AP Macro Banking System 4

Question 1

Which of the following counts as part of M1?

Accepted Answer

Demand deposits (checking accounts)

Answer

M1 includes the most liquid assets: currency in circulation and demand deposits such as checking accounts.

Question 2

If the Fed raises the discount rate, commercial banks will most likely:

Accepted Answer

Borrow less from the Fed and tighten lending

Answer

A higher discount rate makes borrowing from the Fed more expensive, so banks borrow less and lend less.

Question 3

Which of the following is a liability on a commercial bank's balance sheet?

Accepted Answer

Deposits held by customers

Answer

Customer deposits are liabilities because the bank owes that money back to depositors.

Question 4

The monetary base (M0) consists of:

Accepted Answer

Currency in circulation plus bank reserves held at the Fed

Answer

The monetary base includes physical currency in circulation plus bank reserves on deposit at the Federal Reserve.

Question 5

When the Fed sells government securities through open market operations, the immediate effect is:

Accepted Answer

Bank reserves decrease

Answer

When the Fed sells securities, buyers pay with funds that leave the banking system, reducing bank reserves.

AP Practice Test