ap economics: module 32 terms

how does monetary policy influence the interest rate?

how does monetary policy influence the interest rate?

the 3 tools affect MS, which alter IR

t or f: the money market determines the eq. IR in the long run

f: the money market determines the eq. IR in the SHORT run (the loanable funds market does this in the LONG run)

t or f: printing money while the economy is in a recession to help the govt. pay off bills is a destabilizing/counterproductive economic action

t

in the long run, a change in MS will affect ____, but doesn’t impact the ____ and ____.

APL, interest rate, real aggregate output

effects of monetary expansion in long run

↑MS → ↓IR → ↑AD (↑I and ↑C) → ↑APL and ↑a.o. in SR → inflationary gap → ↓SRAS (self-correction)

OVERALL EFFECT: ↑MS → ↑APL but no effect on RGDP and a.o.

effects of monetary contraction in long run

↓MS → ↑IR → ↓AD (↓I and ↓C) → ↓APL and ↓a.o. in SR → recessionary gap → ↑SRAS (self-correction)

OVERALL EFFECT: ↓MS → ↓APL but no effect on RGDP and a.o.

t or f: changes in the APL are proportionate to changes in MS

t

monetary neutrality

changes in MS have no real effects on the economy

• in LR, only effect from a change in MS is an equal change in APL

effects of an increase in MS on the IR in the long run

no actual increase in the end: ↑MS → ↓IR → ↑APL → ↑MD → ↑IR (back to eq.)

• how is IR back to the eq. level? → changes in MS are proportionate to changes in MD

  • ↑MS by x% → ↑APL by x% → ↑MD by x%

*OPPOSITE FOR DECREASE IN IS