Friday, June 9, 2017

2017 AP Macroeconomics FRQ #3

2017 AP Macroeconomics FRQ #3

(A) Draw a CLG of the PPC, with consumer goods on the horizontal axis and capital goods on the vertical axis. Indicate a point on your graph, labeled X, that represents full employment and a possible combination of goods produced.
PPC Cheat Sheet here.

(B) Assume that there is an increase in the country's national savings. Draw a CLG of the loanable funds market, showing the change in the real interest rate from the increase in savings.
Fiscal Policy Cheat Sheet here.

Understand that if savings is increasing then the supply of loanable funds is increasing.

If the supply of loanable funds is increasing then the RIR, real interest rate is falling.

(C) On the same graph in part (A), show another point, labeled Z, that represents full employed and a new combination of consumer goods and capital goods consistent with the increase in the nations increased savings.

Higher rate of savings implies a higher rate of capital investment which will lead to more future growth.

(D)Referring to your answer in part (C), will the long run aggregate supply curve shift right, left or remain the same.

The LRAS will increase in the long-run as savings increase, consumption and investment will increase. Investment will increase in capital goods and therefore future growth can be expected with a shifting rightward of the LRAS curve.

2017 AP Macroeconomics FRQ #2

2017 AP Macroeconomics FRQ #2

(A) Draw a CLG of the money market and show the effect of the reduced holdings of money on the equilibrium nominal interest rate in the short-run.

Money Market = Monetary Policy
Reduced holdings of money = Demand for Money decreases

From the Monetary Policy cheat sheet here

Demand for Money falls, the Nominal Interest Rate (NIR) falls
The opportunity cost of holding cash has fallen.
(B) Based on the changes in the interest rate in part (A), what will happen to each of the following in the short-run?
(i) Prices of previously issued Bonds. ((Bond Prices will Increase)

MR. Waugh - If interest rates are falling then we must assume that the interest rates of previous bonds must be higher.

Jung Sub - What does that mean, Mr. Waugh?

Mr. Waugh - Well Jung Sub, each bond has an amount of interest that it pays to the owner of the bond every year. It could pay 5% of the face value to the owner every year. Bond holders are rational people. If the banks are only paying 1% to borrow your money a bond holder would be making a profit by having a bond paying 5%.

So, if the nominal interest rate falls to 1%, then the price of a bond paying 5% will increase as it is now a better value than bonds created and sold today with a yield rate of 1%.

Is that clear Jung Sub?

Jung Sub -  Not really Mr. Waugh, but I think we should move on.

Jung Sub's face when I start talking about Bonds.

(ii) The price level and real income.

Cause and effect - If the nominal interest rate falls then consumption increases which drives up AD and therefore the PL and causes the RGDP to increase which implies that real income (Y) increases also.

Answer - PL and Y (incomes) increase

(C) With a constant money supply, based on your answer in part (B)(ii), will the velocity of money increase, decrease, remain unchanged or will it be indeterminate?

Velocity of money is the rate that money exchanges for goods and services. If incomes are increasing we would expect that the velocity of money would increase.

AD is increasing along with RGDP and (Y) incomes so people are spending money faster than before. Velocity has increased.

(D) If the FED (central bank) wishes to reverse the changes in the interest rate identified in part (A), what open market operation (OMO) would it use?

If interest rates are falling (part A), then the FED would sell bonds, reducing the money supply and increasing the Nominal Interest Rate.

2017 AP Macroeconomics FRQ #1

2017 AP Macroeconomics FRQ #1

(A) Using the numerical values above, draw a CLG of the short-run and long-run Phillips curves. Label the current short run  equilibrium as point B. Plot the numerical values above on the graph.

I find it's most beneficial to draw AD/AS curve with Phillips curves.
Phillips Curve Cheat Sheet here.
Understand that a country with a higher unemployment 7% compared to 5%, and with a low inflation rate of 3% that the appropriate AD?AS curve would be a recessionary curve.

The Phillips curve is fairly simple, helps to know that 
a shift of the AD curve is a movement on the SRPC.

It also helps to know that the NRU or natural rate of unemployment is at full employment (equilibrium)

(B) Assume the government of X takes no policy action to reduce unemployment. In the long-run, will each of the following shift to the right, left or remain the same?
(i) Short-run aggregate supply curve. Explain.

