Practice a College Board-style free response question on the Financial Sector. Write your response, then reveal the model answer to see exactly what earns each point.
Free Response Question · Unit 4 · Money Creation, the Money Market & Monetary Policy
The country of Marlowe has a required reserve ratio of 20%. First National Bank, located in Marlowe, currently holds exactly its required reserves with no excess reserves. A new customer deposits $2,000 into a checking account at First National Bank.
A
Calculate the amount of excess reserves First National Bank now has as a result of this new deposit. Show your work.
✓ Model answer (earns the point)
Required reserves on the new deposit = 20% × $2,000 = $400. Excess reserves = $2,000 − $400 = $1,600.
Why it scores: Correctly calculates required reserves first, then subtracts to find excess reserves, with the correct numeric answer and units ($1,600). Skipping the required-reserves step is a common error.
B
Calculate the maximum total increase in Marlowe's money supply that could result from this single $2,000 deposit. Show your work.
Why it scores: Correctly calculates the money multiplier, then multiplies by the excess reserves (not the full deposit) to find the maximum total increase. A common error is multiplying the full $2,000 deposit by the multiplier instead of starting from excess reserves.
C
Suppose Marlowe's central bank wants to use monetary policy to fight rising inflation. Identify one specific tool it could use, and explain how that tool would affect the money market graph (money supply or demand) and the nominal interest rate.
✓ Model answer (earns the point)
Marlowe's central bank could conduct an open market sale of government securities. Selling securities removes money from the banking system, which shifts the money supply curve left in the money market graph. Since money demand is unchanged, the new intersection of supply and demand occurs at a higher nominal interest rate. This higher interest rate raises the cost of borrowing, discouraging investment and consumption, which reduces aggregate demand and helps cool inflationary pressure. The central bank could alternatively raise the discount rate or increase the required reserve ratio to achieve a similar contractionary effect.
Why it scores: Names a specific, correct tool (open market sale), correctly identifies which curve shifts and in which direction, and correctly predicts the resulting change in the nominal interest rate. Just saying "the Fed will raise rates" without identifying the underlying mechanism and graph shift would earn only partial credit.
How to score points on AP Macroeconomics FRQs
Show every step of money creation calculations. Find required reserves, then excess reserves, then apply the multiplier — skipping steps is the most common source of lost points.
Be precise about which curve shifts in the money market. Money supply is controlled by the Fed; money demand responds to GDP and the price level. Don't mix them up.
Name a specific tool, not just "the Fed will act." Open market operations, the discount rate, and the required reserve ratio are the three named tools graders look for.
Trace the full causal chain. Tool → money supply/demand shift → interest rate change → investment/consumption change → AD change. Skipping links costs points.
Label your units and round appropriately. "$8,000" is not the same as "8,000" to an AP grader.