AP Macroeconomics Unit 4: Financial Sector and Money Markets

Study Guide Overview

Financial Sector (15-20%)

Money, banking, and financial markets

- Definition of financial assets: money, stocks,

bonds

- Time value of money (present and future value)

- Measures of money supply

- Banks and creation of money

- Money demand

- Money market and the equilibrium nominal

interest rate

Loanable funds market

- Supply of and demand for loanable funds

- Equilibrium real interest rate

- Crowding out

Central bank and control of the money supply

- Tools of central bank policy

- Quantity theory of money

- Real versus nominal interest rates

Guiding questions

1. What is the relationship between savings and investment spending?

2. What are the four principal types of financial assets, and what is the purpose of each?

3. What are the functions and roles of money? How is the amount of money in the economy measured?

4. What is meant by “time value of money” and how does this influence decision making?

5. What is the role of banks, and how are they regulated? How do banks serve to create money?

6. What is the structure and role of the Federal Reserve System?

7. How does the Fed respond to financial crises? What tools does it use?

8. What is the relationship between liquidity preference and short run interest rates?

9. What is the purpose of the loanable funds market, and how does it operate?

10. How can the two models of interest rates be reconciled?

Important Formulas Money Multiplier = 1/ Required Reserve Ratio Money supply ● Velocity = Price level ● Quantity of output

Vocabulary

1. Bonds

2. Contractionary monetary

policy

3. Demand deposit

4. Discount rate

5. Excess reserves

6. Federal funds rate

7. Fractional reserve banking

8. Interest rate

9. Loanable funds market

10. M1

11. M2

12. M3

13. Monetary policy

14. Money demand

15. Money market

16. Money supply

17. Open-market operation

18. Required reserves

19. Actual reserves

20. Balance sheet

21. Capital inflow

22. Commodity money

23. Crowding out

24. Federal funds market

25. Fiat money

26. Financial asset

27. Financial risk

28. Fisher effect

29. Leverage

30. Liability

31. Liquidity

32. Medium of exchange

33. Money multiplier

34. National savings

35. Near-money

36. Physical asset

37. Rate of return

38. Reserve ratio

39. Store of value

40. Trade balance

41. Velocity of money

Readings from textbook Chapters 13-15

10/28 – FRQ #2, pages 244-250 10/29 – pages 251-260 10/30 – Ch. 13 Read Assign. Due, pages 265-273 10/31 – pages 274-278 11/1 – Ch. 14 Read Assign. Due, pages 284-290 11/4 – pages 291-301

11/5 – No reading/STUDY! 11/6 –Vocabulary quiz 11/7 – Ch. 15 Read Assign Due 11/8 – No reading/STUDY! 11/11 – Review Day 11/12 – Tentative Test Date

This unit corresponds to Chapters 11-12 in the Welker book.