AP Macroeconomics Question 382: Answer and Explanation

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Question: 382

5. If a nation is operating at full employment, and the central bank engages in contractionary monetary policy, the nation can expect the interest rate, the purchases of new homes, and the unemployment rate to change in which of the following ways?

INTEREST RATES     NEW HOMES     UNEMPLOYMENT RATE

  • A. Decrease     Increase     Increase
  • B. Decrease     Decrease     Decrease
  • C. Increase     Decrease     Decrease
  • D. Increase     Decrease     Increase
  • E. Increase     Increase     Increase

Correct Answer: D

Explanation:

D-Contractionary monetary policy increases interest rates. Higher interest rates decrease new home demand, investment spending, and AD, and increase the unemployment rate.