Page 317 - Krugmans Economics for AP Text Book_Neat

but consistent with, another model known as the loanable funds model of the interest
rates, which is developed in the next module. In the loanable funds model, we will see
that the interest rate matches the quantity of loanable funds supplied by savers with
the quantity of loanable funds demanded for investment spending. Section 5 The Financial Sector

Module 28 AP Review
Solutions appear at the back of the book.

Check Your Understanding
1. Explain how each of the following would affect the quantity of 2. How will each of the following affect the opportunity cost or
money demanded, and indicate whether each change would benefit of holding cash? Explain.
cause a movement along the money demand curve or a shift of a. Merchants charge a 1% fee on debit/credit card transactions
the money demand curve. for purchases of less than $50.
a. Short -term interest rates rise from 5% to 30%. b. To attract more deposits, banks raise the interest paid on
b. All prices fall by 10%. six-month CDs.
c. New wireless technology automatically charges supermarket c. Real estate prices fall significantly.
purchases to credit cards, eliminating the need to stop at the d. The cost of food rises significantly.
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.

Tackle the Test: Multiple-Choice Questions
1. A change in which of the following will shift the money 4. Which of the following is true regarding short-term and
demand curve? long-term interest rates?
I. the aggregate price level a. Short-term interest rates are always above long-term
II. real GDP interest rates.
III. the interest rate b. Short-term interest rates are always below long-term
a. I only interest rates.
b. II only c. Short-term interest rates are always equal to long-term
c. III only interest rates.
d. I and II only d. Short-term interest rates are more important for
e. I, II, and III determining the demand for money.
e. Long-term interest rates are more important for
2. Which of the following will decrease the demand for money?
determining the demand for money.
a. an increase in the interest rate
b. inflation 5. The quantity of money demanded rises (that is, there is a
c. an increase in real GDP movement along the money demand curve) when
d. an increase in the availability of ATMs a. the aggregate price level increases.
e. the adoption of Regulation Q b. the aggregate price level falls.
c. real GDP increases.
3. What will happen to the money supply and the equilibrium
d. new technology makes banking easier.
interest rate if the Federal Reserve sells Treasury securities?
e. short-term interest rates fall.
Money supply Equilibrium interest rate
a. increase increase
b. decrease increase
c. increase decrease
d. decrease decrease
e. decrease no change

module 28 The Money Market 275