Aim for FiveMacroeconomics

Short free-response question

Money, bonds, and the money market

  • Unit 4
  • 5 points
  • About 12 minutes

A shorter question on one or two models, often with data in a table. You might calculate something like an unemployment rate, real GDP or the spending change needed to close a gap, draw a labeled graph (described in words on this site), and explain an effect. On the exam: Questions 2 and 3 of 3 in Section II; each is worth a quarter of the section score, with about 12 minutes suggested for each. A four-function calculator is allowed.

The question

The economy of Granmoor has a banking system with limited reserves.

Suggested time: 12 minutes

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Part (a)

1 point

A resident of Granmoor moves $2,000 from a checking account into a 12-month certificate of deposit (a small time deposit). Identify the effect of this transfer on M1 and on M2.

0 / 2,500 characters

Part (b)

1 point

A store in Granmoor posts the prices of all its goods in Granmoor's currency so shoppers can compare them. Identify the function of money this illustrates.

0 / 2,500 characters

Part (c)

1 point

Which is more liquid: money in a checking account or a corporate bond? Explain.

0 / 2,500 characters

Part (d)

2 points

Real GDP in Granmoor increases. Describe a correctly labeled graph of the money market in Granmoor, and show the effect of the increase in real GDP on the nominal interest rate.

0 / 2,500 characters

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