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AP Macroeconomics Unit 4: The Financial Sector

Connect financial assets, real and nominal interest rates, money, banks, the money market, monetary policy, national saving, and loanable funds.

Syllabus
Effective Fall 2025
Course
AP Macroeconomics

Covered syllabus points

4.1 Financial Assets4.2 Nominal v. Real Interest Rates4.3 Definition, Measurement, and Functions of Money4.4 Banking and the Expansion of the Money Supply4.5 The Money Market4.6 Monetary Policy4.7 The Loanable Funds Market

Unit 4: Financial Sector question 1

[Maximum number: 5]

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 ]

Unit 4: Financial Sector question 2

[Maximum number: 3]

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 ]

Unit 4: Financial Sector question 3

[Maximum number: 5]

The following is a simplified balance sheet for Mi Tierra Bank in the United States.

Mi Tierra Bank

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 ]

Unit 4: Financial Sector question 4

[Maximum number: 3]

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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