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PROFESSIONAL DEVELOPMENT

AP® Macroeconomics
Monetary Policy
Curriculum Module

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Contents
Introduction......................................................................................... 1 Colonel Richard K. Rankin

The Federal Reserve and Monetary Policy: Making It Happen .............................................................................. 3 Margaret Ray

Bank Expansion of Money Supply .................................................. 13 Wayne McCaffery

Open Market Operations and the Effect on GDP ........................... 23 Matt Pedlow

About the Contributors .................................................................... 29

Introduction
Colonel Richard K. Rankin Iolani School Honolulu, Hawaii
The central bank (Federal Reserve) can manipulate the economy’s output, price level, employment and rate of growth by taking steps to change interest rates. While the central bank can do little to influence the demand for money, it controls the supply of money and therefore, in turn, can impact interest rates. Interest rates affect business investment spending and interest-sensitive consumer spending (for example, houses, cars, etc.). In recognition of this important role of the central bank, the AP® Economics Development Committee has frequently included questions about money creation/destruction on the annual AP Macroeconomics Exam. Generally, students have responded very well to questions about money creation/ destruction as well as the related numerical calculations of the theoretical maximum expansion/contraction of the money supply using the deposit multiplier. However, on the 2007 test, the committee decided to ask a more detailed question about money creation and the concomitant issuance of loans. The students generally did not perform as well on this question. Many students could not distinguish between the amount of money created and the loans issued. The concern of the AP Economics Development Committee is that students may just be memorizing the deposit multiplier equation and not fully understanding the process of money creation/destruction. The purpose of this curriculum module is to provide teachers with a well-written article on money and banking as well as two exercises/lessons to help them teach their students about this important role of the central bank. You will find Margaret Ray’s piece both informative and thorough. I believe you will recognize and appreciate her experience of working at the Federal Reserve Bank of Richmond. The lessons and exercises provided by Wayne McCaffery and Matt Pedlow can be used to augment and reinforce the textbook readings on...
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