Two Markets, Two Interest Rates
When to Use Which Market
How the Markets Connect
Path 1: Monetary Policy → Money Market → Loanable Funds → AD-AS
Path 2: Fiscal Policy → Loanable Funds → Money Market
Path 3: Fiscal + Monetary Together
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Graph Comparison Side-by-Side
Money Market - Y-axis: **Nominal** interest rate - MS: **Vertical** line - MD: Downward-sloping - Fed controls the supply curve
Loanable Funds Market - Y-axis: **Real** interest rate - SLF: **Upward-sloping** (not vertical!) - DLF: Downward-sloping - Market forces and government borrowing determine equilibrium
Five Common AP Exam Scenarios
Scenario 1: Fed Buys Bonds
Scenario 2: Government Increases Deficit Spending
Scenario 3: Both the Fed and Government Act (Policy Mix)
Scenario 4: Increase in Household Saving
Scenario 5: Increase in Business Confidence
The Interest Rate Paradox
Common FRQ Format
AP Exam Tips
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Common Mistakes
Unit 4 topics
Unit 4 overview4.10Crowding Out4.1Financial Assets4.2Nominal vs. Real Interest Rates4.3Definition, Measurement, and Functions of Money4.4Banking and the Expansion of the Money Supply4.5The Money Market4.6Monetary Policy4.7The Loanable Funds Market4.8The Money Market and the Loanable Funds Market4.9Fiscal and Monetary Policy Actions in the Short Run