Test Prep For AP® Courses
Which of the following bank regulations was primarily imposed to prevent bank runs?
- capital requirements
- money multiplier
- deposit insurance
- open market operations
- discount rate
Expansionary monetary policy _______ the interest rate, thereby increasing ______.
- raises; saving
- raises; foreign capital inflow
- lowers; government spending
- lowers; exports
- 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.
- Describe the open market operation that Country X’s central bank can execute to impose a contractionary monetary policy.
- 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.
- Which component of aggregate demand does the contractionary monetary policy primarily effect? Explain.
- Using an aggregate demand-aggregate supply diagram, illustrate the effects of the contractionary monetary policy on equilibrium price level and real GDP.