AP Macroeconomics Unit 4 Financial Sector Questions
Connect financial assets, banks, money and loanable-funds markets with interest rates, monetary policy, investment, output, and prices.
- Syllabus
- Effective Fall 2022
- Course
- AP Macroeconomics
Exam points
- compare financial assets and apply the inverse relationship between interest rates and bond prices
- calculate nominal and real interest rates and analyse unexpected-inflation gains
- identify money's functions and calculate M1, M2, or monetary-base measures
- read bank balance sheets and calculate required reserves, excess reserves, and lending capacity
- use the money multiplier while accounting for cash leakage and excess-reserve holdings
Covered syllabus points
Question 1
Assume the economy of Jenland is in short-run equilibrium at a real output level above full-employment real output.
Question (a)
(a)
The banking system in Jenland has ample reserves. Identify a specific monetary policy action that the central bank of Jenland would implement to return the economy to full employment in the short run.
[ 1 ]
Question (b)
(b)
Draw a correctly labeled graph of the reserve market for Jenland, and show the effect of the central bank's action identified in part A on the policy rate.
[ 2 ]
Question (c)
(c)
Based on the change in the interest rate shown on your graph in part B, will each of the following increase, decrease, or remain the same in Jenland in the short run?
[ 2 ]
Question (i)
(i)
The price of previously issued bonds
[ 1 ]
Question (ii)
(ii)
The price level. Explain.
[ 1 ]
Question 2
Inflation and expected inflation are important determinants of economic activity.
Question (a)
(a)
Given the increase in the expected rate of inflation from part (b),
[ 2 ]
Question (i)
(i)
will the nominal interest rate on new loans increase, decrease, or remain unchanged?
[ 1 ]
Question (ii)
(ii)
will the real interest rate on new loans increase, decrease, or remain unchanged?
[ 1 ]
Question (b)
(b)
Assume that the nominal interest rate is 8 percent. Borrowers and lenders expect the rate of inflation to be 3 percent, and the growth rate of real gross domestic product is 4 percent. Calculate the real interest rate.
[ 1 ]
Question 3
The following is a simplified balance sheet for Mi Tierra Bank in the United States.
Mi Tierra Bank
Question (a)
(a)
What is the reserve requirement?
[ 1 ]
Question (b)
(b)
Assume that Luis withdraws $5,000 in cash from his checking account at Mi Tierra Bank.
[ 3 ]
Question (i)
(i)
By how much will Mi Tierra Bank's reserves change based on Luis' withdrawal?
[ 1 ]
Question (ii)
(ii)
What is the initial effect of the withdrawal on the M1 measure of money supply? Explain.
[ 1 ]
Question (iii)
(iii)
As a result of the withdrawal, what is the new value of excess reserves on the balance sheet of Mi Tierra Bank based on the reserve requirement from part (a) ?
[ 1 ]
Question (c)
(c)
Assume that the next day John withdraws from Mi Tierra Bank an amount that exceeds the bank's excess reserves. Assuming that no loans are called in, how can Mi Tierra Bank cover its required reserves?
[ 1 ]
Question 4
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.
Question (a)
(a)
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.
[ 1 ]
Question (b)
(b)
Draw a correctly labeled graph of the money market and show the effect of the change in the money supply identified in part (a) on the nominal interest rate.
[ 2 ]
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