Page 318 - Krugmans Economics for AP Text Book_Neat

Tackle the Test: Free-Response Questions
1. Draw three correctly labeled graphs of the money market. 1 point: c. Money demand shifts left.
Show the effect of each of the following three changes on a
Interest
separate graph. rate, r
a. The aggregate price level increases. MS
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.”
MD 2 MD 1
1 point: Money supply is vertical and labeled.
Quantity of
1 point: Money demand is negatively sloped and labeled.
money
1 point: a. Money demand shifts right.
2. Draw a correctly labeled graph showing equilibrium in the
Interest money market. Select an interest rate below the equilibrium
rate, r
interest rate and explain what occurs in the market at that
MS
interest rate and how the market will eventually return to
equilibrium.

MD 1 MD 2

Quantity of
money
1 point: b. Money demand shifts left.

Interest
rate, r
MS

MD 2 MD 1

Quantity of
money

276 section 5 The Financial Sector