AP Macroeconomics chapter practice15 questions

14 Money Market, Loanable Funds, 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

Households and firms can hold money or interest-bearing assets. What measures the opportunity cost of holding money?

Money pays no interest, so what a holder gives up is the whole nominal return an interest-bearing asset would have paid. Choice B counts only the real part and drops the inflation loss. Choice A confuses what money buys with what holding it costs, D names only the erosion of purchasing power, and E is a bank regulation rather than a household's cost.
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C. The nominal interest forgone

Money pays no interest, so what a holder gives up is the whole nominal return an interest-bearing asset would have paid. Choice B counts only the real part and drops the inflation loss. Choice A confuses what money buys with what holding it costs, D names only the erosion of purchasing power, and E is a bank regulation rather than a household's cost.

Question 2

Question 2 of 15

The overall price level rises while real income is unchanged. The demand for money

The same basket of real transactions now takes more dollars, so households want larger balances at every interest rate. Choice A reverses that. Choice B changes the slope instead of the position, C denies that anything off the axes can shift the curve, and E ties the shift to a condition the relationship never imposes.
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D. shifts right as prices rise

The same basket of real transactions now takes more dollars, so households want larger balances at every interest rate. Choice A reverses that. Choice B changes the slope instead of the position, C denies that anything off the axes can shift the curve, and E ties the shift to a condition the relationship never imposes.

Question 3

Question 3 of 15

A central bank increases the money supply while money demand is unchanged. The nominal interest rate

Someone must be willing to hold the extra money, and only a lower opportunity cost persuades them. Choices A and D reverse the direction; D also assumes the effect vanishes on its own. Choice C forgets that bond prices and yields are two views of one adjustment, and B ties the nominal rate to inflation by a rule the money market does not impose.
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E. falls until people hold the larger stock

Someone must be willing to hold the extra money, and only a lower opportunity cost persuades them. Choices A and D reverse the direction; D also assumes the effect vanishes on its own. Choice C forgets that bond prices and yields are two views of one adjustment, and B ties the nominal rate to inflation by a rule the money market does not impose.

Question 4

Question 4 of 15

The loanable funds market is drawn with a single price on its vertical axis. That variable is

Saving and borrowing plans turn on the inflation-adjusted cost of funds, so the real rate sits on the vertical axis. Choice B is the money market's axis, a near miss worth remembering. Choice C belongs to the aggregate market, D to the labor market, and E to the currency market.
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A. the real interest rate

Saving and borrowing plans turn on the inflation-adjusted cost of funds, so the real rate sits on the vertical axis. Choice B is the money market's axis, a near miss worth remembering. Choice C belongs to the aggregate market, D to the labor market, and E to the currency market.

Question 5

Question 5 of 15

A government runs a budget deficit and borrows in the domestic credit market. How does the supply of loanable funds respond?

A deficit is negative public saving, so less national saving reaches private borrowers at every real rate. Choice A reverses the direction and D confuses spending the borrowed funds with supplying them. Choice C turns a shift into movement along a curve, and E denies that public dissaving touches the supply side at all.
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B. It shifts left.

A deficit is negative public saving, so less national saving reaches private borrowers at every real rate. Choice A reverses the direction and D confuses spending the borrowed funds with supplying them. Choice C turns a shift into movement along a curve, and E denies that public dissaving touches the supply side at all.

Question 6

Question 6 of 15

Crowding out is named for what government borrowing displaces. Which of the following declines does the term describe?

Borrowing pushes the real interest rate up, and interest-sensitive investment projects are the first thing to be dropped. Choice A confuses a squeezed budget with a squeezed credit market, B jumps to long-run capacity, C names the wrong market, and D reverses the currency movement that higher rates produce.
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E. Private investment, when interest rates rise

Borrowing pushes the real interest rate up, and interest-sensitive investment projects are the first thing to be dropped. Choice A confuses a squeezed budget with a squeezed credit market, B jumps to long-run capacity, C names the wrong market, and D reverses the currency movement that higher rates produce.

Question 7

Question 7 of 15

If a new tax provision raises the amount households save at every real interest rate, the supply of loanable funds

More saving offered at every rate is a new position for the whole curve, not a slide along the old one. Choice A reverses the direction and B denies that a saving determinant matters. Choices D and E convert a shift into movement, and E moves along the wrong curve besides.
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C. shifts right

More saving offered at every rate is a new position for the whole curve, not a slide along the old one. Choice A reverses the direction and B denies that a saving determinant matters. Choices D and E convert a shift into movement, and E moves along the wrong curve besides.

Question 8

Question 8 of 15

Firms become more optimistic about the profitability of new projects. How does the demand for loanable funds respond?

Better expected returns make firms want to borrow more at every real rate, which relocates the demand curve. Choices A and D both send the curve the wrong way, D adding the idea that retained profit removes the need to borrow. Choice C treats a determinant change as movement along the curve, and E attaches a condition to a shift that stands on its own.
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B. It shifts right.

