Monetary Policy Flashcards
7 cards from real AP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Monetary Policy flashcards as text
When the Federal Reserve sells government securities on the open market, what is the immediate effect on bank reserves?
Answer: Bank reserves decrease
Selling securities removes money from the banking system as banks pay for them, reducing reserves.
Which of the following best describes the money multiplier?
Answer: The ratio of the money supply to the monetary base
The money multiplier equals 1/reserve requirement and shows how much the money supply expands per dollar of reserves.
If the required reserve ratio is 20%, what is the maximum money multiplier?
Answer: 5
The money multiplier equals 1 divided by the reserve requirement: 1/0.20 = 5.
Contractionary monetary policy is most appropriate when an economy is experiencing:
Answer: Demand-pull inflation above the target rate
Contractionary policy raises interest rates to cool excessive demand and bring inflation back to target.
The prime rate is best described as:
Answer: The interest rate banks charge their most creditworthy customers
The prime rate is the benchmark rate commercial banks use for loans to their best corporate customers.
When the Fed lowers the discount rate, which of the following most likely occurs?
Answer: Banks are encouraged to borrow more from the Fed
A lower discount rate makes it cheaper for banks to borrow from the Fed, encouraging more borrowing and lending.
Which scenario represents an example of the liquidity trap?
Answer: Even near-zero interest rates fail to stimulate borrowing and spending
A liquidity trap occurs when monetary policy loses effectiveness because interest rates are already near zero and cannot fall further.