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2. ____/25
3. ____/10
4. ____/15
5. ____/20

Total: ______/120

Name: ______________________
Period: __________

AP Macroeconomics Problem Set #4


Money, Banking and Monetary Policy

1. ( ____/50) Money, Banking and Financial Markets


Define and give specific examples of each of the following:
a. Definition of financial assets: money, stock and bonds ( ____/10)
b. Time Value of Money (present and future value). ( ____/5)
c. Measures of Money Supply. ( ____/5)
d. How banks create money. ( ____/5)
e. Money Demand. ( ____/5)
f. Money Market Make sure to include a graph! ( ____/10)
g. Loanable Funds Market Make sure to include a graph! ( ____/10)

2.

( ____/25) Central Bank and Control of the Money Supply


Define and give specific examples of each of the following:
a. Tools of Central Bank Policy Make sure to provide a complete response here! ( ____/15)
b. Quantity Theory of Money ( ____/5)
c. Real vs. Nominal Interest Rates ( ____/5)

3. (_____/10) Complete the attached Monetary Policy Study Guide

4. ( ____/15 Points) Practice Free Response Questions


Complete the attached FRQs. Make sure to provide complete answers and label all graphs completely.
FRQ #1: ( ____/5)
FRQ #2: ( ____/5)
FRQ #3: (____/5)
5. (_____/20) STAMP ON PROBLEM SET

APMacroeconomicsProblemSet4

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Name:
------------Team:
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Monetary Policy Study Guide


Key Concepts
1. What are the three functions of money?
2. Explain why a small increase in bank deposits causes a larger increase in the money supply and
identify the equation for the Money Multiplier?

3. EXPLAIN the three tools of monetary policy and identify how each increase or decreases the Ms.
a. Reserve Requirement-

4. In three graphs, show the effect of an increase in Money Supply


Money Market

Investment Market

5. In three graphs, show the effect of a decrease in Money Supply


Money Market
Investment Market

6. Use the concept of the loanable funds market to explain how the government crowds out investors
when it deficit spends.

2. In Country Z, the required reserve ratio is 10 percent. Assume that the central bank sells $50 million in
government securities on the open market.
(a) Calculate each of the following.
(i) The total change in reserves in the banking system

(ii) The maximum possible change in the money supply


(b) Using a correctly labeled graph of the money market, show the impact of the central bank's bond sale
on the nominal interest rate.
(c) What is the impact of the central bank's bond sale on the equilibrium price level in the short run?
(d) As a result of the price level change in part (c), are people with fixed incomes better off, worse off, or
unaffected? Explain.

~. (a) Assume that businesses are granted a tax credit on spending for machinery. Using a correctly labeled graph
of the loanable funds market, show the effect of the business sector's response on the real interest rate.
(b) Now assume instead that the tax rate on interest income from household savings is lowered and there is no
change in government budget deficit. Using a second correctly labeled graph of the loanable funds market,
show the effect of the households' response on the real interest rate.
(c) Given your answer to part (b), explain what will happen to the country's production possibilities curve in
the long run.