AP Macroeconomics Flashcards: Monetary Policy
Written by AP Content Team, Verified for 2026 AP Exams, Last updated: May 2026
Review key ideas with interactive flashcards. This set includes 10 cards to help you master important concepts.
To combat high inflation, what action should a central bank take using open market operations?
The central bank should sell government securities (bonds), which decreases the money supply and raises interest rates.
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To combat high inflation, what action should a central bank take using open market operations?
The central bank should sell government securities (bonds), which decreases the money supply and raises interest rates.
What are the three primary tools of monetary policy?
The three primary tools are open market operations (buying/selling government bonds), the discount rate, and the reserve requirement.
What is the effect of the central bank lowering the reserve requirement?
Lowering the reserve requirement increases the amount of excess reserves banks can lend, which expands the money supply through the money multiplier effect and lowers interest rates.
If an economy is in a recession, what type of monetary policy should the central bank implement and what is the goal?
The central bank should implement expansionary (easy money) policy to increase the money supply, lower interest rates, and increase aggregate demand.
What is the reserve requirement (or reserve ratio)?
The reserve requirement is the fraction of customer deposits that banks are legally required to hold in reserve and cannot lend out.
How does expansionary monetary policy affect the aggregate demand curve?
Expansionary policy lowers interest rates, which stimulates investment and interest-sensitive consumption, causing the aggregate demand (AD) curve to shift to the right.
What is Monetary Policy?
Monetary policy consists of actions undertaken by a central bank to manipulate the money supply and credit conditions in order to stimulate or restrain economic activity.
What is contractionary (or tight money) policy?
Contractionary policy is used to fight inflation by decreasing the money supply and increasing interest rates, which reduces investment and consumption, thereby decreasing aggregate demand.
What is the most frequently used tool of monetary policy?
Open market operations, which involve the central bank buying and selling government securities (bonds) on the open market, is the most common and flexible tool.
What is the discount rate?
The discount rate is the interest rate at which commercial banks can borrow money directly from the central bank.