AP Macroeconomics chapter practice15 questions

12 Money, Financial Assets, Bonds, and Interest Rates

These questions come directly from the chapter practice in the book. Choose the best answer, check your reasoning, and use the explanation to correct any gap.

Question 1

Question 1 of 15

Prices in a market economy are all quoted in the same units. Which of the following uses of money illustrates the unit-of-account function?

Quoting every price in the same units is what lets a buyer compare a shirt with a sandwich, and that comparison is the unit of account. Choice B is the medium of exchange, C the store of value, and D the standard of deferred payment. Choice E names a place a balance sits, not a job it does.
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A. It states the price of a good.

Quoting every price in the same units is what lets a buyer compare a shirt with a sandwich, and that comparison is the unit of account. Choice B is the medium of exchange, C the store of value, and D the standard of deferred payment. Choice E names a place a balance sits, not a job it does.

Question 2

Question 2 of 15

Of the five assets below, the most liquid is

Currency is already a means of payment, so nothing stands between holding it and spending it. Choices C and D can be sold, but only at whatever price the market gives that day and after a fee. Choices A and E, a house and a factory machine, take weeks and heavy transaction cost to convert.
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B. currency held in cash

Currency is already a means of payment, so nothing stands between holding it and spending it. Choices C and D can be sold, but only at whatever price the market gives that day and after a fee. Choices A and E, a house and a factory machine, take weeks and heavy transaction cost to convert.

Question 3

Question 3 of 15

A corporation issues common stock to raise funds for expansion. What does each share represent for the purchaser?

A share is a residual claim: the holder owns whatever is left once every creditor has been paid. Choice A treats the purchase as debt, B assumes the dividend is contractual when directors declare it, and E reverses priority, since creditors are paid first. Choice D borrows the protection of an insured bank deposit.
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C. An ownership claim on the corporation

A share is a residual claim: the holder owns whatever is left once every creditor has been paid. Choice A treats the purchase as debt, B assumes the dividend is contractual when directors declare it, and E reverses priority, since creditors are paid first. Choice D borrows the protection of an insured bank deposit.

Question 4

Question 4 of 15

Market interest rates rise after a bond with fixed coupon payments has been issued. On the secondary market that bond's price

Buyers can get the new, higher coupon elsewhere, so the older bond sells only at a discount deep enough to match that return. Choice A reverses the adjustment. Choice B mistakes face value for market price, C postpones a repricing that happens at once, and E confuses the bond's price with the coupon it pays.
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D. falls immediately

Buyers can get the new, higher coupon elsewhere, so the older bond sells only at a discount deep enough to match that return. Choice A reverses the adjustment. Choice B mistakes face value for market price, C postpones a repricing that happens at once, and E confuses the bond's price with the coupon it pays.

Question 5

Question 5 of 15

Under the current Federal Reserve definitions, which item is included in M1?

The current M1 definition includes savings deposits among other liquid deposits. Choice A is permission to borrow rather than an owned balance, B and C are nonmoney financial assets, and E is a real asset. None of those four is included in M1.
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D. A savings deposit

The current M1 definition includes savings deposits among other liquid deposits. Choice A is permission to borrow rather than an owned balance, B and C are nonmoney financial assets, and E is a real asset. None of those four is included in M1.

Question 6

Question 6 of 15

A household transfers 500 from a checkable deposit to an eligible savings deposit. Under the current definitions, what happens immediately to M1 and M2?

Both checkable and savings deposits are in current M1, and M1 is contained within M2, so moving funds between them changes neither total. Choice A uses an older M1 convention, B removes the balance from both measures, C double-counts the transfer into M2, and D reverses the outdated convention.
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E. Both M1 and M2 are unchanged.

Both checkable and savings deposits are in current M1, and M1 is contained within M2, so moving funds between them changes neither total. Choice A uses an older M1 convention, B removes the balance from both measures, C double-counts the transfer into M2, and D reverses the outdated convention.

Question 7

Question 7 of 15

Sustained inflation erodes what a fixed money balance will buy. Which of the following functions of money does that most weaken?

A balance is worth holding only if it still buys goods later, and inflation is what eats that. Choices B and C keep working while prices climb: goods still carry prices and cash still buys them. Choice D concerns contracts written for future payment rather than balances held now, and E is a legal status, not a function.
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A. Its use as a store of value

A balance is worth holding only if it still buys goods later, and inflation is what eats that. Choices B and C keep working while prices climb: goods still carry prices and cash still buys them. Choice D concerns contracts written for future payment rather than balances held now, and E is a legal status, not a function.

Question 8

Question 8 of 15

An organization issues a bond and receives funds from the purchaser. In that transaction, what is the issuer doing?

