Assume that the United States begins deficit

Assume that the United States begins deficit spending to fund new social
welfare programs.
a. Using a correctly labeled loanable funds graph, show and explain the
impact of the new spending on real interest rates in the United
States.
b. Explain the impact of the change in interest rates you identified in
part (A) on each of the following:
i. Capital investment
ii. Long-term economic growth
iii. The international value of the U.S. dollar

Question 2 (Essay Worth 15 points)

Meagan deposits $750 from her piggy bank into her checking account at
Regions National Bank. The reserve requirement is 10% and the bank has
no excess reserves.
a. What is the immediate effect on the M1 measure of the money
supply of her deposit? Explain why.
b. What is the amount of money the local bank can lend?
c. Calculate how much money the entire banking system can create.
Show your work.
d. Give two reasons why money creation may not increase by the

amount you identified in (c).
(Calculate means show your work on the AP exam)

Question 3 (Multiple Choice Worth 2 points)

You have an opportunity to purchase season tickets for the local
professional football team. The sales representative shows you a colorcoded picture of the arena. Each color represents a different ticket price.
This best illustrates money used as a

store of value.
medium of exchange.
unit of account.
liquid asset.
liability.

Question 4 (Multiple Choice Worth 2 points)

Fiat money is

backed by gold.
backed by the government’s word.
an economic name for credit cards.
held in federal reserve banks around the United States.
commodity-backed money.

Question 5 (Multiple Choice Worth 2 points)

If you use money as a unit of account, you would be

buying a new radio.
returning a sweater to the department store.
searching the Internet for a deal on a new computer.
withdrawing $500 from your savings account.
putting money in a savings bond.

Question 6 (Multiple Choice Worth 2 points)

If you use money as a store of value, you would be

buying a new radio.
searching the Internet for a deal on a new computer.
charging a new book on your credit card.
withdrawing $500 from your savings account.
putting money in a savings bond.

Question 7 (Multiple Choice Worth 2 points)

Apple™ sells 40,000 iPods™ that were produced last year, to new
customers. As a result,

GDP will increase for this year.
GDP will decrease for this year.
the iPods™ will increase GDP for this year and count as inventory for last
year.
the iPods™ will decrease GDP for this year and count as inventory for last
year.
last year’s GDP was increased by the inventory value of the iPods™, and
this year’s GDP increases by the retail value of the iPods™ less their
inventory value from last year.