AP Macroeconomics Unit 5 Questions and Correct Answers the Latest Update
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Course
AP Macroeconomics
Institution
AP Macroeconomics
Contractionary monetary policy
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 Inflation
increases in the price level (inflat...
AP Macroeconomics Unit 5
Questions and Correct Answers the
Latest Update
Contractionary monetary policy
✓ 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 Inflation
✓ increases in the price level (inflation)resulting from an increase in resource costs (for
example, raw material prices) and hence in per unit production costs; inflation
caused by reductions in aggregate supply
Crowding out effect
✓ the offset in aggregate demand that results when expansionary fiscal policy raises the
interest rate and thereby reduces investment spending
Debt Deflation
✓ the reduction in aggregate demand arising from the increase in the real burden of
outstanding debt caused by deflation
Debt GDP Ratio
✓ is the ratio between a country's government debt and its gross domestic product
(GDP)
✓ is asserted to arise when aggregate demand in an economy outpaces aggregate
supply.
✓
✓ ex) Economists will often say that demand-pull inflation is a result of too many
dollars chasing too few goods.
Discretionary Monetary Policy
✓ 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
✓ 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
✓ 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
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