AP Macro Monetary Policy 3 — Questions and Answers
Question 1: An increase in the money supply, all else equal, shifts the money supply curve and causes the equilibrium interest rate to:
- Rise
- Fall (Correct answer)
- Remain unchanged
- Fluctuate randomly
Correct answer: Fall
Greater money supply means more loanable funds available, driving down the price of borrowing — the interest rate.
Question 2: Which of the following is NOT one of the Fed's traditional monetary policy tools?
- Open market operations
- Setting the discount rate
- Adjusting reserve requirements
- Setting federal income tax rates (Correct answer)
Correct answer: Setting federal income tax rates
Tax rates are a fiscal policy tool controlled by Congress and the President, not the Federal Reserve.
Question 3: The Federal Open Market Committee (FOMC) meets approximately how often each year?
- 2 times
- 4 times
- 8 times (Correct answer)
- 12 times
Correct answer: 8 times
The FOMC holds 8 scheduled meetings per year to review economic conditions and set monetary policy targets.
Question 4: If the Fed wants to decrease the federal funds rate, it will most likely:
- Sell Treasury securities
- Buy Treasury securities (Correct answer)
- Raise the discount rate
- Increase reserve requirements
Correct answer: Buy Treasury securities
Buying securities injects reserves into banks, increasing the supply of overnight funds and pushing the federal funds rate down.
Question 5: Quantitative easing (QE) differs from conventional open market operations primarily because:
- QE targets a higher federal funds rate
- QE involves purchasing long-term or riskier assets, not just short-term Treasuries (Correct answer)
- QE reduces bank reserves
- QE is a form of fiscal stimulus directed by Congress
Correct answer: QE involves purchasing long-term or riskier assets, not just short-term Treasuries
QE expands the Fed's balance sheet by purchasing mortgage-backed securities and long-term bonds to lower long-term rates when short-term rates are near zero.
Question 6: In the short run, expansionary monetary policy is expected to:
- Decrease real GDP and lower the price level
- Increase real GDP and raise the price level (Correct answer)
- Increase real GDP and lower the price level
- Decrease real GDP and raise the price level
Correct answer: Increase real GDP and raise the price level
Lower interest rates boost investment and consumption, shifting AD right and increasing both output and prices in the short run.
Question 7: Which best explains why monetary policy has an 'inside lag' that is shorter than fiscal policy's?
- The Fed can change rates without legislative approval (Correct answer)
- Fiscal policy takes effect immediately after implementation
- The Fed's actions have faster real-world effects than tax changes
- Congress acts faster than the Fed in economic crises
Correct answer: The Fed can change rates without legislative approval
The Fed's Board of Governors can change monetary policy in days, while fiscal changes require lengthy congressional debate and passage.
AP Macro Monetary Policy 3
An increase in the money supply, all else equal, shifts the money supply curve and causes the equilibrium interest rate to: