AP Macroeconomics — Unit 4: Financial Sector

What AP Macroeconomics Unit 4 covers

The College Board Course and Exam Description breaks Unit 4 into 9 topics:

1. 4.1 Financial Assets
2. 4.2 Nominal vs. Real Interest Rates
3. 4.3 Definition
4. Measurement
5. and Functions of Money
6. 4.4 Banking and the Expansion of the Money Supply
7. 4.5 The Money Market
8. 4.6 Monetary Policy
9. 4.7 The Loanable Funds Market

AP Macroeconomics Unit 4 practice questions

• You can earn 8% on a stock but might lose it all, or earn 1% in a savings account with zero risk. Why can’t you get high returns AND safety AND instant access all at once?

  The three attributes — liquidity, return, and risk — always trade off. High return means high risk and/or low liquidity — you can optimize for two, not all three.

• Rank these from most liquid to least liquid: stocks, savings account, cash, corporate bonds.

  Cash, then savings, then stocks, then corporate bonds (least liquid). Cash is already money; bonds are hardest to sell quickly without a discount.

• Interest rates in the economy rise. What happens to the price of previously issued bonds?

  Bond prices fall, because new bonds now offer higher, more attractive rates. Existing lower-rate bonds drop in price until their yield matches the new rate.

• What is the opportunity cost of holding money (cash)?

  The interest you give up by not holding bonds instead. Every dollar held as cash is a dollar not earning interest elsewhere.

• What is the Fisher equation relating nominal interest rates, real interest rates, and inflation?

  Nominal = real rate + expected inflation. Rearranged: real rate = nominal − inflation. The nominal rate is advertised; the real rate is purchasing power.

• Expected inflation rises from 2% to 5%. What happens to nominal interest rates if the desired real rate stays the same?

  Nominal rates rise to about 7% to keep the real return steady. Wanting a 2% real return with 5% expected inflation, lenders charge 7% nominal.

• A bank offers a 5% interest rate on a loan. Actual inflation turns out to be 3%. What is the real interest rate the bank earned?

  Real rate = 5% − 3% = 2%. The bank earned 5% in dollars but lost 3% to inflation, so their actual gain in purchasing power was 2%.

• Bitcoin swings 20% in a single week. Why does that make it a worse form of money than US dollars — even though you can buy things with both?

  Because money must be a reliable store of value that holds its worth. Bitcoin's volatility breaks that; dollars stay stable enough to save and price things.

+ 24 more AP Macroeconomics cards in the app.

Key terms in Unit 4

These 12 terms show up in the Unit 4 cards. Each one links to its definition in the AP Macroeconomics key-term reference.

• crowding out
• discount rate
• equilibrium
• federal funds rate
• fiscal policy
• loanable funds market
• monetary policy
• money supply
• multiplier effect
• open market operations
• opportunity cost
• reserve requirement