AP Macroeconomics Question 382: Answer and Explanation
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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
D-Contractionary monetary policy increases interest rates. Higher interest rates decrease new home demand, investment spending, and AD, and increase the unemployment rate.