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AP Macroeconomics Practice Quiz: The Money Market

Written by AP Content Team, Verified for 2026 AP Exams, Last updated: May 2026

Test your understanding with short quizzes. This quiz has 7 questions to check your progress.

Question 1 of 7

The opportunity cost of holding money in the form of cash is best described as the:

All Questions (7)

The opportunity cost of holding money in the form of cash is best described as the:

A) decrease in its purchasing power due to inflation.

B) nominal interest rate that could have been earned on other financial assets.

C) convenience and liquidity of having cash on hand.

D) transaction costs associated with converting other assets into cash.

Correct Answer: B

The opportunity cost of holding money is the interest you give up by not holding interest-bearing assets like bonds. The nominal interest rate represents this forgone earning. While inflation affects the real value of money, it is not the opportunity cost of holding it relative to other assets.

Which of the following best describes the relationship between the nominal interest rate and the quantity of money demanded?

A) They are directly related; as the interest rate rises, the quantity demanded rises.

B) They are inversely related; as the interest rate rises, the quantity demanded falls.

C) They are unrelated; the interest rate does not affect the quantity of money people want to hold.

D) The relationship is positive at low interest rates and negative at high interest rates.

Correct Answer: B

There is an inverse relationship between the nominal interest rate and the quantity of money demanded, which is why the money demand curve is downward sloping. A higher interest rate increases the opportunity cost of holding money, so people and firms choose to hold less of their wealth as money and more in interest-earning assets.

An increase in which of the following would cause the money demand curve to shift to the right?

A) The nominal interest rate

B) The money supply

C) The aggregate price level

D) The discount rate

Correct Answer: C

A rightward shift in the money demand curve means people want to hold more money at any given interest rate. An increase in the aggregate price level means that more money is needed to purchase the same amount of goods and services, thus increasing the transaction demand for money and shifting the curve to the right. Changes in the nominal interest rate cause a movement along the curve, not a shift.

If a country's central bank conducts an open-market purchase of government bonds, which of the following will occur in the money market?

A) The money supply will decrease, and the nominal interest rate will rise.

B) The money supply will increase, and the nominal interest rate will fall.

C) The demand for money will increase, and the nominal interest rate will rise.

D) The demand for money will decrease, and the nominal interest rate will fall.

Correct Answer: B

An open-market purchase of bonds by the central bank injects money into the banking system, increasing the money supply. This shifts the vertical money supply curve to the right. With a given money demand curve, this increase in supply leads to a surplus of money at the original interest rate, causing the equilibrium nominal interest rate to fall.

Assume the money market is in equilibrium. If the central bank wants to increase the nominal interest rate, which of the following monetary policy actions should it take?

A) Decrease the reserve requirement.

B) Sell government bonds on the open market.

C) Decrease the discount rate.

D) Buy government bonds on the open market.

Correct Answer: B

To increase the nominal interest rate, the central bank must decrease the money supply (a contractionary monetary policy). Selling government bonds on the open market removes money from the banking system, decreasing the money supply. This shifts the money supply curve to the left, causing the equilibrium nominal interest rate to rise.

Suppose a country is experiencing a period of significant real GDP growth while the central bank takes no action. Ceteris paribus, what will be the effect on the nominal interest rate and the quantity of money demanded?

A) The nominal interest rate will decrease, and the quantity of money demanded will increase.

B) The nominal interest rate will increase, and the quantity of money demanded will not change.

C) The nominal interest rate will increase, and the quantity of money demanded will increase.

D) The nominal interest rate will increase, but the effect on the quantity of money demanded is ambiguous.

Correct Answer: B

An increase in real GDP increases the volume of economic transactions, which in turn increases the demand for money. This shifts the money demand curve to the right. With a fixed, vertical money supply (since the central bank takes no action), the equilibrium nominal interest rate must rise. The quantity of money supplied remains unchanged, and at the new equilibrium, the quantity of money demanded will equal this unchanged quantity supplied.

The supply curve for money is typically depicted as a vertical line in the money market graph because:

A) the quantity of money supplied is fixed by the central bank and does not change in response to the interest rate.

B) it is impossible for the central bank to change the amount of money in circulation in the short run.

C) the demand for money is perfectly inelastic with respect to the interest rate.

D) commercial banks are required to hold a fixed percentage of their deposits in reserve, which fixes the total money supply.

Correct Answer: A

In the money market model, the money supply is determined by the central bank's policy decisions (e.g., open market operations, reserve requirement, discount rate). It is treated as a fixed quantity at any given point in time, independent of the nominal interest rate. Therefore, the money supply curve is drawn as a vertical line, indicating that the quantity supplied does not vary with the interest rate.