10 free sample questions with answers and explanations. See how you'd score on the real CLEP exam.
A central bank concerned about inflation would most appropriately implement which combination of monetary policy actions?
Increase the money supply and lower the federal funds rate
Decrease the required reserve ratio and buy government bonds
Sell government securities and raise the federal funds rate
Lower the discount rate and expand open market purchases
Increase the monetary base and decrease interest rates
Explanation
Sell government securities and raise the federal funds rate is correct because selling securities reduces money supply while raising rates decreases borrowing, both contractionary measures that combat inflation.
If the Federal Reserve increases the federal funds rate during a period of high inflation, banks would most likely respond by:
Lowering interest rates on savings accounts and loans
Expanding credit availability to stimulate borrowing
Purchasing more Treasury bonds to increase profits
Reducing their required reserve balances at the Fed
Increasing interest rates on consumer loans and mortgages
Explanation
Increasing interest rates on consumer loans and mortgages is correct because higher federal funds rates increase banks' borrowing costs, which they pass to consumers through higher loan and mortgage rates.
Which of the following Federal Reserve actions would most directly reduce the money supply to combat rising inflation?
Lowering the discount rate to encourage bank borrowing
Increasing the federal funds rate target
Decreasing the required reserve ratio for commercial banks
Selling government securities in open market operations
Expanding the monetary base through quantitative easing
Explanation
Selling government securities in open market operations is correct because selling securities removes money from circulation, directly decreasing the money supply and reducing inflationary pressure.
An increase in expected future income would most likely affect the loanable funds market by:
Decreasing demand for loanable funds and lowering real interest rates
Increasing demand for loanable funds and raising real interest rates
Increasing supply of loanable funds and lowering real interest rates
Decreasing supply of loanable funds and raising real interest rates
Having no effect on either supply or demand
Explanation
Increasing demand for loanable funds and raising real interest rates is correct because higher expected future income increases current consumption demand, shifting loanable funds demand rightward and raising real interest rates.
Which scenario would shift the supply of loanable funds leftward, increasing real interest rates?
Households increase retirement savings
Businesses reduce capital expenditure plans
Government implements policies encouraging private savings
Central bank reduces the discount rate
Decline in household disposable income due to recession
Explanation
Decline in household disposable income due to recession is correct because reduced disposable income decreases household savings, shifting loanable funds supply leftward and raising real interest rates.
Which of the following would cause real interest rates to increase in the loanable funds market?
Increase in household savings rates
Decrease in business investment demand
Increase in government budget deficits
Decrease in inflation expectations
Increase in money supply growth
Explanation
Increase in government budget deficits is correct because increased government borrowing shifts demand for loanable funds rightward, raising equilibrium real interest rates.
When converting a price index from a 2005 base year (index = 140) to a 2015 base year, what is the new index value for 2005?
0
280
100
140
71.4
Explanation
71.4 is correct because 100 × (100/140) = 71.4, establishing 2015 as the new reference point with index 100.
If the price index for 2012 is 120 with a 2010 base year, and prices increase by 25% from 2012 to 2018, what is the price index for 2018 using the same 2010 base year?
120
145
150
155
175
Explanation
150 is correct because 120 × 1.25 = 150, reflecting the cumulative price increase from the 2010 base year.
An increase in business confidence leading to greater capital investment would most likely cause the SRAS to shift in which direction?
Left, due to higher production costs
Right, due to lower input prices
Left, due to increased aggregate demand
Right, due to increased productive capacity
No shift, only a movement along the curve
Explanation
Right, due to increased productive capacity is correct because more capital investment expands productive capacity, allowing firms to supply greater output at each price level.
Which factor would NOT shift the short-run aggregate supply curve?
Changes in expected future prices
Technological improvements
Changes in the quantity of capital stock
Changes in the current price level
Changes in input costs
Explanation
Changes in the current price level is correct because price level changes cause movements along SRAS, not shifts of the curve itself.