Free Macroeconomics MCQs with Answers

• A. Control the money supply
• B. Provide notes and coins for trade
• C. Make a profit
• D. Provide a cheque clearing system

Explanation: A commercial bank operates primarily to earn profit, mainly by accepting deposits and lending funds at interest.

• A. flat; steep
• B. flat; flat
• C. steep; flat
• D. steep; steep

Explanation: Monetarists generally assume investment is quite responsive to interest rates, making the IS curve relatively flat, while money demand is…

• A. the economy moves up the LM curve
• B. The LM curves shifts to the left
• C. The economy moves down the LM curve
• D. The LM curve shift to the right

Explanation: An increase in the money supply shifts the LM curve to the right because more money is available at each interest rate.

• A. be reduced
• B. not be affected
• C. fall to zero
• D. be increased

Explanation: When investment is more interest-sensitive, a rise in interest rates causes a larger fall in investment.

• A. Suffer even more
• B. not be reduced as much as it would have been
• C. be replaced by foreign investment
• D. be replaced by consumer spending

Explanation: Higher government spending raises interest rates and can crowd out private investment, but a simultaneous monetary expansion shifts LM…

• A. downward sloping over all levels of output
• B. upward sloping over all levels of output
• C. horizontal until it reaches full capacity and then becomes vertical
• D. vertical until it reaches full capacity and then becomes horizontal

Explanation: In the simple Keynesian model, spare capacity allows firms to increase output at a roughly fixed price, so aggregate supply is horizontal…

• A. decrease the money supply
• B. increase the money supply
• C. increase the demand for money
• D. decrease the demand for money

Explanation: Higher government spending shifts the IS curve right and would raise the interest rate.

• A. is determined in the goods market and influences the level of planned investment and thus the money market
• B. is determined in the money market and influences the level of planned investment and thus the goods market
• C. is determined in the goods market and has no influences on the money market
• D. is determined in the money market and has no influence on the goods market

Explanation: The interest rate is determined by the interaction of money demand and money supply in the money market.

• A. contractionary fiscal policy
• B. expansionary monetary policy
• C. contractionary monetary policy
• D. expansionary fiscal policy

Explanation: Expansionary monetary policy increases the money supply to lower interest rates, encourage spending and investment, and raise aggregate…

• A. aggregate output increases the demand for money increase the interest rate increase planned investment
• B. money supply increases the interest rate decrease planned investment increases aggregate output increases and money demand increase
• C. money supply increases the interest rate increase planned investment increases aggregate output increases and money demand increases
• D. money demand increases the interest rate decreases planned investment increases aggregate output increases and money demand increases

Explanation: An expansionary monetary policy raises the money supply, lowers the interest rate, increases planned investment, and raises aggregate…

• A. the rate at which current consumption can be exchanged for future consumption
• B. the price of borrowing money
• C. The opportunity cost of holding money
• D. the return on money that is saved for the future

Explanation: Holding money means giving up the interest that could have been earned by holding an interest-bearing asset, so the interest rate is the…

• A. the discount rates
• B. the level of aggregate output
• C. the interest rates
• D. the inflation rates

Explanation: The opportunity cost of holding non-interest-bearing money is the interest income forgone, so it rises when interest rates rise.

• A. Profit motive
• B. Precautionary motive
• C. Transactions motive
• D. speculation motive

Explanation: The transactions motive is the desire to hold money for ordinary purchases of goods and services.

• A. An increase in the interest rate
• B. An increase in the level of aggregate output
• C. A decrease in the price level
• D. An increase in the supply of money

Explanation: A higher level of aggregate output creates more transactions, so people need larger money balances and demand more money.

• A. change in a certain direction
• B. remain constant
• C. fall
• D. rise

Explanation: When money demand exceeds money supply, people try to obtain money by selling interest-bearing assets.

• A. reduce
• B. have no effect on
• C. increase
• D. double

Explanation: The money multiplier depends on banks converting excess reserves into loans and deposits.

• A. required reserve ratio
• B. profit margin
• C. excess reserves
• D. net worth

Explanation: Required reserves are the amount a bank must retain under the reserve requirement, while any reserves above that amount are excess…

• A. an asset
• B. capital
• C. net worth
• D. a liability

Explanation: A customer’s checking deposit is a claim against the bank, while the bank must repay or transfer it on demand, so it appears as a…

• A. barter money
• B. currency value
• C. legal tender
• D. commodity money

Explanation: Legal tender is money that the government requires creditors to accept for settling debts.

• A. rise by an amount that depends on the bank's reserve ratio
• B. rise by less than the amount of the deposit
• C. fall by exactly the amount of the deposit as long as the bank does not change its reserve ratio
• D. fall by exactly the amount of the deposit as long as the bank does not change its reserve ratio
• E. be unchanged

Explanation: The bond purchase creates bank reserves, and when the seller deposits the proceeds, banks can use excess reserves to create additional…