APMacro: Practice FRQ


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Assume that a country’s economy is currently at equilibrium along an upward-sloping short-run aggregate supply curve. Suppose that the country’s central bank conducts open-market sale of government bonds. Using a correctly labeled graph of the money market, show how the open-market sale of bonds will affect money supply and interest rate. Indicate whether the interest rate you identified is a real or nominal rate. Under what condition will the nominal interest rate differ from the real interest rate? Using a correctly labeled graph of aggregate demand and aggregate supply, show the short-run effect of the open-market operation on real output and price level. Identify a fiscal policy action that would offset the impact on real output and price level.

Arrows-02-june

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