Wednesday, March 18, 2015

Fiscal Policy (Loanable Funds) FRQ Cheat Sheet

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.