AP Macroeconomics Question 310: Answer and Explanation

Test Information

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Question: 310

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

Explanation:

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.