AP Macroeconomics Unit 5 Study Guide
Contractionary monetary policy - Answer-REDUCES the money supply. The Fed may decide to take a
contractionary approach by INCREASING the interest rates. Indicates a shift in AD to the left to full
employment, and reduce inflationary pressures
Cost Push Infla...
Discretionary Monetary Policy - Answer✔✔-deliberate changed in any of the Fed tools to create counter
cyclical pressures to encourage expansion or dampen inflation
ex)
the use of changes in the interest rate or the money supply to stabilize the economy
Disinflation vs. Deflation - Answer✔✔-Disinflation is an inflation rate that is decreasing but still >0.
Deflation is a negative inflation rate
ex) A slowing in the rate of price inflation
Equation of Exchange - Answer✔✔-MV = PQ, where M is the money supply, V is the velocity of money, P
is the price level, and Q is the quantity of output of goods and services produced in an economy.
ex)
the equation says that nominal GDP (P * Q) is equal to the quantity of money (M) multiplied by the
number of times each dollar is spent in a year (V)
Expansionary Monetary Policy - Answer✔✔-A shift in monetary policy designed to stimulate aggregate
demand. Bond purchases by the Fed, the creation of additional bank reserves, and an increase in the
growth rate of the money supply generally indicate a shift to a more expansionary monetary policy.
Fiscal Policy Lags - Answer✔✔-is the time between the beginning of recession or inflation and the
certain awareness that is actually happening.
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