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Expansionary and Contractionary Monetary Policy quiz

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  • What are the two main goals of the Federal Reserve when conducting monetary policy?
    The Fed aims to manage employment and maintain price stability in the economy.
  • What is expansionary monetary policy designed to do during a recession?
    It increases the money supply, lowers interest rates, and shifts aggregate demand right to boost GDP.
  • How does the Fed lower interest rates in the money market?
    The Fed increases the money supply, which leads to a lower equilibrium interest rate.
  • What open market operation does the Fed use to increase the money supply?
    The Fed purchases treasury securities from the public to inject money into the economy.
  • How does a lower interest rate affect investment, consumption, and net exports?
    Lower interest rates increase investment, consumption, and net exports, raising aggregate demand.
  • What happens to the aggregate demand curve when the Fed employs expansionary monetary policy?
    The aggregate demand curve shifts to the right, increasing GDP and price level.
  • What is the result of expansionary monetary policy on the AD-AS model?
    It moves the economy from a recessionary short-run equilibrium to a long-run equilibrium with higher GDP and price level.
  • When does the Fed use contractionary monetary policy?
    The Fed uses contractionary policy when the economy is experiencing high inflation and overemployment.
  • What is the main goal of contractionary monetary policy?
    Its goal is to decrease GDP and reduce inflation by raising interest rates.
  • How does the Fed raise interest rates in the money market?
    The Fed decreases the money supply, which leads to a higher equilibrium interest rate.
  • What open market operation does the Fed use to decrease the money supply?
    The Fed sells treasury securities to the public, taking money out of circulation.
  • How does a higher interest rate affect investment, consumption, and net exports?
    Higher interest rates decrease investment, consumption, and net exports, lowering aggregate demand.
  • What happens to the aggregate demand curve when the Fed employs contractionary monetary policy?
    The aggregate demand curve shifts to the left, reducing GDP and price level.
  • What is the result of contractionary monetary policy on the AD-AS model?
    It moves the economy from an overheated short-run equilibrium to a sustainable long-run equilibrium with lower price level.
  • How do monetary policy actions by the Fed affect the AD-AS model?
    By changing the money supply and interest rates, the Fed shifts aggregate demand, influencing GDP and price levels.