Download module 28 review

AP Macroeconomics
MODULE 28 REVIEW
Check Your Understanding
1. Explain how each of the following would affect the quantity of money demanded, and indicate whether each change
would cause a movement along the money demand curve or a shift of the money demand curve.
a. Short-term interest rates rise from 5% to 30%.
b. All prices fall by 10%.
c. New wireless technology automatically charges supermarket purchases to credit cards, eliminating the
need to stop at the cash register.
d. In order to avoid paying taxes, a vast underground economy develops in which workers are paid their
wages in cash rather than with checks.
2. How will each of the following affect the opportunity cost or benefit of holding cash? Explain.
a. Merchants charge a 1% fee on debit/credit card transactions for purchases of less than $50.
b. To attract more deposits, banks raise the interest paid on six-month CDs.
c. Real estate prices fall significantly.
d. The cost of food rises significantly.
Tackle the Test: Multiple-Choice Questions
1. A change in which of the following will shift the money demand curve?
I. the aggregate price level
II. real GDP
III. the interest rate
a. I only
b. II only
c. III only
d. I and II only
e. I, II and III
2. Which of the following will decrease the demand for money?
a. an increase in the interest rate
b. inflation
c. an increase in real GDP
d. an increase in the availability of ATMs
e. the adoption of Regulation Q.
3. What will happen to the money supply and the equilibrium interest rate if the Federal Reserve sells Treasury
securities?
Money Supply
Equilibrium Interest Rate
a. Increase
Increase
b. Decrease
Increase
c. Increase
Decrease
d. Decrease
Decrease
e. Decrease
No Change
4. Which of the following is true regarding short-term and long-term interest rates?
a. Short-term interest rates are always above long-term interest rates.
b. Short-term interest rates are always below long-term interest rates.
c. Short-term interest rates are always equal to long-term interest rates.
d. Short-term interest rates are more important for determining the demand for money.
e. Long-term interest rates are more important for determining the demand for money.
5. The quantity of money demanded rises (that is, there is a movement along the money demand curve) when
a. the aggregate price level increases.
b. the aggregate price level falls.
c. real GDP increases.
d. new technology makes banking easier.
e. short-term interest rates fall.
Tackle the Test: Free-Response Questions (answer on loose leaf)
1. Draw three correctly labeled graphs of the money market. Show the effect of each of the following three changes on
a separate graph.
a. The aggregate price level increases.
b. Real GDP falls.
c. There is a dramatic increase in online banking.
2. Draw a correctly labeled graph showing equilibrium in the money market. Select an interest rate below the
equilibrium interest rate and explain what occurs in the market at that interest rate and how the market will
eventually return to equilibrium.