AP Macroeconomics chapter practice15 questions

15 The Federal Reserve and Monetary Policy

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

When a central bank buys government securities in the open market, that purchase initially

The central bank pays for the securities by crediting the seller's reserve account, so reserves rise the same day. Choice B reverses the flow. Choice A confuses who holds the debt with how much is outstanding, C treats a portfolio swap as a tax, and E hands a liquidity operation the power to move capacity.
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D. adds reserves to the banking system

The central bank pays for the securities by crediting the seller's reserve account, so reserves rise the same day. Choice B reverses the flow. Choice A confuses who holds the debt with how much is outstanding, C treats a portfolio swap as a tax, and E hands a liquidity operation the power to move capacity.

Question 2

Question 2 of 15

An open-market sale of government securities is generally classified

Selling securities pulls reserves out and pushes short-term rates up, which restrains borrowing and spending. Choice A reverses the direction and B hands the tool to the wrong authority. Choice C confuses a deliberate operation with a built-in budget response, and D denies a short-run effect the model does predict.
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E. as contractionary

Selling securities pulls reserves out and pushes short-term rates up, which restrains borrowing and spending. Choice A reverses the direction and B hands the tool to the wrong authority. Choice C confuses a deliberate operation with a built-in budget response, and D denies a short-run effect the model does predict.

Question 3

Question 3 of 15

A central bank lowers its policy interest rate. Which of the following follows in the standard transmission story?

Cheaper financing pulls forward investment and interest-sensitive consumer purchases, the first real link in the chain. Choice B reverses what a lower rate does to present values, and D contradicts the rate cut itself. Choice C sends demand the wrong way, and E lets a nominal change move capacity.
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A. Interest-sensitive spending increases.

Cheaper financing pulls forward investment and interest-sensitive consumer purchases, the first real link in the chain. Choice B reverses what a lower rate does to present values, and D contradicts the rate cut itself. Choice C sends demand the wrong way, and E lets a nominal change move capacity.

Question 4

Question 4 of 15

A cut in the required reserve ratio on checkable deposits

The multiplier is (1)/(r), so cutting r raises it and each dollar of reserves supports more deposits. Choice A inverts that arithmetic and B denies that the requirement binds lending at all. Choice D confuses the multiplier with the base, since the ratio changes no reserves, and E assigns a central-bank rule to the legislature.
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C. raises the deposit multiplier

The multiplier is (1)/(r), so cutting r raises it and each dollar of reserves supports more deposits. Choice A inverts that arithmetic and B denies that the requirement binds lending at all. Choice D confuses the multiplier with the base, since the ratio changes no reserves, and E assigns a central-bank rule to the legislature.

Question 5

Question 5 of 15

Central banks operate several administered rates. Which of the following describes the rate known as the discount rate?

The discount rate is what the central bank charges banks borrowing directly from it. Choice D is the closest miss: banks lending to each other overnight set the interbank rate, not the central bank. Choices A and B name rates set in private markets and by Treasury issuance, and E confuses deflating a price index with lending.
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C. The rate the central bank charges banks

The discount rate is what the central bank charges banks borrowing directly from it. Choice D is the closest miss: banks lending to each other overnight set the interbank rate, not the central bank. Choices A and B name rates set in private markets and by Treasury issuance, and E confuses deflating a price index with lending.

Question 6

Question 6 of 15

Which of the following sequences follows an expansionary monetary policy action in the standard model?

Easier policy lowers market rates, cheaper credit lifts interest-sensitive spending, and aggregate demand moves right. Choice B runs the same chain in the tightening direction, and D pairs falling reserves with rising demand, which cannot both happen. Choice C substitutes a fiscal chain, and E begins with a wage adjustment that comes late if at all.
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A. Rates fall, investment rises, demand shifts right.

Easier policy lowers market rates, cheaper credit lifts interest-sensitive spending, and aggregate demand moves right. Choice B runs the same chain in the tightening direction, and D pairs falling reserves with rising demand, which cannot both happen. Choice C substitutes a fiscal chain, and E begins with a wage adjustment that comes late if at all.

Question 7

Question 7 of 15

The equation of exchange is written as MV=PY. In that equation velocity is measured as

Rearranging MV=PY gives V=(PY)/(M), nominal spending per dollar of money. Choice C inverts that ratio. Choice E is the approximate real interest rate, and A and B pair variables the equation never puts together.
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D. nominal GDP divided by the money stock

Rearranging MV=PY gives V=(PY)/(M), nominal spending per dollar of money. Choice C inverts that ratio. Choice E is the approximate real interest rate, and A and B pair variables the equation never puts together.

Question 8

Question 8 of 15

The money stock grows 7 percent a year, velocity is stable, and real output grows 2 percent. Long-run inflation is approximately

Stable velocity means zero velocity growth, so 7+0= +2 and 5. Choice C hands all money growth to prices, A reports real growth, D adds money and output growth, and E doubles money growth.
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B. 5 percent

Stable velocity means zero velocity growth, so 7+0= +2 and 5. Choice C hands all money growth to prices, A reports real growth, D adds money and output growth, and E doubles money growth.

