**2010 AP Macro Exam (FOREX) Multiple Choice**

**Answer (B)**

**Answer (A)**

**Answer (B)**

**Answer (A)**

**Answer (A)**

**Answer (D)**

If the Government is spending then the Real Interest rate is increasing.

FRQ's that ask about government spending always want to know the real interest rate. The loanable funds graph tell you whether the real interest rate is rising or falling.

Hint, if the government is spending the RIR is increasing.

Remember that Keynesian view spending is a short-term fix for a recession.

The reasoning is a bit circular because the idea of a reduction in government is not entertained along with the reduction in taxes.

Fiscal Policy (Taxes) Real Interest Rates

OK, correction ,, Tax cuts and RIR

Look at it from a balanced budget starting point.

Tax cuts require the government to deficit spend as we don't assume there could be a reduction in government.**(faulty and circular thinking in my libertarian view)**

So, Taxes decrease and therefore government spending must increase to make up the lack of taxes being collected. The Real Interest Rate increases...

OK, correction ,, Tax cuts and RIR

Look at it from a balanced budget starting point.

Tax cuts require the government to deficit spend as we don't assume there could be a reduction in government.

So, Taxes decrease and therefore government spending must increase to make up the lack of taxes being collected. The Real Interest Rate increases...

Monetary Policy (money market, loanable funds, investment, AD/AS) & real interest rates

So lately I've been trying to increase my understanding of how fiscal and monetary policies work in tandem. I've been a bit dismayed as many students can't understand the Real interest Rate questions on the AP exam and I haven't found any resources that string it all together.

So I've spent a few days working through the past FRQ's and Multiple choice sections of exams in hopes of clarifying exactly what the college board is testing.

1st Monetary Policy

On the left is an explanation of the causal chain of events. On the right is a graphical illustration of the left side. Sometimes seeing what happens in graphs makes the left side a bit more clear. Hope this helps,,, any mistakes, corrections, comments,, wcwaugh@aol.com

So lately I've been trying to increase my understanding of how fiscal and monetary policies work in tandem. I've been a bit dismayed as many students can't understand the Real interest Rate questions on the AP exam and I haven't found any resources that string it all together.

So I've spent a few days working through the past FRQ's and Multiple choice sections of exams in hopes of clarifying exactly what the college board is testing.

1st Monetary Policy

On the left is an explanation of the causal chain of events. On the right is a graphical illustration of the left side. Sometimes seeing what happens in graphs makes the left side a bit more clear. Hope this helps,,, any mistakes, corrections, comments,, wcwaugh@aol.com

Fiscal Policy (Loanable Funds) FRQ Cheat Sheet

Some students have a conceptual problem with understanding this section (to many things to think about at this point in the course I think.

Anything that makes money flow into the commercial banks is an increase in the supply of loanable funds and therefore the real interest rate will fall, (more of a supply of something the price falls, ) more money supplied and the price (interest rate) will fall.

Notice that each question is in two places.

2014 is in the Supply decreasing**(interest rates rise)** and in demand increasing __(interest rates rise)__

2013 is in the supply increasing**(interest rates fall)** and the Demand decreasing section **(interest rates fall).**

Both answers would be correct unless on the AP exam they ask you specifically what happens to supply. 2014 would then be a supply increasing explanation with a correct graph.

Some students have a conceptual problem with understanding this section (to many things to think about at this point in the course I think.

Anything that makes money flow into the commercial banks is an increase in the supply of loanable funds and therefore the real interest rate will fall, (more of a supply of something the price falls, ) more money supplied and the price (interest rate) will fall.

Notice that each question is in two places.

2014 is in the Supply decreasing

2013 is in the supply increasing

Both answers would be correct unless on the AP exam they ask you specifically what happens to supply. 2014 would then be a supply increasing explanation with a correct graph.

So I have started to try and create a google site for all of my information. Don't laugh.

I'm posting a link to the google site so you can download the FRQ's & MC questions for the Reserve Requirements (T-accounts) for the Monetary Policy section of the course.

Here is the link,, problems? e-mail me wcwaugh@aol.com

mjmfoodie - video - Reserve Requirements (Money Creation)

Excellent summary of monetary policy and how banks create money.

Take the time to read it as it touches upon most of what you will need to do well on the AP Exam.

Let's go through a few and see if we can understand what the college board is testing.

So, The Reserve Requirement is 20% (they must keep on reserve 20% of the

If the RR is 20% or .2 and the multiplier is (1/RRR) = 1/.2 = 5 ,, so the multiplier is 5

If there is $100 in

- Don't get confused,, you need the 20% RR to figure out the multiple (1/.2 = 5)
**Not**to subtract the 20% from the $100.- As the $100 dollars is already in
**excess reserves**. - If the $100 dollars had been a
**checking deposit**(deposited by someone) then you would have subtracted the $20 from the $100 and multiplied $80 x 5 and the money supply would have increased by $400. - AS the amount was already in
**excess reserves**, the whole amount in excess reserves is multiplied by the 5.

So, the RR is 10%,, and the multiplier is (1/RRR) = 1/.1 = **10 is the multiplier.**

There is a **checkable deposit of $100** - (the RRR = 10% of $100** = $10 dollars**) = **$100 - $10 = $90**

So, now we have $90 in **excess reserves**, & the money supply is expanded by the multiplier x the change in the **excess reserves**.

$90 x 10 = $900

- You needed the RR 10% to have the multiple
- Since it was a deposit you have to subtract out the RR
- The difference is it goes into excess reserves and can be re-loaned out again.
- This is the essence of fractional reserve banking.
**What if the RR had been 20%****If the RR was 20% the multiple would be 5 not 10 like above.****This makes sense as the higher the RR the less money creation (loans) can take place.****20% would be subtracted from the $100 checkable deposit to leave $80****The $80 dollars would be placed in excess reserves to be re-loaned.****Then the MS would increase by 5 x 80 = $400**

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