AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 571:

  Which of the following would lead to a reduction in inflation?

  A. Increasing aggregate demand and increasing aggregate supply.

  B. Decreasing aggregate demand and increasing aggregate supply.

  C. Decreasing aggregate demand and decreasing aggregate supply.

  D. Increasing aggregate demand and decreasing aggregate supply.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. Decreasing aggregate demand and increasing aggregate supply will reduce the

  inflationary pressures.

  Choice "a" is incorrect. Increasing aggregate demand causes the price level to rise.

  Choice "c" is incorrect. Decreasing aggregate supply causes the price level to rise.

  Choice "d" is incorrect. Both of these would cause the price level to rise.

• Question 572:

  Initially the nominal interest rate is 8 percent and the inflation rate is 6 percent. One year later, the nominal interest rate rises to 12 percent while the inflation rate rises to 10 percent. It follows that the real rate of interest:

  A. Has remained the same.

  B. Has fallen.

  C. Has risen.

  D. Insufficient information given for an answer.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. The real interest rate equals the nominal interest rate minus the inflation rate. Thus,

  the real interest rate in the first year is: real interest rate = 8 − 6 = 2 and the real interest rate in the next

  year is: real interest rate = 12 − 10 = 2.

• Question 573:

  Which of the following is most likely to cause an increase in the amount of frictional unemployment in an economy?

  A. An invention that renders an industry obsolete.

  B. A downturn in aggregate business activity.

  C. An increase in the average age of the work force.

  D. A reduction in the average age of the work force.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. Younger workers tend to move between jobs more frequently.

  Choice "a" is incorrect. This would lead to structural unemployment.

  Choice "b" is incorrect. This would lead to cyclical unemployment.

  Choice "c" is incorrect. Older workers tend to be voluntarily between jobs less frequently than younger

  workers.

• Question 574:

  Which of the following correctly lists the three ways to increase the money supply?

  A. Raise the required reserve ratio, increase the discount rate, sell bonds in the open market.

  B. Raise the required reserve ratio, increase the discount rate, buy bonds in the open market.

  C. Lower the required reserve ratio, increase the discount rate, buy bonds in the open market.

  D. Lower the required reserve ratio, decrease the discount rate, buy bonds in the open market.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. The three ways the Fed can increase the money supply are: (1) buy (purchase)

  government securities in the open market, (2) lower the discount rate, and (3) lower the required reserve

  ratio.

  Choice "a" is incorrect, per above.

  Choice "b" is incorrect, per above.

  Choice "c" is incorrect, per above.

• Question 575:

  An increase in the money supply leads to:

  A. A decline in interest rates, an increase in investment and an increase in aggregate demand.

  B. A decline in interest rates, a decrease in investment and an increase in aggregate demand.

  C. An increase in interest rates, a decrease in investment and a decrease in aggregate demand.

  D. An increase in the money supply has no effect on interest rates or investment.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. Expansionary monetary policy results when the Fed increases the money supply.

  Expansionary monetary policy affects the economy through the following chain of events: (1) an increase

  in the money supply causes interest rates to fall, (2) falling interest rates stimulate the desired levels of firm

  investment and household consumption, (3) increases in desired investment and consumption cause an

  increase in aggregate demand, and (4) aggregate demand shifts to the right causing real GDP and the

  price level to rise.

  Choice "b" is incorrect. An increase in the money supply causes investment to increase, not decrease.

  Choice "c" is incorrect. An increase in the money supply causes interest rates to decrease, not increase,

  investment to increase, not decrease and aggregate demand to increase, not decrease.

  Choice "d" is incorrect per above.

• Question 576:

  To decrease the money supply, the Fed might:

  A. Sell government securities on the open market.

  B. Buy government securities on the open market.

  C. Decrease the required reserve ratio.

  D. Lower the discount rate.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. To decrease the money supply, the Fed can: (1) sell government securities in the

  open market, (2) increase the discount rate, and (3) increase the required reserve ratio.

  Choice "b" is incorrect. The Fed should sell (not buy) securities on the open market.

  Choice "c" is incorrect. The Fed should increase (not decrease) the required reserve ratio.

  Choice "d" is incorrect. The Fed should increase (not decrease) the discount rate.

• Question 577:

  The discount rate set by the Federal Reserve is the:

  A. Rate that commercial banks charge for loans to each other.

  B. Rate that commercial banks charge for loans to the general public.

  C. Rate that the central bank charges for loans to commercial banks.

  D. Ratio of a bank's reserves to its demand deposits.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. The discount rate refers to the rate established by the Federal Reserve for shortterm

  (often overnight) loans the Fed makes to member banks.

  Choice "a" is incorrect. The discount rate is the rate the Federal Reserve charges.

  Choice "b" is incorrect per above Explanation: .

  Choice "d" is incorrect. This would be the bank's reserve ratio - not the discount rate.

• Question 578:

  All of the following actions are valid tools that the Federal Reserve Bank uses to control the supply of money, except:

  A. Selling government securities.

  B. Changing the reserve ratio.

  C. Raising or lowering the discount rate.

  D. Printing money when the money supply appears low.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. The treasury prints money. The Fed must increase the money supply through:

  1.

  Federal open market committee (FOMC) purchasing or selling government securities,

  2.

  Raising or lowering the discount rate, or

  3.

  Changing the reserve ratio.

  Choices "a", "b", and "c" are incorrect because they are all valid tools to control the supply of money.

• Question 579:

  If the Federal Reserve wanted to implement an expansionary monetary policy, which one of the following actions would the Federal Reserve take?

  A. Raise the reserve requirement and the discount rate.

  B. Purchase additional U.S. government securities and lower the discount rate.

  C. Raise the discount rate and sell U.S. government securities.

  D. Lower the discount rate and raise the reserve requirement.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. Fed purchases of government securities increase the money supply (putting money

  into circulation), and lowering the discount rate encourages borrowing by member banks and increases the

  money supply. Hence, these measures would help implement an expansionary monetary policy.

  Choice "a" is incorrect. Raising the reserve requirement and the discount rate would have the opposite

  effect of decreasing the money supply.

  Choice "c" is incorrect. Raising the discount rate and selling government securities would reduce the

  money supply.

  Choice "d" is incorrect. Raising the reserve requirement would decrease the money supply, but lowering

  the discount rate would increase the money supply.

• Question 580:

  The determination of gross domestic product (GDP) by the expenditure approach would include:

  A. Net exports.

  B. Business profits.

  C. Compensation to employees.

  D. A capital consumption allowance.

  Correct Answer: A

  Explanation: Choice "a" is correct. The expenditure approach to computing GDP includes: Consumption Net exports Government expenditures Capital investment Choices "b", "c", and "d" are incorrect, per the above.