The issuer takes in funds now and owes repayment later, which is borrowing. Choice B reverses who lends to whom. Choice A describes issuing stock, C describes what the funds may later buy, and D describes a payment made with nothing received in return.
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E. Borrowing from the bond purchaser

The issuer takes in funds now and owes repayment later, which is borrowing. Choice B reverses who lends to whom. Choice A describes issuing stock, C describes what the funds may later buy, and D describes a payment made with nothing received in return.

Question 9

Question 9 of 15

Liquidity and default risk are separate properties of an asset. Which of the following best defines liquidity?

Liquidity is about how fast and how cheaply an asset becomes spendable, not about what it earns or how safe it is. Choice A names return, C default risk, D maturity, and E the identity of the issuer.
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B. Easy conversion into payment without loss

Liquidity is about how fast and how cheaply an asset becomes spendable, not about what it earns or how safe it is. Choice A names return, C default risk, D maturity, and E the identity of the issuer.

Question 10

Question 10 of 15

Two bonds promise identical payments, but one issuer is more likely to default. Compared with the safer bond, the riskier one must offer

Lenders take on extra default risk only if they are paid for it, so the riskier bond sells at a lower price and therefore a higher yield. Choice A reverses the risk premium and B moves the price the wrong way, since a higher price means a lower yield. Choice C denies that risk is priced, and E names maturity, a separate reason yields differ.
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D. a higher yield

Lenders take on extra default risk only if they are paid for it, so the riskier bond sells at a lower price and therefore a higher yield. Choice A reverses the risk premium and B moves the price the wrong way, since a higher price means a lower yield. Choice C denies that risk is priced, and E names maturity, a separate reason yields differ.

Question 11

Question 11 of 15

A one-year loan carries a nominal interest rate of 8 percent, and expected inflation is 3 percent. Using the Fisher approximation, the expected real interest rate is

The Fisher approximation gives 8%-3%=5%. Choice A reports expected inflation, C leaves the nominal rate unadjusted, D adds inflation instead of subtracting it, and E multiplies the two percentage numbers.
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B. 5 percent

The Fisher approximation gives 8%-3%=5%. Choice A reports expected inflation, C leaves the nominal rate unadjusted, D adds inflation instead of subtracting it, and E multiplies the two percentage numbers.

Question 12

Question 12 of 15

A saver wants a claim that pays a fixed sum rather than a share of profit. Which of the following instruments makes its holder a creditor?

A bondholder is a creditor with a claim to fixed payments; every other instrument here buys a piece of the firm. Choices A, B, and D are equity positions taken directly, through a fund, and through a partnership. Choice E is an accounting balance of owner funds, not a security anyone holds.
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C. A bond issued by a corporation

A bondholder is a creditor with a claim to fixed payments; every other instrument here buys a piece of the firm. Choices A, B, and D are equity positions taken directly, through a fund, and through a partnership. Choice E is an accounting balance of owner funds, not a security anyone holds.

Question 13

Question 13 of 15

Which of the following situations shows money working as a medium of exchange?

Handing over cash to obtain a good on the spot is the medium of exchange at work. Choice A shows the unit of account, C the store of value, and D the standard of deferred payment. Choice E is barter, a trade carried out with no money in it at all.
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B. A shopper hands cash to a grocer.

Handing over cash to obtain a good on the spot is the medium of exchange at work. Choice A shows the unit of account, C the store of value, and D the standard of deferred payment. Choice E is barter, a trade carried out with no money in it at all.

Question 14

Question 14 of 15

A lender makes a fixed-rate nominal loan when inflation is expected to be 3 percent. Actual inflation is 7 percent. Relative to the expectation at the time of the loan, the higher actual inflation benefits

Unexpectedly high inflation lowers the purchasing power of the fixed repayment, benefiting the borrower and hurting the lender relative to expectation. A incorrectly indexes the nominal payment, B reverses the purchasing-power effect, C confuses nominal with real rates, and E ignores the redistribution created by the surprise.
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D. the borrower because repayment dollars buy less

Unexpectedly high inflation lowers the purchasing power of the fixed repayment, benefiting the borrower and hurting the lender relative to expectation. A incorrectly indexes the nominal payment, B reverses the purchasing-power effect, C confuses nominal with real rates, and E ignores the redistribution created by the surprise.

Question 15

Question 15 of 15

Which of the following explains why the price of an existing bond and market interest rates move in opposite directions?

Coupon and face value are fixed by contract, so price is the only term left that can move to deliver a competitive return. Choice B treats the coupon as adjustable and D treats face value the same way. Choice C confuses interest-rate risk with credit risk, and E invents a redemption rule that no ordinary bond contains.
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A. Only the price can adjust to match current returns.

Coupon and face value are fixed by contract, so price is the only term left that can move to deliver a competitive return. Choice B treats the coupon as adjustable and D treats face value the same way. Choice C confuses interest-rate risk with credit risk, and E invents a redemption rule that no ordinary bond contains.

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