EMILLECT 2024/2025 ACADEMIC YEAR ©2024 EMILLECT. ALL RIGHTS RESERVED. FIRST PUBLISH OCTOBER 2024.
AP Macroeconomics Unit 5 Study Guide
Contractionary monetary policy - Answer✔✔-REDUCES the money supply. The Fed may decide to take a
contractionary approach by INCREASING the interest rates. Indicates a shift in AD to the left to full
employment, and reduce inflationary pressures
Cost Push Inflation - Answer✔✔-increases in the price level (inflation)resulting from an increase in
resource costs (for example, raw material prices) and hence in per unit production costs; inflation caused
by reductions in aggregate supply
Crowding out effect - Answer✔✔-the offset in aggregate demand that results when expansionary fiscal
policy raises the interest rate and thereby reduces investment spending
Debt Deflation - Answer✔✔-the reduction in aggregate demand arising from the increase in the real
burden of outstanding debt caused by deflation
Debt GDP Ratio - Answer✔✔-is the ratio between a country's government debt and its gross domestic
product (GDP)
Demand pull inflation - Answer✔✔-is asserted to arise when aggregate demand in an economy outpaces
aggregate supply.
ex) Economists will often say that demand-pull inflation is a result of too many dollars chasing too few
goods.
Page 1/7
, EMILLECT 2024/2025 ACADEMIC YEAR ©2024 EMILLECT. ALL RIGHTS RESERVED. FIRST PUBLISH OCTOBER 2024.
Discretionary Monetary Policy - Answer✔✔-deliberate changed in any of the Fed tools to create counter
cyclical pressures to encourage expansion or dampen inflation
ex)
the use of changes in the interest rate or the money supply to stabilize the economy
Disinflation vs. Deflation - Answer✔✔-Disinflation is an inflation rate that is decreasing but still >0.
Deflation is a negative inflation rate
ex) A slowing in the rate of price inflation
Equation of Exchange - Answer✔✔-MV = PQ, where M is the money supply, V is the velocity of money, P
is the price level, and Q is the quantity of output of goods and services produced in an economy.
ex)
the equation says that nominal GDP (P * Q) is equal to the quantity of money (M) multiplied by the
number of times each dollar is spent in a year (V)
Expansionary Monetary Policy - Answer✔✔-A shift in monetary policy designed to stimulate aggregate
demand. Bond purchases by the Fed, the creation of additional bank reserves, and an increase in the
growth rate of the money supply generally indicate a shift to a more expansionary monetary policy.
Fiscal Policy Lags - Answer✔✔-is the time between the beginning of recession or inflation and the
certain awareness that is actually happening.
Page 2/7
AP Macroeconomics Unit 5 Study Guide
Contractionary monetary policy - Answer✔✔-REDUCES the money supply. The Fed may decide to take a
contractionary approach by INCREASING the interest rates. Indicates a shift in AD to the left to full
employment, and reduce inflationary pressures
Cost Push Inflation - Answer✔✔-increases in the price level (inflation)resulting from an increase in
resource costs (for example, raw material prices) and hence in per unit production costs; inflation caused
by reductions in aggregate supply
Crowding out effect - Answer✔✔-the offset in aggregate demand that results when expansionary fiscal
policy raises the interest rate and thereby reduces investment spending
Debt Deflation - Answer✔✔-the reduction in aggregate demand arising from the increase in the real
burden of outstanding debt caused by deflation
Debt GDP Ratio - Answer✔✔-is the ratio between a country's government debt and its gross domestic
product (GDP)
Demand pull inflation - Answer✔✔-is asserted to arise when aggregate demand in an economy outpaces
aggregate supply.
ex) Economists will often say that demand-pull inflation is a result of too many dollars chasing too few
goods.
Page 1/7
, EMILLECT 2024/2025 ACADEMIC YEAR ©2024 EMILLECT. ALL RIGHTS RESERVED. FIRST PUBLISH OCTOBER 2024.
Discretionary Monetary Policy - Answer✔✔-deliberate changed in any of the Fed tools to create counter
cyclical pressures to encourage expansion or dampen inflation
ex)
the use of changes in the interest rate or the money supply to stabilize the economy
Disinflation vs. Deflation - Answer✔✔-Disinflation is an inflation rate that is decreasing but still >0.
Deflation is a negative inflation rate
ex) A slowing in the rate of price inflation
Equation of Exchange - Answer✔✔-MV = PQ, where M is the money supply, V is the velocity of money, P
is the price level, and Q is the quantity of output of goods and services produced in an economy.
ex)
the equation says that nominal GDP (P * Q) is equal to the quantity of money (M) multiplied by the
number of times each dollar is spent in a year (V)
Expansionary Monetary Policy - Answer✔✔-A shift in monetary policy designed to stimulate aggregate
demand. Bond purchases by the Fed, the creation of additional bank reserves, and an increase in the
growth rate of the money supply generally indicate a shift to a more expansionary monetary policy.
Fiscal Policy Lags - Answer✔✔-is the time between the beginning of recession or inflation and the
certain awareness that is actually happening.
Page 2/7
