Download HW 5.1 AP Macro – Modules 31 and 32 Directions: After reading

Name ____________________________
HW 5.1
AP Macro – Modules 31 and 32
Directions: After reading your textbook, answer the following questions. Be sure to label any and all important information.
Part One: Multiple Choice (Yes, some of these do also appear in your textbook)
1. Which of the following actions can the Fed take to decrease the equilibrium interest rate?
a. increase the money supply
d. decrease money demand
b. increase money demand
e. both (a) and (d)
c. decrease the money supply
2. Contractionary monetary policy attempts to ___________ aggregate demand by _________ interest rates
a. decrease, increasing
b. increase, decreasing
c. decrease, decreasing
d. increase, increasing
e. increase, maintaining
3. Which of the following is a goal of monetary policy?
a. Zero inflation
b. Deflation
c. Price stability
d. Increased potential output
e. Decreased actual real GDP
4. When implementing monetary policy, the Federal Reserve attempts to achieve
a. an explicit target real GDP growth rate
b. zero inflation
c. a low rate of deflation
d. an explicit target inflation rate
e. 4-5% inflation
5. In the long run, changes in the quantity of money affect which of the following?
I.
Real aggregate output
II.
Interest rates
III.
The aggregate price level
a.
b.
c.
d.
e.
I only
II only
III only
I and II only
I, II, and III
6. An increase in the money supply will lead to which of the following in the short run?
a. higher interest rates
b. decreased investment spending
c. decreased consumer spending
d. increased aggregate demand
e. lower real GDP
7. A 10% decrease in the money supply will change the aggregate price level in the long run by
a. zero
b. less than 10%
c. 10%
d. 20%
e. more than 20%
8. Money neutrality means that, in the long run, changes in the money supply
a. cannot happen
b. have no effect on the economy
c. have no real effect on the economy
d. increase real GDP
e. change real interest rates
9. A graph of percentage increases in the money supply and average annual increases in the price level for various
countries provides evidence that
a. changes in the two variables are exactly equal
b. the money supply and aggregate price level are unrelated
c. money neutrality holds only in wealthy countries
d. monetary policy is ineffective
e. money is neutral in the long run
Part Two: Free Response
10. An economy is in long-run macroeconomic equilibrium with an unemployment rate of 5% when the government
passes a law requiring the central bank to use monetary policy to lower the unemployment rate to 3% and keep it
there. How could the central bank achieve this goal in the short run? What would happen in the long run?
Illustrate with a diagram
11. The effectiveness of monetary policy depends on how easy it is for changes in the money supply to change interest
rates. By changing interest rates, monetary policy affects investment spending and the aggregate demand curve.
The economies of Albernia and Brittania have very different money demand curves, as shown in the accompanying
diagram.
In which economy will changes in the money supply be a more effective policy tool? Why?