Financial sector practice questions (AP Macroeconomics)

Sample questions

6 of the 13 free AP Macroeconomics questions on this unit, from the free AP Macroeconomics Practice Test, the free AP Macroeconomics Multiple Choice Questions with Answers and the free AP Macroeconomics Free-Response (FRQ) Practice Exam. Each answer is behind its own toggle; the whole paper, its PDF and the full answer key are on the exam page.

1. Question 12 marks · Money market
   The central bank increases the money supply. In the money market, the short-run effect is that:
   • A.
     the money supply curve shifts right and the nominal interest rate falls
   • B.
     the money demand curve shifts right and the nominal interest rate rises
   • C.
     the money supply curve shifts right and the nominal interest rate rises
   • D.
     there is a movement along the money supply curve as the interest rate falls
   • E.
     the real interest rate rises because expected inflation increases
   Show answerFrom the free AP Macroeconomics Practice Test →
2. Question 22 marks · Money creation & the money multiplier
   A customer deposits 1,000 dollars of currency into a checking account. The required reserve ratio is 10 percent, banks hold no excess reserves, and all loans are redeposited in the banking system. The maximum increase in the total money supply resulting from this deposit is:
   • A.
     100 dollars
   • B.
     900 dollars
   • C.
     1,000 dollars
   • D.
     9,000 dollars
   • E.
     10,000 dollars
   Show answerFrom the free AP Macroeconomics Practice Test →
3. Question 32 marks · Fed tools & ample reserves
   In an ample-reserves regime — the Federal Reserve's operating framework since 2008 — the Fed's primary tool for raising the federal funds rate is:
   • A.
     selling small quantities of government bonds to drain reserves
   • B.
     raising the interest rate it pays on reserve balances
   • C.
     raising the required reserve ratio
   • D.
     printing less currency
   • E.
     lowering the discount rate
   Show answerFrom the free AP Macroeconomics Practice Test →
4. Question 46 marks · Bank balance sheets & money creation
   The banking system. First Bank of Alandia has the following simplified balance sheet. Assets: reserves of 30,000 dollars and loans of 170,000 dollars. Liabilities: demand deposits of 200,000 dollars. The required reserve ratio is 10 percent.
   $Reserves = 30{,}000, \qquad Loans = 170{,}000, \qquad Deposits = 200{,}000, \qquad rr = 0.10$
   (a)

   Calculate First Bank's required reserves and its excess reserves. Show your work.

   [2]
   (b)

   What is the maximum amount of new loans that First Bank alone can safely make? Explain.

   [2]
   (c)

   Assuming all banks lend out their full excess reserves and all loans are redeposited in the banking system, calculate the maximum increase in demand deposits for the banking system as a whole. Show your work.

   [2]
   Show answerFrom the free AP Macroeconomics Practice Test →
5. Question 51 mark · Money & banking
   Harbor Bank has 50,000 dollars in checkable deposits and holds 14,000 dollars in reserves. The required reserve ratio is 20 percent. If Harbor Bank lends out all of its excess reserves and every other bank does the same, with no cash leakage, the maximum amount by which the money supply can eventually increase is:
   • A.
     4,000 dollars
   • B.
     14,000 dollars
   • C.
     20,000 dollars
   • D.
     50,000 dollars
   • E.
     70,000 dollars
   Show answerFrom the free AP Macroeconomics Multiple Choice Questions with Answers →
6. Question 61 mark · Money market & monetary policy
   Holding the money supply constant, an increase in the price level will most likely cause:
   • A.
     the money demand curve to shift to the right and the nominal interest rate to rise
   • B.
     the money demand curve to shift to the left and the nominal interest rate to fall
   • C.
     the money supply curve to shift to the right and the nominal interest rate to fall
   • D.
     a movement down along the money demand curve and the nominal interest rate to fall
   • E.
     the money demand curve to shift to the right and the nominal interest rate to fall
   Show answerFrom the free AP Macroeconomics Multiple Choice Questions with Answers →

The other 7 are in the free exams: the free AP Macroeconomics Practice Test, the free AP Macroeconomics Multiple Choice Questions with Answers and the free AP Macroeconomics Free-Response (FRQ) Practice Exam.

Key terms

The definitions and formulas AP Macroeconomics expects for financial sector, typeset as they appear on the paper.

Money and its measures

Anything generally accepted as a medium of exchange, unit of account and store of value. M1 is currency plus checkable deposits (and, since 2020, savings deposits); M2 adds small time deposits and money market funds.

Bond prices and interest rates

A bond's price and the market interest rate move in opposite directions: when rates rise, existing bonds with lower fixed payments are worth less.

Money market

Money demand slopes down against the nominal interest rate (the opportunity cost of holding money); money supply is set by the central bank. The money market determines the nominal rate, the loanable funds market the real rate.

Fractional reserve banking and the money multiplier

Banks hold a fraction of deposits as reserves and lend the rest; each loan becomes a new deposit. The maximum expansion from an initial change in excess reserves is the multiplier times that change.

$$\text{money multiplier} = \frac{1}{rr}, \qquad \Delta M_{\max} = \frac{1}{rr} \times \Delta \text{excess reserves}$$

Monetary policy tools

In a limited-reserves framework the central bank uses open market operations, the discount rate and reserve requirements. In the ample-reserves framework used today, it steers the policy rate through administered rates: interest on reserves and the discount rate.

Loanable funds market

Supply comes from national saving (private plus public), demand from borrowers for investment. It determines the real interest rate; a government deficit raises demand for loanable funds and the real rate.

Crowding out

When deficit-financed government spending raises the real interest rate in the loanable funds market and so reduces private investment, offsetting part of the fiscal stimulus and slowing long-run growth.

Frequently asked questions

Other AP Macroeconomics topics

• Basic economic concepts
• Economic indicators and the business cycle
• National income and price determination
• Long-run consequences of stabilization policies
• Open economy: international trade and finance

All AP Macroeconomics topics · All free practice exams