Economic Equilibrium and Monetary Policy

Megan Cole from Homewood High School presents an AP daily video on the financial sector, focusing on two free response questions. The video covers the full employment equilibrium in Country Alpha, the impact of Country Beta's recession, and the monetary policy actions to counter these effects. It also discusses the effects of credit card fee changes on money demand and the use of open market operations to stabilize interest rates.

What does it mean when an economy is at full employment equilibrium?

• The economy is producing above its potential output.

• The economy is producing below its potential output.

• The economy is experiencing high unemployment.

• The current output is equal to the potential output.

How does a recession in a trading partner country affect aggregate demand?

• It increases aggregate demand due to increased imports.

• It has no effect on aggregate demand.

• It decreases aggregate demand due to lower exports.

• It increases aggregate demand due to higher exports.

What is the goal of expansionary monetary policy?

• To increase aggregate demand.

• To increase interest rates.

• To decrease aggregate demand.

• To reduce inflation.

What happens to the policy rate when the Central Bank lowers administered interest rates?

• The policy rate fluctuates randomly.

• The policy rate decreases.

• The policy rate increases.

• The policy rate remains unchanged.

How does a drop in credit card fees affect money demand?

• It increases money demand.

• It causes money demand to fluctuate.

• It has no effect on money demand.

• It decreases money demand.

What is the relationship between interest rates and bond prices?

• They fluctuate independently.

• They are inversely related.

• They are unrelated.

• They are directly related.

What happens to the price level when interest rates fall?

• The price level decreases.

• The price level remains constant.

• The price level increases.

• The price level fluctuates.

What open market operation can a central bank use to increase interest rates?

• Buy bonds to increase the money supply.

• Sell bonds to decrease the money supply.

• Buy bonds to decrease the money supply.

• Sell bonds to increase the money supply.

What is the effect of selling bonds on the money supply?

• It decreases the money supply.

• It increases the money supply.

• It stabilizes the money supply.

• It has no effect on the money supply.

What is the effect of a lower interest rate on interest-sensitive spending?

• It increases interest-sensitive spending.

• It decreases interest-sensitive spending.

• It has no effect on interest-sensitive spending.

• It causes interest-sensitive spending to fluctuate.