Question 9

Question 9 of 15

A central bank expands the money supply while the economy is already near full employment. What is the most likely result?

With resources already close to fully employed, extra nominal demand has almost nowhere to go but prices. Choice A reverses that split. Choices B and C treat an expansion as a contraction, and D lets a monetary action move potential output on the spot.
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E. Mostly inflation and little extra output

With resources already close to fully employed, extra nominal demand has almost nowhere to go but prices. Choice A reverses that split. Choices B and C treat an expansion as a contraction, and D lets a monetary action move potential output on the spot.

Question 10

Question 10 of 15

Monetary and fiscal tools sit with different authorities. Which of the following belongs to the fiscal side?

Government purchases are voted through the budget, which puts them on the fiscal side. Choice A is a central-bank operation despite trading Treasury paper, and E is set by the central bank even though it looks like regulation. Choices C and D are central-bank lending and a central-bank administered rate.
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B. Government purchases of goods and services

Government purchases are voted through the budget, which puts them on the fiscal side. Choice A is a central-bank operation despite trading Treasury paper, and E is set by the central bank even though it looks like regulation. Choices C and D are central-bank lending and a central-bank administered rate.

Question 11

Question 11 of 15

Inflation has run above target for a year. What is a central bank most likely to do?

Selling securities takes reserves out of the system and tightens financial conditions, which is how a central bank leans against inflation. Choice A runs the same instrument backward and C eases through the multiplier instead. Choice D is a fiscal move and expansionary besides, and E is trade policy.
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B. Sell government securities outright

Selling securities takes reserves out of the system and tightens financial conditions, which is how a central bank leans against inflation. Choice A runs the same instrument backward and C eases through the multiplier instead. Choice D is a fiscal move and expansionary besides, and E is trade policy.

Question 12

Question 12 of 15

One statement is an identity and the other adds behavior. Which of the following distinguishes the quantity equation from the quantity theory?

Once the four variables are defined, MV=PY cannot fail; the theory is what happens when you add that velocity is stable and output is set by capacity. Choice B reverses which statement carries the assumptions, and D treats an identity as proof of causation. Choice C overstates the speed and precision claimed, and E confuses nominal growth with real capacity.
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A. The equation is an identity; the theory adds assumptions.

Once the four variables are defined, MV=PY cannot fail; the theory is what happens when you add that velocity is stable and output is set by capacity. Choice B reverses which statement carries the assumptions, and D treats an identity as proof of causation. Choice C overstates the speed and precision claimed, and E confuses nominal growth with real capacity.

Question 13

Question 13 of 15

Long-run monetary neutrality concerns a permanent change in the level of the money stock. Such a change alters

Capacity comes from resources, technology, and institutions, none of which a change in the money stock touches, so the change lands on prices and other nominal magnitudes. Choice A grants a short-run output response permanent status, and B assigns a nominal change to the labor market's structural features. Choice C treats money as if it financed capital accumulation, and D forgets that wages and prices rise together.
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E. nominal variables, not real output

Capacity comes from resources, technology, and institutions, none of which a change in the money stock touches, so the change lands on prices and other nominal magnitudes. Choice A grants a short-run output response permanent status, and B assigns a nominal change to the labor market's structural features. Choice C treats money as if it financed capital accumulation, and D forgets that wages and prices rise together.

Question 14

Question 14 of 15

The monetary base is under a central bank's direct control while the money stock is not, because

The base is currency plus reserves, and both are the central bank's to set; how much deposit money those reserves support depends on how much banks lend and how much currency the public keeps out of the banks. Choice A leaves reserves out of the base, and B puts deposits into it, which describes the money stock instead. D denies that an open-market purchase leaves reserves in place, and E freezes by statute a ratio that moves with the same lending and currency choices.
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C. banks and depositors decide how far deposits expand

The base is currency plus reserves, and both are the central bank's to set; how much deposit money those reserves support depends on how much banks lend and how much currency the public keeps out of the banks. Choice A leaves reserves out of the base, and B puts deposits into it, which describes the money stock instead. D denies that an open-market purchase leaves reserves in place, and E freezes by statute a ratio that moves with the same lending and currency choices.

Question 15

Question 15 of 15

Which of the following explains why expansionary monetary policy may produce little additional spending during a severe downturn?

With sales and incomes expected to stay weak, a lower borrowing cost does not make a new project worth starting, so the extra reserves sit idle. Choice A reverses what expected inflation does to a real rate, and C reverses what a purchase does to reserves. Choice B invents an equivalence that does not hold, and E invents a settlement rule that does not exist.
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D. Firms and households may not want to borrow.

With sales and incomes expected to stay weak, a lower borrowing cost does not make a new project worth starting, so the extra reserves sit idle. Choice A reverses what expected inflation does to a real rate, and C reverses what a purchase does to reserves. Choice B invents an equivalence that does not hold, and E invents a settlement rule that does not exist.

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