Test Prep For AP® Courses


Which of the following bank regulations was primarily imposed to prevent bank runs?

  1. capital requirements
  2. money multiplier
  3. deposit insurance
  4. open market operations
  5. discount rate

Expansionary monetary policy _______ the interest rate, thereby increasing ______.

  1. raises; saving
  2. raises; foreign capital inflow
  3. lowers; government spending
  4. lowers; exports
  5. lowers; investment spending

In response to overheating pressures, the central bank of Country X decides to enact a contractionary monetary policy. Answer the following questions based on this scenario.

  1. Describe the open market operation that Country X’s central bank can execute to impose a contractionary monetary policy.
  2. Using a money market diagram with axes labeled appropriately, illustrate the effects of the open market operation you described in Part a on the equilibrium interest rate and quantity of money.
  3. Which component of aggregate demand does the contractionary monetary policy primarily effect? Explain.
  4. Using an aggregate demand-aggregate supply diagram, illustrate the effects of the contractionary monetary policy on equilibrium price level and real GDP.