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AP Macroeconomics 4.4 Banking and the Expansion of the Money Supply Questions

Analyse fractional-reserve banks with balance sheets, reserve calculations, lending chains, and limits on the maximum expansion of money and deposits.

Syllabus
Effective Fall 2022
Course
AP Macroeconomics

Exam points

  • read a bank balance sheet and classify reserves, loans, deposits, and owners' equity
  • calculate required and excess reserves, the reserve ratio, and an individual bank's loan capacity
  • update a bank's balance sheet after cash deposits, withdrawals, lending, or reserve changes
  • use the simple money multiplier to calculate system-wide deposits, loans, and money-supply changes
  • distinguish a cash redeposit from a new reserve injection when calculating money creation

Covered syllabus points

POL-2.A—a. Define key terms related to the banking system and the expansion of the money supply. b. Explain how the banking system creates…

Question 1

[Maximum number: 1]

Assume that commercial banks must hold a minimum of 20% of their deposits as reserves. Now suppose that the central bank of the country sells $100,000 of government bonds to commercial banks.

Calculate the maximum change and state the direction of change in the money supply as a result of the central bank bond sale. Show your work.

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