AP Macroeconomics / Unit 4: Financial Sector

4.6 Monetary Policy

3 practice questions

Notes

The central bank's tools: open market operations (buying bonds adds reserves), interest on reserves, discount rate, reserve requirement.

Expansionary: lower interest rates → more investment → AD right.
Contractionary: raise rates → AD left.

Practice

To fight a recession, the Fed would:

Raising interest rates aims to:

Today the Fed's main tool for setting short-term rates (with ample reserves) is:

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