Mr. Maurer
AP Economics
Name: _________________________
Unit 3 Test Review
Review from Chapter 12 – Fiscal Policy
1. What is the purpose of expansionary fiscal policy? When would the government use expansionary
fiscal policy?
2. Provide two examples of expansionary fiscal policy and explain how each works.
3. When would the government use contractionary fiscal policy?
4. Provide to examples of contractionary fiscal policy and explain how each works.
Chapter 13 – Money and Banking
5. Identify: medium of exchange, transactions demand for money, asset demand for money,
6. What is the relationship between interest rates and bond prices?
7. How is the asset demand for money related to the nominal interest rate?
8. What is included in the M1 money supply? Why aren’t savings accounts included?
9. What is the relationship between bond prices and interest rates?
10. Identify the characteristics of fiat money.
11. Draw a graph of a money market with a constant money supply. Show an increase in the demand for
money on your graph. What happens to the interest rate and the quantity of money?
Chapter 14 – How Banks and Thrifts Create Money
12. Explain how the money multiplier works and how it is calculated.
13. Identify: fractional reserve banking system, reserve ratio, federal funds rate
14. What characteristic of our banking system allows commercial banks’ to create money?
Chapter 15 – Monetary Policy
15. What is the purpose of expansionary monetary policy (“easy money”)? When would the Federal
Reserve use an easy money policy?
16. Identify 3 different “easy money” actions the Federal Reserve can take and explain how each works.
Which of these does it actually used most often?
17. What is the possible negative unintended consequence of an easy money policy?
18. What is the purpose of restrictive monetary policy (“tight money”)? When would the Federal Reserve
use a tight money policy?
19. Identify 3 different “tight money” actions the Federal Reserve can take and explain how each works.
Which of these does it actually used most often?
20. Explain how monetary policy works (for both easy money and tight money).
21. What are “open-market operations” and how do they work?
22. What is the velocity of money (what does the term mean)? If nominal GDP is $1 billion and the
money supply is 200 million, what is the velocity of money?
23. How could fiscal policy and monetary policy be used together to decrease a government deficit
without changing aggregate demand?
24. How could fiscal policy and monetary policy be used together to increase investment spending
without raising the price level?
25. Trace the series of events that would lead follow if the Federal Reserve implanted a contractionary
monetary policy.
26. If investment becomes more responsive to changes in the interest rate, what effect will this have on
monetary policy’s effectiveness?
27. What specific monetary policy action does the Federal Reserve use to lower or raise the federal funds
rate?