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AP Macroeconomics 4.6 Monetary Policy Questions

Select and model monetary policy in limited- or ample-reserve systems, tracing policy rates through spending, aggregate demand, output, and prices.

Syllabus
Effective Fall 2022
Course
AP Macroeconomics

Exam points

  • select expansionary or contractionary monetary policy from the direction of the output gap
  • apply bond trades, the discount rate, and reserve requirements in a limited-reserve system
  • calculate monetary-base and maximum money-supply effects of an open-market operation
  • use a money-market graph to connect a supply shift with the nominal interest rate
  • use administered rates and a reserve-market graph for policy under ample reserves

Covered syllabus points

POL-1.D—a. Define monetary policy and related terms. b. Explain (using graphs as appropriate) the short-run effects of a monetary policy…POL-1.E—Define why there are lags to monetary policy

Question 1

[Maximum number: 4]

Assume the economy of Jenland is in short-run equilibrium at a real output level above full-employment real output.

Question (a)

(a)

The banking system in Jenland has ample reserves. Identify a specific monetary policy action that the central bank of Jenland would implement to return the economy to full employment in the short run.

[ 1 ]

Question (b)

(b)

Draw a correctly labeled graph of the reserve market for Jenland, and show the effect of the central bank's action identified in part A on the policy rate.

[ 2 ]

Question (c)

(c)

Based on the change in the interest rate shown on your graph in part B, will each of the following increase, decrease, or remain the same in Jenland in the short run?

[ 1 ]

Question (i)

(i)

The price level. Explain.

[ 1 ]
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