AP Macroeconomics Question 86: Answer and Explanation
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12. A use of easy money (expansionary) policy by the Fed could result in which of the following?
- A. an increase in net exports
- B. a decrease in net exports
- C. an increase in the real interest rate
- D. an increase in the nominal interest rate
- E. crowded out investment
Correct Answer: B
B Expansionary monetary policy will decrease interest rates, which will induce a capital inflow and increase investment and consumption. As a result, there will be increased inflation, which will cause the relative price to be high for foreign nations, which will decrease net exports, so the answer is (B).