AP Macro Monetary Policy 2

Question 1

When the Federal Reserve sells government securities on the open market, what is the immediate effect on bank reserves?

Accepted Answer

Bank reserves decrease

Answer

Selling securities removes money from the banking system as banks pay for them, reducing reserves.

Question 2

Which of the following best describes the money multiplier?

Accepted Answer

The ratio of the money supply to the monetary base

Answer

The money multiplier equals 1/reserve requirement and shows how much the money supply expands per dollar of reserves.

Question 3

If the required reserve ratio is 20%, what is the maximum money multiplier?

Accepted Answer

5

Answer

The money multiplier equals 1 divided by the reserve requirement: 1/0.20 = 5.

Question 4

Contractionary monetary policy is most appropriate when an economy is experiencing:

Accepted Answer

Demand-pull inflation above the target rate

Answer

Contractionary policy raises interest rates to cool excessive demand and bring inflation back to target.

Question 5

The prime rate is best described as:

Accepted Answer

The interest rate banks charge their most creditworthy customers

Answer

The prime rate is the benchmark rate commercial banks use for loans to their best corporate customers.

AP Practice Test