AP Macro Unit 4 Review: Financial Sector
AP Macro Unit 4 covers money, banking, the money market, monetary policy, and the loanable funds market. Worth 18–23% of the exam, it is where the Fed lives — and where students most often mix up which interest-rate graph to draw.
What's in Unit 4
- 1Financial assets (money vs bonds; prices and interest rates)
- 2Nominal vs real interest rates (Fisher equation)
- 3Definition, measurement, and functions of money
- 4Banking and the expansion of the money supply (money multiplier)
- 5The money market (nominal interest rate)
- 6Monetary policy (open market operations, reserve requirements, discount rate, interest on reserves)
- 7The loanable funds market (real interest rate)
Study this unit free on EconLearn
The Federal Reserve, interest rates, and money supply tools.
Full lesson, practice questions & flashcards →Saving, investment, real interest rates, and crowding out.
Full lesson, practice questions & flashcards →What to master for the exam
- Money market vs loanable funds: money market uses the NOMINAL rate and money supply is vertical; loanable funds uses the REAL rate and is driven by saving and borrowing.
- Trace expansionary monetary policy: Fed buys bonds → money supply right → nominal rate falls → investment rises → AD shifts right.
- Use the money multiplier (1/reserve ratio) on deposit-expansion questions, and know bond prices move inversely with interest rates.
- Apply the Fisher equation: real rate ≈ nominal rate − expected inflation.
AP Macro Unit 4: common questions
What is on AP Macro Unit 4?
Money and financial assets, nominal vs real interest rates, how banks expand the money supply, the money market graph, the Fed's monetary policy tools, and the loanable funds market. It is worth 18–23% of the AP Macro exam.
When do you use the money market vs the loanable funds market?
Use the money market when the question involves the money supply, the Fed, or monetary policy — it determines the nominal interest rate. Use loanable funds when the question involves saving, investment demand, or government borrowing/deficits — it determines the real interest rate. Drawing the wrong graph is one of the most common FRQ point losses in this unit.