AP Macroeconomics 4.6: Monetary Policy
Analyze expansionary and contractionary monetary policy through interest rates, money and reserve markets, aggregate demand, output, and prices.
- Syllabus
- Effective Fall 2025
- Course
- AP Macroeconomics
Covered syllabus points
4.6 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 ]
| A Point 1 | State that the central bank would incre interest on reserves. |
|---|
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 ]
| B\nPoint 2 | Draw a correctly labeled graph of the reserve market with the supply curve intersecting the demand curve in the range of ample reserves. | 1 point |
|---|---|---|
| Point 3 | The graph must show an increase in the administered interest rates, resulting in an increase in the policy rate.\nOR\nThe graph must show an increase in the lower bound of the demand curve for reserves, resulting in an increase in the policy rate. | 1 point |
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 ]
(ii) & State that the price level will decrease and explain that the increase in interest rates will decrease interest-sensitive spending (consumption, investment, or net exports), which will decrease aggregate demand. & 1 point \\ \hline \end{tabular}
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