AP Macro Banking System 3

Question 1

If the reserve requirement is reduced from 20% to 10%, what happens to the money multiplier?

Accepted Answer

It increases from 5 to 10

Answer

The money multiplier equals 1/reserve requirement; reducing RR from 20% to 10% raises the multiplier from 5 to 10.

Question 2

In a fractional reserve banking system, banks:

Accepted Answer

Hold only a fraction of deposits as reserves and lend the rest

Answer

Fractional reserve banking means banks keep only a fraction of deposits as reserves while lending the remainder.

Question 3

When the Fed conducts contractionary monetary policy, which of the following is most likely?

Accepted Answer

The money supply decreases and interest rates rise

Answer

Contractionary policy reduces the money supply by removing reserves, which pushes interest rates higher.

Question 4

The federal funds rate is:

Accepted Answer

The overnight rate banks charge each other for reserve loans

Answer

The federal funds rate is the interest rate at which banks lend reserves to each other overnight.

Question 5

Which of the following is a tool of the Federal Reserve used to conduct monetary policy?

Accepted Answer

Open market operations

Answer

Open market operations — buying or selling government securities — are the Fed's primary tool for controlling the money supply.

AP Practice Test