Q: A bank receives a new deposit of $1,000. If the required reserve ratio is 20%, what is the maximum amount of new loans the bank can make from this deposit?

$$1,000 \times (1 - 0.20) = 800$

Question 1

Which of the following best explains why the Aggregate Demand (AD) curve is downward sloping?

Accepted Answer

Because as the price level falls, the purchasing power of money increases, leading to higher consumption, investment, and net exports.

Question 2

Suppose the government increases its spending on infrastructure. Which of the following best describes the effect on the Aggregate Demand (AD) curve?

Accepted Answer

The AD curve shifts to the right.

Question 3

Which of the following would cause a shift of the Short-Run Aggregate Supply (SRAS) curve to the left?

Accepted Answer

An increase in the price of oil, a key input for many firms.

Question 4

In the long run, if the economy is producing at potential GDP, which of the following is true?

Accepted Answer

The economy is at the intersection of the AD, SRAS, and LRAS curves.

Question 5

Which of the following is NOT a function of money?

Accepted Answer

A method for producing goods and services.

Question 6

Which of the following is an example of fiat money?

Accepted Answer

U.S. dollar bills not backed by gold or silver.

Question 7

If the required reserve ratio is 10%, what is the simple money multiplier?

Accepted Answer

$$\frac{1}{0.10} = 10$$

Question 8

Which of the following actions by the Federal Reserve would be considered expansionary monetary policy?

Accepted Answer

Purchasing government securities in the open market.

Question 9

Suppose the velocity of money ($$V) is $$constant, real GDP ($$Y) $$grows by 2% per year, and the money supply ($$M) $$grows by 5% per year. According to the Quantity Theory of Money, what is the inflation rate?

Accepted Answer

$$5\% - 2\% = 3\%$$

Question 10

Which of the following best describes the main goal of contractionary monetary policy?

Accepted Answer

To reduce inflation by decreasing the money supply.

Question 11

If the Federal Reserve wants to lower the federal funds rate, which of the following actions should it take?

Accepted Answer

Buy government securities, increasing bank reserves.

Question 12

Which of the following is included in M2 but NOT in M1?

Accepted Answer

Savings deposits.

Question 13

A bank receives a new deposit of $1,000. If the required reserve ratio is 20%, what is the maximum amount of new loans the bank can make from this deposit?

Accepted Answer

$$1,000 	imes (1 - 0.20) = 800$

Question 14

Which of the following would cause a movement along the Aggregate Demand (AD) curve, rather than a shift?

Accepted Answer

A change in the price level.

Question 15

According to the Taylor Rule, if the target inflation rate is 2%, actual inflation is 4%, and the output gap is 1%, what is the recommended federal funds rate if the equilibrium real federal funds rate is 2%? (Use: $$	ext{Fed Funds Rate} = 2\% + 	ext{Inflation} + 0.5 	imes (	ext{Inflation Gap}) + 0.5 	imes (	ext{Output Gap}))$$

Accepted Answer

$$2\% + 4\% + 0.5 	imes (4\% - 2\%) + 0.5 	imes 1\% = 2\% + 4\% + 1\% + 0.5\% = 7.5\%$$

Question 16

Which of the following best describes the difference between static and dynamic AD-AS models?

Accepted Answer

The dynamic model incorporates ongoing growth in potential GDP and inflation, while the static model assumes fixed potential GDP and price level.

Question 17

If the Federal Reserve increases the required reserve ratio, what is the likely effect on the money supply?

Accepted Answer

The money supply will decrease because banks can make fewer loans.

Question 18

Which of the following is a likely cause of demand-pull inflation?

Accepted Answer

An increase in aggregate demand due to higher consumer spending.

Question 19

Which of the following is NOT a tool of monetary policy used by the Federal Reserve?

Accepted Answer

Changing the federal income tax rate.

Question 20

Suppose the economy is experiencing a recessionary gap. Which combination of monetary policy actions would the Federal Reserve most likely take to close the gap?

Accepted Answer

Lower the discount rate and buy government securities.

Macroeconomics Study Guide: Aggregate Demand & Supply, Money, and Monetary Policy

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