consumer basket

Answer

Measures only imported goods

Answer

Is based on a fixed basket of goods

Answer

Tracks producer prices rather than consumer prices

Question 6

Which of the following is a consequence of unanticipated deflation?

Accepted Answer

The real value of debt increases, harming borrowers

Answer

The real burden of debt decreases for borrowers

Answer

Creditors receive repayments of lower real value

Answer

Consumer spending rises as future prices seem lower