Money, banking, and how a central bank steers the economy. The functions and measures of money, how banks create money through lending, the money market, monetary policy, and the loanable funds market.
Seven topics from the College Board CED, in order.
Topic 4.1
Financial Assets
Bonds, stocks, and other financial assets — how they're valued and how interest rates and bond prices move inversely.
Topic 4.2
Nominal vs. Real Interest Rates
Adjusting the nominal interest rate for expected inflation to find the real cost of borrowing or return on saving.
Topic 4.3
Definition, Measurement & Functions of Money
Medium of exchange, store of value, unit of account — and how M1 and M2 measure the money supply.
Topic 4.4
Banking & the Expansion of the Money Supply
Fractional reserve banking, bank balance sheets, and how new loans expand the money supply (including the money multiplier in a limited-reserves setting).
Topic 4.5
The Money Market
Money demand and money supply determining the nominal interest rate, and how the central bank shifts this market.
Topic 4.6
Monetary Policy
The central bank's tools in the ample-reserves framework (administered rates like interest on reserves) and the limited-reserves framework (open market operations, reserve requirements, the discount rate).
Topic 4.7
The Loanable Funds Market
How the supply of saving and the demand for borrowing determine the real interest rate.
About Unit 4
Unit 4 shifts the focus from the real side of the economy (Units 2–3) to the financial sector — money, banks, and the central bank's tools for steering the economy. You'll learn what actually counts as "money," how the banking system multiplies an initial deposit into a much larger expansion of the money supply, and how the Federal Reserve uses monetary policy to influence interest rates and, ultimately, aggregate demand.
This unit is roughly 18–23% of the AP Macro exam and takes about 15–18 class periods. The money market graph and the loanable funds market graph are tested constantly, and Unit 4's monetary policy tools pair directly with Unit 3's fiscal policy tools — together they form the two main levers of macroeconomic stabilization covered in Unit 5.
Three ideas anchor Unit 4 and recur across the whole course — this unit connects the College Board's Markets (MKT), Macroeconomic Models (MOD), and Macroeconomic Policies (POL) Big Ideas:
Key Idea 1
Money facilitates exchange — and trust makes it work
Key Idea 2
Banks create money — through lending, not printing
Key Idea 3
Central banks steer the economy through interest rates