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AP Macroeconomics Practice Quiz: Monetary Policy

Written by AP Content Team, Verified for 2026 AP Exams, Last updated: May 2026

Test your understanding with short quizzes. This quiz has 7 questions to check your progress.

Question 1 of 7

To combat a recession and promote economic growth, which of the following actions would a central bank most likely take?

All Questions (7)

To combat a recession and promote economic growth, which of the following actions would a central bank most likely take?

A) Sell government securities on the open market.

B) Increase the required reserve ratio.

C) Increase the discount rate.

D) Buy government securities on the open market.

Correct Answer: D

To combat a recession, a central bank implements expansionary monetary policy. Buying government securities (an open-market operation) increases bank reserves, which increases the money supply, lowers interest rates, and stimulates investment and aggregate demand.

If an economy is experiencing a high rate of inflation, which of the following combinations of monetary policy actions would be most appropriate?

A) Sell government bonds and increase the discount rate.

B) Buy government bonds and decrease the discount rate.

C) Sell government bonds and decrease the reserve requirement.

D) Buy government bonds and increase the reserve requirement.

Correct Answer: A

To fight inflation, the central bank uses contractionary (tight) monetary policy. Selling government bonds and increasing the discount rate are both contractionary actions. They both work to decrease the money supply, raise interest rates, and reduce aggregate demand, thereby curbing inflation.

An open market sale of government securities by the central bank will have what immediate effect on the money market?

A) An increase in the money supply and a decrease in the nominal interest rate.

B) A decrease in the money supply and an increase in the nominal interest rate.

C) An increase in the demand for money and an increase in the nominal interest rate.

D) A decrease in the demand for money and a decrease in the nominal interest rate.

Correct Answer: B

An open market sale involves the central bank selling government securities to commercial banks, which pulls money out of the banking system. This action directly decreases the money supply. In the money market graph, a decrease in the money supply shifts the vertical supply curve to the left, resulting in a higher equilibrium nominal interest rate.

The interest rate that the Federal Reserve charges commercial banks for short-term loans is known as the

A) federal funds rate

B) prime rate

C) discount rate

D) real interest rate

Correct Answer: C

The discount rate is the interest rate set by the central bank on loans extended to commercial banks through its 'discount window'. This is distinct from the federal funds rate, which is the rate banks charge each other for overnight loans.

Which of the following describes the correct cause-and-effect chain of an expansionary monetary policy?

A) The central bank buys bonds -> money supply increases -> nominal interest rates decrease -> investment and consumption increase -> aggregate demand increases.

B) The central bank sells bonds -> money supply decreases -> nominal interest rates increase -> investment and consumption decrease -> aggregate demand decreases.

C) The central bank buys bonds -> money supply decreases -> nominal interest rates increase -> investment and consumption decrease -> aggregate supply decreases.

D) The central bank increases the reserve requirement -> money supply increases -> nominal interest rates decrease -> investment and consumption increase -> aggregate demand increases.

Correct Answer: A

Expansionary monetary policy begins with an action to increase the money supply, such as buying bonds. This surplus of money in the banking system lowers the nominal interest rate. A lower interest rate makes borrowing cheaper, which stimulates interest-sensitive investment and consumption, leading to a rightward shift of the aggregate demand curve.

Suppose the required reserve ratio is 10 percent and the central bank buys $50 million in government securities from the public. If there are no leakages, what is the maximum possible change in the money supply?

A) An increase of $5 million

B) An increase of $50 million

C) An increase of $450 million

D) An increase of $500 million

Correct Answer: D

The money multiplier is calculated as 1 / required reserve ratio. In this case, the multiplier is 1 / 0.10 = 10. The maximum change in the money supply is the initial change in reserves multiplied by the money multiplier. Therefore, the maximum increase is $50 million * 10 = $500 million.

If an economy is operating with a significant inflationary gap, the central bank could take which of the following actions to restore long-run equilibrium?

A) Decrease income taxes to stimulate consumption.

B) Increase the federal funds rate target.

C) Decrease the reserve requirement.

D) Purchase government bonds on the open market.

Correct Answer: B

An inflationary gap requires a contractionary monetary policy to reduce aggregate demand. By increasing its target for the federal funds rate, the central bank signals its intent to tighten the money supply. It would achieve this by selling bonds, which raises the actual federal funds rate toward the new, higher target. This leads to higher interest rates throughout the economy, reducing inflation. Options C and D are expansionary policies, and option A is an expansionary fiscal policy.