AP Macroeconomics Question 310: Answer and Explanation
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5. To move the economy closer to full employment, the central bank decides that the federal funds rate must be increased. The appropriate open market operation is to ______, which ______ the money supply, ______ aggregate demand, and fights ______.
OMO MONEY SUPPLY AD TO FIGHT
- A. Buy bonds Increases Increases Unemployment
- B. Buy bonds Increases Increases Inflation
- C. Sell bonds Decreases Decreases Unemployment
- D. Sell bonds Decreases Increases Inflation
- E. Sell bonds Decreases Decreases Inflation
Correct Answer: E
E —If the central bank has decided that moving to full employment requires an increase in the federal funds rate, it must sell bonds to decrease the money supply. The resulting increase in interest rates decreases AD and puts downward pressure on the price level.