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Unit 4 money and banking, from your own notes
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Money is what money does, and the exam tests the functions
Medium of exchange, unit of account, store of value: an asset counts as money by performing those jobs, and the measures widen from cash to deposits by liquidity. Scenario questions name an asset and ask which function it serves or fails, inflation eroding the store of value being the recurring case.
Banks multiply deposits, and the multiplier is a ceiling
Under fractional reserves a bank keeps a share and lends the rest, the loan becomes a new deposit elsewhere, and the chain sums toward one over the reserve ratio. The exam grades the ceiling logic: the multiplier assumes every loan returns as a deposit and banks lend fully, so the real expansion runs below it.
The money market sets the nominal rate, so draw it first
Money demand slopes down against the nominal interest rate, money supply stands vertical where policy put it, and the crossing is the rate. Income shifts demand; the central bank shifts supply. Unit 4's graph questions are this diagram plus one shift, and the credited answer names the shift, the new rate, and the direction in one chain.
Two operating regimes, two chains, and the exam asks both
In limited reserves, an open market purchase adds bank reserves, expands lending and lowers the rate. In ample reserves, reserves are plentiful and the central bank steers by administered rates, chiefly interest on reserves: raise it and banks hold rather than lend, lifting market rates. Name the regime before naming the tool, because the mechanisms differ.
Bond prices and rates are one lever seen from two ends
A bond pays fixed amounts, so when market rates rise, existing bonds' fixed payments are worth less and their prices fall; when rates fall, prices rise. The inverse relation is definitional, not empirical, and the exam asks it both directly and inside open market chains, where buying bonds lifts their price and lowers the rate in the same breath.
What to photograph for Financial Sector
Your money market graphs and regime chains. Related: Unit 3, photo to quiz and pricing.
Sources used on this page
- College Board, AP Macroeconomics
- Money supply
- Fractional-reserve banking
- Open market operation
- Monetary policy
- Active recall
- Spaced repetition
- Testing effect
- Forgetting curve
- Generation effect
- Judgment of learning
- Metacognition
- Desirable difficulty
- Distributed practice
- Formative assessment
- Flashcard
- Cloze test
- Multiple choice
- Test (assessment)
- Educational assessment
- Advanced Placement
- Curriculum
- Study skills
- Study guide
- Note-taking
- Overlearning
- Instructional scaffolding
- Item analysis
- Mastery learning
| Action | Regime | Chain to the rate |
|---|---|---|
| Open market purchase | Limited reserves | Reserves up, lending up, rate down |
| Open market sale | Limited reserves | Reserves down, lending down, rate up |
| Raise interest on reserves | Ample reserves | Holding beats lending, rates up |
| Lower interest on reserves | Ample reserves | Lending beats holding, rates down |
| Income rises | Either | Money demand right, rate up |
| Bond prices rise | Either | Rates fell, definitionally |
What does AP Macro Unit 4 cover?
Money and its functions, fractional reserve banking and the multiplier, the money market, and central bank policy in both reserve regimes.
What are the three functions of money?
Medium of exchange, unit of account and store of value. Questions test which function an asset performs or loses.
How does the money multiplier work?
Banks lend excess reserves, loans return as deposits, and the chain sums toward one over the reserve ratio, a ceiling rather than a guarantee.
What is the difference between the two reserve regimes?
Limited reserves steer rates by changing reserve quantities through open market operations; ample reserves steer by administered rates, chiefly interest on reserves.
Why do bond prices fall when rates rise?
A bond's payments are fixed, so higher market rates make those fixed payments worth less, and the price adjusts down.
Can I build questions from my own Unit 4 notes?
Yes. A photographed page or an uploaded PDF keeps the questions bounded: they come from what you gave, not from the rest of the course.
Last updated: 2026-08-15