AP Macroeconomics FRQ Review #3

What does full employment equilibrium imply about the economy of country Alpha?

• Current output is below potential output.

• The economy is experiencing high inflation.

• The economy is in a state of recession.

• Current output is equal to potential output.

How does a recession in country Beta affect country Alpha's aggregate demand?

• It remains unchanged despite Beta's economic downturn.

• It increases as Beta's demand for imports rises.

• It decreases because Beta buys fewer goods from Alpha.

• It increases due to higher exports to Beta.

What monetary policy should the Central Bank of Alpha implement to counteract the recession effects from Beta?

• Sell government bonds to increase money supply.

• Decrease interest rates to boost aggregate demand.

• None of the above.

• Increase interest rates to reduce money supply.

What is the relationship between interest rates and bond prices?

• No relationship exists between the two.

• Inversely related: as interest rates fall, bond prices rise.

• Bond prices are unaffected by changes in interest rates.

• Directly proportional: as one increases, so does the other.

What open market operation can the Central Bank perform to maintain the nominal interest rate after a drop in credit card fees?

• Sell bonds to decrease the money supply.

• Buy bonds to increase the money supply.

• Decrease the discount rate offered to banks.

• Increase the reserve requirements for banks.