Graphs Monetary Policy - It is time once again to practice

Graphs Monetary Policy Question

It is time once again to practice writing a free response question (FRQ). On the AP Exam, you may have a FRQ from this unit. When you answer these questions, there is a specific format that you must follow. Please read the instructions below so you will understand how to correctly answer a FRQ.

Answer in clear, concise language. You are not writing an essay.

Following directions is important; the first word in a FRQ can tell you a lot.

 Identify means a one or two word answer; explain always means in words and pictures where appropriate; how means how and why.

Include correctly drawn and labeled graphs and diagrams to support your answer where needed, even if the question does not specifically tell you to draw one.

Use blue or black ink to create your drawings. You will be required to do this on the AP Exam.

 If you like to erase, use and Erasermate™ ink pen.

Separate and label the answer in the same manner in which the question is written.

 For example if there is a part A, B (i), B (ii), and C, your answer must have a part A, B (i), B (ii), and C.

Answer the questions in logical order; they are designed that way for a reason.

Be consistent with your answer.

You may use standard economic abbreviations. RGDP for real GDP is fine.

Assume an economy operating below full employment.

A. Draw a correctly labeled AD/AS graph showing: i. the problem in the economy ii. current price level and output iii. full employment output

B. Identify an open market operation that the Fed could implement to resolve the problem.

C. Using a correctly labeled money market graph with a side-by-side investment demand graph, show the effect of the policy you identified in part B on each of the following: i. nominal interest rates ii. quantity of investment demanded

D. On your graph in part A, show the short-run effects of the action you identified on each of the following: i. aggregate demand - explain why AD shifts ii. output iii. price level E. Given your answer in part C, explain what will happen to each of the following: i. the international value of the dollar ii. the nation's exports and imports

 part 2.

1. Draw a correctly labeled loanable funds graph that shows what happens to real interest rates for each of the following situations. ( you will have three graphs) a. The government needs money to fund a war b. Business investors become more optimistic about the economy c. The government raises personal income taxes