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Unit 4: Money and Monetary Policy

Study guide for CLEP CLEP Principles of Macroeconomics — Unit 4: Money and Monetary Policy. Practice questions, key concepts, and exam tips.

106

Practice Questions

11

Flashcards

7

Key Topics

Key Concepts to Study

money supply M1/M2
Federal Reserve tools
money multiplier
quantity theory of money
real vs nominal interest rates
loanable funds market
Fisher equation

Sample Practice Questions

Try these 5 questions from this unit. Sign up for full access to all 106.

Q1EASY

Which of the following is a tool of monetary policy?

A) Fiscal policy
B) Reserve requirements
C) Government spending
D) Taxation
E) Price controls
Show Answer

Answer: B — Reserve requirements is correct because reserve requirements are a tool used by the Fed to implement monetary policy.

Q2MEDIUM

An increase in the money supply will

A) Increase interest rates and reduce borrowing
B) Decrease interest rates and increase borrowing
C) Have no effect on interest rates or borrowing
D) Lead to higher inflation and lower unemployment
E) Reduce economic growth
Show Answer

Answer: B — Decrease interest rates and increase borrowing is correct because more money reduces interest rates, increasing borrowing..

Q3HARD

The money multiplier is affected by

A) Reserve requirements
B) Inflation rate
C) Interest rates
D) Government debt
E) Exchange rates
Show Answer

Answer: A — Reserve requirements is correct because reserve requirements determine the proportion of deposits lent out..

Q4HARD

What happens when the Fed buys government securities?

A) Money supply decreases
B) Interest rates rise
C) Banks' reserves increase
D) Aggregate demand falls
E) Inflation increases immediately
Show Answer

Answer: C — Banks' reserves increase is correct because when the Fed buys government securities, it injects liquidity into the economy, increasing banks' reserves and the money supply.

Q5MEDIUM

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

A) Fiscal policy
B) Open market operations
C) Government spending
D) Taxation
E) Regulation
Show Answer

Answer: B — Open market operations is correct because open market operations are a key tool used by the Federal Reserve to implement monetary policy, while fiscal policy is a tool of government spending and taxation.

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Study Tips for Unit 4: Money and Monetary Policy

  • Focus on understanding concepts, not memorizing facts — CLEP tests application
  • Practice with timed questions to build exam-day speed
  • Review explanations for wrong answers — they reveal common misconceptions
  • Use flashcards for key terms, practice questions for deeper understanding

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