AP Macroeconomics Question 20: Answer and Explanation

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Question: 20

3. Which of the following would be considered contractionary monetary policy?

  • A. The purchase of bonds
  • B. The sale of bonds
  • C. An increase in taxes
  • D. An increase in government spending
  • E. A decrease in the discount rate

Correct Answer: B


B Contractionary monetary policy is when the government's actions reduce the overall money supply in the economy. Purchasing bonds, increasing taxes (and spending the additional tax revenue), increasing government spending, and decreasing the discount rate all increase the supply of money, so eliminate (A), (C), (D) and (E). Selling bonds reduces the overall money supply in the economy; therefore, the answer is (B).