In the long-run employees will accept lower wages, wages are a resource cost, lower wages will shift the SRAS curve rightward, prices will fall and therefore output will increase back to long-run equilibrium at a lower price level.
(ii) Long-run phillips curve

The long-run phillips curve is unaffected but the short-run phillips curve would shift leftward, inflation would decrease and unemployment would decrease back to the NRU, natural rate of unemployment.

(C) Identify a fiscal policy action that could be used to reduce the unemployment rate in the short-run.

In the short run the government could use an expansionary fiscal policy (tax lowered or more government spending), 
Fiscal Policy Cheat Sheet here.

(D) Draw a CLG of the AD/AS graph, showing the effects on equilibrium, PL and RGDP from an expansionary fiscal policy.
As the government spends, consumption increases pushing AD rightward, PL increases and RGDP increases along with (Y) real incomes.

(E) Based on the change in real GDP identified in part (D), will the supply of County X's currency in the FOREX, increase , decrease, or remain the same? Explain.

Look at the Y, real income above. It is increasing, if incomes are increasing and the PL is increasing then 
PL increases - foreigners buy less of our goods - exports fall
Y, real incomes increase - domestic consumers demand foreign goods - imports increase

AS imports increase, the supply of our currency increases in the FOREX.
Again, if we are importing goods, we must be dumping our currency into the FOREX to buy the foreign currency to pay the foreign producers of the imported goods we want to buy.

Simple, Yes.

(F) Based on (E) does our currency appreciate, depreciate, no change.

Understand that the valuation of our currency is calculated in relation to the demand/supply of our currency in the FOREX.

So if the supply of our currency increases in the FOREX, we can use a simple supply/demand graph to explain what is going on.
Our currency will depreciate as more and more of it is dumped into the FOREX market buying imported goods.

Tuesday, May 23, 2017

2017 AP Microeconomics FRQ #3

2017 AP Microeconomics FRQ #3

(A) Identify the monopolists.
(i) Profit maximising quantity
(ii) Profit maximising price
Recognise, that the MPC is the MC curve and that the MR = MPB, therefore the Profit Max for this Monopoly is where MR = MC, 
Price = P4 
Quantity = Q3

(B) What information in the graph indicates that there is a negative externality?

MSC > MPC = Negative Externality

(C) Identify the socially optimal quantity.
Social Optimal Quantity is where MSB = MSC
Social Optimal Quantity = Q3

Understand: This time the monopoly is producing an output that is equal to the socially efficient amount, Here the welfare losses caused by the negative externality are less in a monopoly environment than they would be in a competitive environment. This is a point worth remembering when it comes to things like energy markets. People naturally assume that competitive markets are better than ones with market power, but if there is a negative externality of pollution that comes with consuming energy, then the economic welfare effects may be less bad for society if there is a monopoly or oligopoly provider producing a lower amount at higher price for consumers (and enjoying high profits) than if there was a competitive market, prices were forced down for consumers, and an excessive amount of energy was consumed.

(D) In the case in which the government imposes a per-unit tax equal to the marginal external cost, identify each of the following.
(i) The dollar value of the tax, using the price labels from the graph

The tax would be equal to the vertical distance between the MSC and MPC. (P4 - P1) 

(ii) The profit-maximising quantity associated with the tax.

(E) Given the monopoly facing the negative externality, would the dead-weight loss increase, decrease, or stay the same as a result of imposing the per-unit tax? Explain.

2017 AP Microeconomics FRQ #2

2017 AP Microeconomics FRQ #2

(A) If the firm uses one unit of capital and one unit of labor, will it be operating with constant, increasing, or decreasing returns to scale? Explain using numbers from the table.

Ok, if we are talking about Returns to Scale, then we must be talking about the long run.
If the firm is using one unit of labor with one unit of capital in the short run, and then we compare the additional output that can be produced with K2, we will see that output would have doubled. So, input doubles (K1-10 to K2-20) and output exactly doubles. This implies that there is a constant return to scale.
(B) Assume now that the firm currently has two units of capital and is using three units of labor.
(i) Calculate the marginal product for the third unit of labor. Show Your Work.

