Wednesday, February 22, 2017

Terms of Trade (Absolute & Comparative Advantage)

Terms of Trade 
(Absolute & Comparative Advantage)

(A) Who has the absolute advantage  in producing donuts? Explain.

If we look at the chart above we see that John can produce 200 donuts and Erica can produce 150. Therefore John has an absolute advantage in the production of donuts.


(B) Who has the comparative advantage in producing donuts? Explain.

John can either produce 200 donuts or 100 cupcakes. If he makes 200 donuts he gives up 100 cupcakes (100/200 = .5 or 1/2). Said in a different way, for every donut John makes he gives up 1/2 of a cupcake or for every cupcake he makes he gives up 2 donuts. (200/100 = 2)

Erica, on the other hand, can either make 150 donuts or 50 cupcakes. If she makes 150 donuts she gives up 50 cupcakes (50/150 = .333... or 1/3). Said in a different way, for every donut Erica makes she gives up a 1/3 of a cupcake or for every cupcake she makes she gives up 3 donuts.  (150/50 = 3)

As Erica's opportunity cost of producing 1 donut is 1/3 of a cupcake, which is less than John's opportunity cost which is 1/2 of a cupcake for every donut he makes. 

Erica gives up less cupcakes by producing donuts than John does. She is more efficient.

Remember that comparative advantage is about who gives up less than the other person, as lower opportunity cost is the key.


(C) Assume that John and Erica decide to specialise according to their comparative advantages and that one cupcake is exchanged for four donuts.

If John and Erica specialise then Erica would make the donuts and John would make cupcakes. 

(i) Indicate wether or not specialisation and trade would be beneficial to John.

Before specialisation John could make a cupcake or two donuts,  said another way, if John makes two donuts he gives up a cupcake. After trade and specialisation John can trade a cupcake for 4 donuts. He would be better off.


(ii) Indicate wether or not specialisation and trade would be beneficial to Erica.

Before specialisation Erica could make a donut and give up 1/3 of a cupcake. Said another way, Erica could make a cupcake and give up 3 donuts. After trade and specialisation Erica would have to give up 4 donuts for 1 cupcake. This would not be beneficial for Erica.


(D) Assume that Erica discovers a new cupcake production technique that will increase her daily production of cupcakes only. Using donuts on the horizontal axis, draw a correctly labeled  production possibility curve for Erica, before and after the technology change in cupcake production.

Understand, that Erica's production of donuts will not increase but her ability to produce more cupcakes with the same resources will increase.










Monday, February 20, 2017

2012 Macro Multiple Choice (Balance of Payments)

2012 Macro Multiple Choice (Balance of Payments)
Cheat Sheet here.


Answer - (B)
Surplus = Exports > Imports


2012 Macro Multiple Choice (PPC, LRAS, Productivity, Growth)

2012 Macro Multiple Choice 
(PPC, LRAS, Productivity, Growth)

Answer - (E)



Answer - (E)

(A) Physical Capital - capital formation would increase labor productivity
(B) Human Capital - smarter/more skilled humans would increase labor productivity
(C) Technology - would increase labor productivity
(D) Educational Achievement - smarter/more skilled humans would increase labor productivity
(E) Labor Force -  is the least likely to increase productivity

2012 Macro Multiple Choice (Fiscal & Monetary Combo)

2012 Macro Multiple Choice (Fiscal & Monetary Combo)


Answer - (A)

First - you must know that fiscal = Taxes & Government spending
monetary = OMO, discount rate, reserve requirements
Second - Fiscal and Monetary policies - expansionary and contractionary
Third - inflation is the price level

So, a reduction in inflation (PL) is a contractional fiscal and monetary policy
Fiscal - Increase taxes (contractional) - AD decreases PL falls
Monetary - Sell Bonds (contractional) - MS decreases, interest rates rise, investment falls, PL falls


 Answer - (D)

Understand that demand-pull inflation is an increase in AD pushes the PL up.

Reducing Demand pull inflation, means lowering AD thus the PL

The fiscal policy to reduce Demand Pull inflation = Government spending decreases and taxes increase

If this Fiscal contractionary policy occurs
(A) GDP will decrease
(B) Labor force participation rate will decrease
(C) the PL price level will decrease
(D) Unemployment will increase
(E) Wage levels will fall




Answer - (C)



2012 Macro Multiple Choice (Reserve Requirements)

2012 Macro Multiple Choice (Reserve Requirements)
Cheat Sheet here.


Answer - (D)
Understand that excess reserves can be loaned out.
Understand the difference between required reserves and excess reserves.
Understand that both sides must equal.


Answer - (B)
$100 - 10%(RRR) = 90 x 10(1/.1) = $900




2012 Macro Multiple Choice (MPC/MPS)

2012 Macro Multiple Choice (MPC/MPS)
Cheat Sheet here

Answer - (E)

In AP econ you can choose to do two things with your money, spend it (MPC), or save it (MPS).

Answer - (D)

The multiplier is 1/1-.75 = 1/.25 = 4 x 2m = 8m change 


Answer - (B)

Tricky Bastards!!!


Ok, so the point is to know that the MPC is about how much is spent from an extra dollar of income.
The extra dollar is a percentage spent of an increase or decrease, specifically the change in income.
Here the change in income is from an income of $40,000 to $50,000
This is a $10,000 change in income
&
$10,000 x .8 = 8,000


Saturday, February 18, 2017

2012 Macro Multiple Choice (Unemployment, Inflation, Phillips Curve)

2012 Macro Multiple Choice (Unemployment, Inflation, Phillips Curve)
Cheat Sheet here

Answer - (B)

Hyperinflation Video

Answer - (B) 

If you are so hopelessly out of work that you've stopped looking over the past four weeks -- the Department of Labor doesn't count you as unemployed. That's right. While you are as unemployed as one can possibly be, and tragically may never find work again, you are not counted in the figure we see relentlessly in the news.

Answer - (A)

Answer - (C)
From the cheat sheet


Answer - (C)


 Answer - (D)
From the cheat sheet

Answer - (E)


Answer - (E)