Econowaugh AP

Sunday, March 15, 2015

Micro & Macro Reviews (Reffonomics)

Wednesday, March 11, 2015

Monetary Policy (Reserve Requirements) FRQ's & MC

Monetary Policy (Reserve Requirements) FRQ's & MC

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.

Money Supply Notes

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

Money Multiplier (Creation) Money Supply Increase

1995 AP Macro Exam

Answer (D) $500

(money already in excess reserves)

So, The Reserve Requirement is 20% (they must keep on reserve 20% of the checkable deposited amount), there is $100 dollars worth of excess reserves, how much money creation can happen within the money supply. (Think: money multiplier)

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 excess reserves we simply take the 100 x 5 = $500 increase in the Money Supply.

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.

2008 AP Macro Exam

Answer (C) $900

(money deposited in checking account)

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

Tuesday, March 10, 2015

Monetary Policy Cheat Sheet

Monetary Policy

Purchasing Power of the US Dollar

M1 Money Supply

Monetary Policy Cheat Sheet

2010 Multiple Choice Questions (FED, Banking, Monetary Policy & Money Creation)

2010 Multiple Choice Questions (FED, Banking, Monetary Policy & Money Creation)

This section, along with AD/AS is the second most tested.
Here are the multiple choice questions for the 2010, AP Macroeconomics exam.

Notice, topics questioned include:
T-accounts, Velocity of Money, Bond Prices, Res. Requirements, Rational Expectations

*(the FRQ's for this section are quite easy compared to the wealth of knowledge you need to be able to answer the Multiple choice)

Answer (A) Reduce Inflation

Answer (A) increase in the nominal output

Answer (C) Interest rates will decline

Answer (C) increasing the reserve requirements

Answer (C) selling bonds on the open market

Answer (B) Rational Expectations

Answer (B) demand deposits

Answer (D) Engage in Open Market Purchases

Answer (B) It falls when interest rates rise, because the opportunity cost of holding money increases.

Answer (B) Increase - Decrease

Answer (D) Decrease - Decrease

Answer (E) Buying Bonds increases the MS, which lowers the interest rate

Answer (E) a decrease of $5 million

Monday, March 9, 2015

Monetary Policy (Money Supply) FRQ Cheat Sheet

Money Supply & The FED (Monetary Policy)

Here is a FRQ cheat sheet for Monetary Policy (money supply) and soon I will add a cheat sheet for this section of the AP Macroeconomics exam.

Notice we can see some trends:

Demand for Money

Increases or decreases based on people's desire to hold more or less currency (Cash)
Incomes change (Income Increases, (C) Increases, (I) increases, (AD) Increases, Output increases, therefore DM Increases)
Income change (Income Decreases, (C) Decreases, (I) Decreases, (AD) Decreases, Output Decreases, therefore DM Decreases)
Show how this effects nominal interest rates and the price level.
How the FED can counteract the effects.

Money Supply

What is the open market operation the FED will use? Expansionary(Buy bonds)
What is the open market operation the FED will use? Contractionary (Sell bonds)
Show what happens to the Nominal Interest Rate.
What happens to the Price Level and the Real Interest Rate?
What happens to Aggregate Demand (AD)?