AP_Krugman_Textbook

276 section 5 The Financial Sector

Tackle the Test: Free-Response Questions

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.

Answer (6 points)

1 point:The vertical axis is labeled “Interest rate” or “r” and the horizontal
axis is labeled “Quantity of money.”

1 point:Money supply is vertical and labeled.

1 point:Money demand is negatively sloped and labeled.

1 point:a. Money demand shifts right.

1 point:b. Money demand shifts left.

Quantityof

money

Interest
rate, r

MD 2 MD^1

MS

Quantityof

money

Interest
rate, r

MD 1 MD^2

MS

1 point:c. Money demand shifts left.

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.

Quantityof

money

Interest

rate, r

MD 2 MD^1

MS