AP Macroeconomics Flashcards: The Money Market
Written by AP Content Team, Verified for 2026 AP Exams, Last updated: May 2026
Review key ideas with interactive flashcards. This set includes 10 cards to help you master important concepts.
What is a contractionary monetary policy action and how does it affect the money market?
Selling government bonds is a contractionary policy. This action decreases the money supply, shifting the money supply curve to the left and causing the nominal interest rate to increase.
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What is a contractionary monetary policy action and how does it affect the money market?
Selling government bonds is a contractionary policy. This action decreases the money supply, shifting the money supply curve to the left and causing the nominal interest rate to increase.
What is the opportunity cost of holding money?
The opportunity cost of holding money is the nominal interest rate that could have been earned by holding that wealth in an interest-bearing asset, such as a bond.
If an economy's real GDP increases, what is the resulting effect on the nominal interest rate?
An increase in real GDP leads to more transactions, which increases the demand for money. This shifts the money demand curve to the right and causes the nominal interest rate to rise.
What does the money market model illustrate?
The money market model illustrates the interaction between the supply of and demand for money to determine the equilibrium nominal interest rate.
How does an increase in the overall price level affect the money market?
An increase in the price level increases the transaction demand for money, as more money is needed for purchases. This shifts the money demand curve to the right, raising the nominal interest rate.
How do changes in the money market link to the aggregate demand curve?
Changes in the nominal interest rate in the money market affect interest-sensitive spending (investment and consumption), which are components of aggregate demand, thus causing the aggregate demand curve to shift.
If the central bank buys government bonds, what is the effect on the money supply and the nominal interest rate?
When the central bank buys bonds, it increases the money supply. This shifts the money supply curve to the right, causing the nominal interest rate to fall.
Why is the money supply curve a vertical line?
The money supply curve is vertical because the quantity of money in an economy is determined by the central bank's monetary policy and is independent of the nominal interest rate.
What are the two primary components of money demand?
The two primary components are transaction demand, which is money held for everyday purchases, and asset demand, which is money held as a store of value.
Why is the demand for money curve downward sloping?
The money demand curve is downward sloping because a lower nominal interest rate reduces the opportunity cost of holding money, causing people to demand a larger quantity of it.