So if we are using K2, then we have moved into the present short-run with K2, so compare the K2 numbers. I found it useful to just combine the Labor costs and the costs of K1, and then add the additional cost of K2 ($75). 

1 Unit of Labor - Labor ($200) + K1 ($75) + K2 ($75) = $350
2 Units of Labor - Labor ($400) + K1 ($75) + K2 ($75) = $550
3 Units of Labor - Labor ($600) + K1 ($75) + K2 ($75) = $750

Marginal Product is simply 50 to 75, which is a marginal product of 25 for the 3rd worker.

(ii) Did the firm experience diminishing marginal returns with the addition of the third unit of labor? Explain using numbers from the table.

The firm experienced diminishing returns with the addition of the 3rd unit of labor. The marginal product of the 3rd worker is 25, which is less than the marginal product of the 2nd worker which is 30.

(DECREASING MARGINAL RETURNS: In the short-run production of a firm, an increase in the variable input results in a decrease in the marginal product of the variable input.)

(iii) Calculate the firm's average total cost for its current level of production.  Show Your Work.

The average total cost is sometimes referred to as the per unit total cost since it is calculated by taking the total cost of production and dividing that by the number of units produced (quantity). In variable form, it looks like this: 
TC / Q = ATC
Where fixed costs + variable costs (quantity) = TC

ATC is total costs (labor and capital) divided by the amount of total output.

(iv) If the firm's output is sold in a competitive market, what is the lowest output price at which the third unit of labor would be hired?

  So, if I understand this question, they are asking what is the lowest price (of the good) that would make hiring worker number 3 possible.

Again, This problem has challenged my summer mind. Take the answers with a grain of salt. 
Trust but verify. This is like when you buy a used car, if it breaks in half after you drive it off the lot, you own both pieces.

My thinking is that the cost of capital (K1 & K2) aren't added into the marginal cost numbers as capital in the short-run is considered fixed and therefore not included in the marginal cost.
This makes sense as as we add more labor and as marginal product decreases then marginal costs must be increasing.

Where MRP = MRC, Marginal Revenue Product = Marginal Revenue Costs
MRP (what the worker brings in) = MRC (what the worker costs)

If our MRC, is $200 then to be able to hire the 3rd worker she must at least bring in $200, where 
Since we know that the MRP is MP x P (of the good), then the minimum that the output price of the good could fall would be $8.

2017 AP Microeconomics FRQ #1

2017 AP Microeconomics FRQ #1

(A) Draw a CLG for the corn market and a representative corn farmer (Firm). On your graph show each of the following.
(i) The equilibrium price and quantity in the corn market, labelled PM & QM.
(ii) The profit maximising quantity of corn produced by the representative farmer earning zero economic profit (normal profit) labelled QF.

(B) Assume the demand for ethanol increases. On your graph in part (A) show what will happen to each of the following in the short-run
(i) The market price and quantity of corn labelled P* & Q*.
(ii) The area of profit or loss earned by the corn farmer. Shaded completely.

If the demand for Ethanol increases then the demand for corn must increases as corn is an input for Ethanol.

(C) Relative to your answer in part (B), state what will happen to the market equilibrium price and quantity of corn in the long-run. Explain.

Profits in the short run, attract firms
Firms enter in the long-run
Firms enter and produce more Supply, Supply increases
Increased Supply means quantity produced increases
Increased Supply drives prices lower

(D) Soybeans are produced in a perfectly competitive market. Assume farmers can grow either corn or soybeans on the same land. What happens to the price of soybeans in the next planting season if the price of corn increases? Explain.

Ok, if the price of corn increases farmers will want to plant more of it as the profits on each bushel will be greater than on a bushel of soy beans. So farmers switch from soybean production to corn production hunting for profits. This reduces the supply of soybeans in production. Less supply means hire prices for soybeans.

Corn and Soybeans are considered competitively (supplied) produced goods. 

(E) Assume instead that the government sets a binding price ceiling in the corn market.
Draw a new CLG of the corn market and show each of the following.
(i) The binding price ceiling, labelled PC.
(ii) The quantity purchased by consumers in the corn market, labelled QC.

Understand that a binding price ceiling is one that is below the equilibrium point. Binding also means effective which implies it must effect the market and an effective price ceiling is one that is below equilibrium.
Remember that ceilings are low, and floors are high.