AP Macroeconomics : How to find money supply

Study concepts, example questions & explanations for AP Macroeconomics

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Example Questions

Example Question #1 : Money Supply

Which of the following is not a part of M1?

Possible Answers:

All of these are a part of M1.

Traveler's checks

A check that has been written but not yet deposited

Paper money

Money in a personal savings account

Correct answer:

Money in a personal savings account

Explanation:

Money in a personal savings account would not be considered a part of M1. The reason for this is that money in a savings account is considered to be lacking in liquidity - as a result, money in a savings account is considered to belong to M2.

Example Question #1 : How To Find Money Supply

An increase in the money supply curve would most likely result in which of the following situations?

Possible Answers:

No effect on the real interest rate

A decrease in the quantity of money available

A decrease in the real interest rate

An increase in the real interest rate

Correct answer:

A decrease in the real interest rate

Explanation:

As with any supply curve increase, price decreases and quantity increases.

Since in the market for money, price is referred to as the interest rate (i.e. the price of borrowing money), the decrease in price is interpreted as a decrease in the interest rate.

An increase (not a decrease) in the quantity of money available would be expected after an increase in the money supply curve.

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