Q: A bank receives a new deposit of $1,000. If the reserve requirement is 20%, what is the maximum amount this bank can loan out 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 above potential GDP, what is likely to happen to the Short-Run Aggregate Supply (SRAS) curve?

Accepted Answer

SRAS will shift to the left as wages and input prices rise.

Question 5

Which of the following is NOT a function of money?

Accepted Answer

A method for producing goods and services.

Question 6

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

Accepted Answer

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

Question 7

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

Accepted Answer

Savings deposits

Question 8

A bank receives a new deposit of $1,000. If the reserve requirement is 20%, what is the maximum amount this bank can loan out from this deposit?

Accepted Answer

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

Question 9

Which of the following best describes fiat money?

Accepted Answer

Money that has no intrinsic value but is accepted by government decree.

Question 10

According to the Quantity Theory of Money, if the money supply increases by 5%, velocity and real GDP are constant, what happens to the price level?

Accepted Answer

The price level increases by 5%.

Question 11

Which of the following is a tool of monetary policy used by the Federal Reserve?

Accepted Answer

Open market operations

Question 12

If the Federal Reserve wants to decrease the money supply, which action should it take?

Accepted Answer

Sell government securities in the open market.

Question 13

Suppose the Federal Open Market Committee (FOMC) decides to implement expansionary monetary policy. What is the likely effect on interest rates and aggregate demand?

Accepted Answer

Interest rates decrease and aggregate demand increases.

Question 14

Which of the following best describes the Taylor Rule for setting the federal funds target rate?

Accepted Answer

It sets the target rate based on the inflation gap and output gap.

Question 15

If the economy is experiencing high inflation, which monetary policy is most appropriate?

Accepted Answer

Contractionary monetary policy

Question 16

Which of the following would cause a movement along the money demand curve, rather than a shift of the curve?

Accepted Answer

A change in the interest rate

Question 17

Suppose the economy is in long-run equilibrium. If there is a sudden increase in consumer confidence, what is the likely short-run effect?

Accepted Answer

Aggregate demand shifts right, increasing output and the price level.

Question 18

Which of the following is true about the static versus dynamic AD-AS model?

Accepted Answer

The dynamic model incorporates ongoing growth in potential GDP and inflation, while the static model assumes these are constant.

Question 19

If the velocity of money ($$V) is 4$$, the money supply ($$M) is$$ $$500$$ billion, and nominal GDP ($$P 	imes Y) is$$ $$2,000$$ billion, does the Quantity Theory of Money hold?

Accepted Answer

$$V 	imes M = P 	imes Y so$$ $$4 	imes 500 = 2,000$$, which holds true.

Question 20

A central bank wants to increase the money supply by $$200$$ million. If the reserve requirement is $$10\%$$, how much should it inject into the banking system through open market operations?

Accepted Answer

$$200 \div 0.10 = 20$$ million

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

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