AP Macroeconomics – Monetary Policy
1. Under a fractional reserve banking system, banks are required to
a. keep part of their demand deposits as reserves
b. expand the money supply when requested by the central bank
c. insure their deposits against losses and bank runs
d. pay a fraction of their interest income in taxes
e. charge the same interest rate on all their loans
2. When the Federal Reserve buys government securities on the open market, which of the
following will decrease in the short run?
a. Interest rates
b. Taxes
c. Investment
d. The amount of money loaned by banks
e. The money supply
3. If a commercial bank has no excess reserves and the reserve requirement is 10 percent, what
is the value of new loans this single bank can issue if a new customer deposits $10,000?
a. $100,000
b. $90,333
c. $10,000
d. $9,000
e. $1,000
4. When a central bank sells securities in the open market, which of the following set of events is
most likely to follow?
a. An increase in the money supply, a decrease in interest rates, and an increase in
aggregate demand
b. An increase in the money supply, an increase in interest rates, and a decrease in
aggregate demand
c. An increase in interest rates, an increase in the government budget deficit, and a
movement toward trade surplus
d. A decrease in the money supply, an increase in interest rates, and a decrease in
aggregate demand
e. A decrease in the money supply, a decrease in interest rates, and a decrease in
aggregate demand
5. The federal funds rate is the interest rate that
a. The Federal Reserve charges the federal government on its loans
b. Banks charge one another for short-term loans
c. Banks charge their best customers
d. Equalizes the yield on government bonds and corporate bonds
e. Is equal to the inflation rate