Better expected returns make firms want to borrow more at every real rate, which relocates the demand curve. Choices A and D both send the curve the wrong way, D adding the idea that retained profit removes the need to borrow. Choice C treats a determinant change as movement along the curve, and E attaches a condition to a shift that stands on its own.

Question 9

Question 9 of 15

The nominal interest rate rises while the price level and real income are unchanged. Which of the following occurs in the money market?

The nominal rate is the money-demand curve's own axis, so a change in it moves the economy along the curve rather than relocating it. Choices A and B treat the axis variable as a shift factor, which would make money demand the cause of the rate change rather than its record. Choice C changes the slope, and E has holdings rising just as holding money becomes more expensive.
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D. The economy slides up money demand.

The nominal rate is the money-demand curve's own axis, so a change in it moves the economy along the curve rather than relocating it. Choices A and B treat the axis variable as a shift factor, which would make money demand the cause of the rate change rather than its record. Choice C changes the slope, and E has holdings rising just as holding money becomes more expensive.

Question 10

Question 10 of 15

Nominal income falls while the nominal interest rate is unchanged. What happens to the transactions demand for money?

Smaller nominal transactions need smaller balances to carry them out, at any interest rate. Choice B reverses the direction, C denies that income shifts money demand, D changes the shape rather than the position, and E claims a one-for-one magnitude the relationship does not fix.
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A. It falls.

Smaller nominal transactions need smaller balances to carry them out, at any interest rate. Choice B reverses the direction, C denies that income shifts money demand, D changes the shape rather than the position, and E claims a one-for-one magnitude the relationship does not fix.

Question 11

Question 11 of 15

Which of the following changes lowers the equilibrium real interest rate in the loanable funds market?

More saving at every rate moves supply right, and the equilibrium real rate slides down the demand curve. Choices C and D pull in the opposite direction: a deficit drains public saving and a fall in household saving drains private saving. Choice B raises the rate from the demand side, and E moves the nominal rate through the Fisher relation while leaving the real equilibrium alone.
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A. An increase in private saving

More saving at every rate moves supply right, and the equilibrium real rate slides down the demand curve. Choices C and D pull in the opposite direction: a deficit drains public saving and a fall in household saving drains private saving. Choice B raises the rate from the demand side, and E moves the nominal rate through the Fisher relation while leaving the real equilibrium alone.

Question 12

Question 12 of 15

In the loanable funds diagram, one curve traces the plans of borrowers. Which of the following does that demand curve represent?

The demand curve answers one question: how much do borrowers want for capital projects at each real rate. Choice A belongs on the supply side. Choices B and C name money-market quantities, and D names a stock of past loans rather than the flow of new borrowing.
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E. Desired borrowing to finance investment

The demand curve answers one question: how much do borrowers want for capital projects at each real rate. Choice A belongs on the supply side. Choices B and C name money-market quantities, and D names a stock of past loans rather than the flow of new borrowing.

Question 13

Question 13 of 15

A central bank conducts an open-market purchase of securities. The first market to register that operation is

The purchase lands on reserve balances and the money stock, and the interest rate moves before anything real does. Choices A, C, and E are reached only after that rate change works through spending, and B responds later still, through the exchange rate.
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D. the money market

The purchase lands on reserve balances and the money stock, and the interest rate moves before anything real does. Choices A, C, and E are reached only after that rate change works through spending, and B responds later still, through the exchange rate.

Question 14

Question 14 of 15

Households save less at every real interest rate, shifting the supply of loanable funds left. Which of the following describes the real interest rate and private investment afterward?

Scarcer saving bids up the real rate, and the higher rate prices some private projects out, so the two variables move in opposite directions. Choices A and C have them moving together, and D reverses both. Choice E denies that a supply shift changes anything.
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B. The rate rises, investment falls.

Scarcer saving bids up the real rate, and the higher rate prices some private projects out, so the two variables move in opposite directions. Choices A and C have them moving together, and D reverses both. Choice E denies that a supply shift changes anything.

Question 15

Question 15 of 15

The money market and the loanable funds market are drawn with different axes. Which of the following distinguishes them?

The money market pairs a nominal rate with the stock of balances people hold; loanable funds pairs a real rate with the flow of saving and borrowing per period. Choice A puts real GDP on both horizontal axes, and B forgets that the central bank sets the money supply. Choice D ignores the nominal-versus-real difference, and E denies that either market clears.
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C. One measures a stock, the other a flow.

The money market pairs a nominal rate with the stock of balances people hold; loanable funds pairs a real rate with the flow of saving and borrowing per period. Choice A puts real GDP on both horizontal axes, and B forgets that the central bank sets the money supply. Choice D ignores the nominal-versus-real difference, and E denies that either market clears.

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