Fiscal Policy & Monetary Policy (Expansionary) (1of3)

Fiscal Policy Expansion & Monetary PolicyExpansion

Monetary & Fiscal, how do they work when used at the same time. Lets start by looking at what is the cause and effect of Fiscal and Monetary policy when both are expansionary.

When Monetary and Fiscal are both expansionary AD (increases) and the IR (no change).

How would this knowledge have helped us with the following question?

2008 AP Micro Exam

Answer - C

To bring the economy out of a recession, AD must shift right. 

Expansionary Fiscal & Monetary Policy can be used.

GS increases (expansionary fiscal) & a lowering of the Federal Funds Rate (expansionary monetary)

Of course you need to know that lowering the Fed. Funds Rate increases the MS.

If the FED lowers the Fed. Funds Rate banks can get loans at a lower rate and banks will therefore make more loans and create more money. (Expansionary)

From the Monetary Policy Cheat Sheet (Link)

2000 AP Micro 

Answer - C - Higher Interest Rates

Fiscal Policy tends to get higher interest rates.

Government Spending Increases and Consumption increases and Investment increases which shifts AD rightward which increases GDP and (Y) incomes and when incomes increases the Demand for Money increases pushing up the Nominal Interest rates and the government borrowing to spend money causes the Demand for loanable funds to increase thus driving up the Real Interest Rate.

or

Fiscal Policy Expansion causes AD to Increases and Interest Rates to Increase.

2010 Multiple Choice Questions (FED, Banking, Monetary Policy & Money Creation)

2010 Multiple Choice Questions (FED, Banking, Monetary Policy & Money Creation)

This section, along with AD/AS is the second most tested.
Here are the multiple choice questions for the 2010, AP Macroeconomics exam.

Notice, topics questioned include: 
T-accounts, Velocity of Money, Bond Prices, Res. Requirements, Rational Expectations

*(the FRQ's for this section are quite easy compared to the wealth of knowledge you need to be able to answer the Multiple choice)

Answer (A) Reduce Inflation

 Answer (A) increase in the nominal output

 Answer (C) Interest rates will decline

Answer (C) increasing the reserve requirements

Answer (C) selling bonds on the open market

Answer (B) Rational Expectations

Answer (B) demand deposits

Answer (D) Engage in Open Market Purchases

Answer (B) It falls when interest rates rise, because the opportunity cost of holding money increases.

Answer (B) Increase - Decrease

Answer (D) Decrease - Decrease

Answer (E) Buying Bonds increases the MS, which lowers the interest rate

Answer (E) a decrease of $5 million