AP Macro Monetary Policy 3

Question 1

An increase in the money supply, all else equal, shifts the money supply curve and causes the equilibrium interest rate to:

Accepted Answer

Fall

Answer

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?

Accepted Answer

Setting federal income tax rates

Answer

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?

Accepted Answer

8 times

Answer

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:

Accepted Answer

Buy Treasury securities

Answer

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:

Accepted Answer

QE involves purchasing long-term or riskier assets, not just short-term Treasuries

Answer

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.

AP Practice Test

AP Practice Test

AP Macro Monetary Policy 3