Thursday, March 26, 2015

2010 AP Macro Exam (FOREX) Multiple Choice

2010 AP Macro Exam (FOREX) Multiple Choice

Answer (B)

Answer (A)

Answer (B)

Answer (A)

Answer (A)

Answer (D)

Wednesday, March 25, 2015

2010 AP Macro Exam Multiple Choice (PPC, Comparative Advantage, Circular Flow)

2010 AP Macro Exam Multiple Choice 
(PPC, Comparative Advantage, Circular Flow)

Answer (C) Countries X & Y can engage in mutually advantageous trade by exchanging 1 watch for 1 radio.

Answer (D) 10
Opportunity cost,, what is given up - to move from 10 to 20 (A) is a gain of 10.
to move from 90 to 80 (B) is a loss of ten.
Lose 10 units of (B) and gain 10 units of (A)

Answer (A) Households are on the demand side of the product market and the supply side of the resource market.

Tuesday, March 24, 2015

Fiscal Policy Cheat Sheet

Fiscal Policy Cheat Sheet

This is a tentative cheat sheet,, I will be working my way over the next week through the FRQ's and Multiple choice questions to check my thinking.

Questions, comments, corrections -

Monday, March 23, 2015

Government Spending & Taxes and Real Interest Rates

Government Spending and Real Interest Rates

If the Government is spending then the Real Interest rate is increasing.

FRQ's that ask about government spending always want to know the real interest rate. The loanable funds graph tell you whether the real interest rate is rising or falling.

Hint, if the government is spending the RIR is increasing.

Remember that Keynesian view spending is a short-term fix for a recession.
When the RIR increases, investment is reduced and growth is sacrificed and there will be less capital investment.

As for the decrease in taxes being expansionary. Take the view that with a balanced budget when the government reduces taxes it must make up the difference with Government spending.
The reasoning is a bit circular because the idea of a reduction in government is not entertained along with the reduction in taxes.

More about crowding out, soon.

Sunday, March 22, 2015

Fiscal Policy (Taxes) Real Interest Rates

Fiscal Policy (Taxes) Real Interest Rates

OK, correction ,, Tax cuts and RIR

Look at it from a balanced budget starting point.

Tax cuts require the government to deficit spend as we don't assume there could be a reduction in government. (faulty and circular thinking in my libertarian view)

So, Taxes decrease and therefore government spending must increase to make up the lack of taxes being collected. The Real Interest Rate increases...

Saturday, March 21, 2015

Nominal Interest Rates, Price Level changes, and the Real Interest Rate

Nominal Interest Rates, Price Level changes, and the Real Interest Rate

Monetary Policy (money market, loanable funds, investment, AD/AS) & real interest rates

Monetary Policy (money market, loanable funds, investment, AD/AS) & real interest rates

So lately I've been trying to increase my understanding of how fiscal and monetary policies work in tandem. I've been a bit dismayed as many students can't understand the Real interest Rate questions on the AP exam and I haven't found any resources that string it all together.

So I've spent a few days working through the past FRQ's and Multiple choice sections of exams in hopes of clarifying exactly what the college board is testing.

1st Monetary Policy

On the left is an explanation of the causal chain of events. On the right is a graphical illustration of the left side. Sometimes seeing what happens in graphs makes the left side a bit more clear. Hope this helps,,, any mistakes, corrections, comments,,

Wednesday, March 18, 2015

Fiscal Policy (Loanable Funds) FRQ Cheat Sheet

Fiscal Policy (Loanable Funds) FRQ Cheat Sheet

Some students have a conceptual problem with understanding this section (to many things to think about at this point in the course I think.

Anything that makes money flow into the commercial banks is an increase in the supply of loanable funds and therefore the real interest rate will fall, (more of a supply of something the price falls, ) more money supplied and the price (interest rate) will fall.

Notice that each question is in two places.
2014 is in the Supply decreasing (interest rates rise) and in demand increasing (interest rates rise)
2013 is in the supply increasing (interest rates fall) and the Demand decreasing section (interest rates fall).

Both answers would be correct unless on the AP exam they ask you specifically what happens to supply. 2014 would then be a supply increasing explanation with a correct graph.

Tuesday, March 17, 2015

Fiscal Policy (2010 AP Multiple Choice Questions)

Fiscal Policy (2010 AP  Multiple Choice Questions)

Answer (A) Increasing government expenditures to build highways
All of the others are monetary policy.

Answer (B) It is the accumulation of past and current budget deficits and surpluses.

Answer (A) 
Lower business taxes mean lower costs for business. AS curve shifts right (input costs decrease, PL decreases) & MC curve shifts right, and to produce at profit max, (produce more) a business must higher more labor. In an imperfectly competitive firm price will decrease.

Answer (B) gov't borrowing to finance its spending decreases private sector investment.

 Answer (D) the automatic stabilizing effect of fiscal policy will be eliminated

Answer (C) decrease income taxes  and increase gov't spending by equal amounts.

Monday, March 16, 2015

Unemployment, Inflation, Phillips Curve Cheat Sheet & FRQ Cheat Sheet

Unemployment, Inflation, Phillips Curve Cheat Sheet

Understand what happens with the Phillips curve when AD/AS changes.

Sunday, March 15, 2015

Unemployment, Inflation & the Phillips Curve (2010 Multiple Choice Questions)

Unemployment, Inflation & the Phillips Curve (2010 Multiple Choice Questions)

Answer (C) approximately increased by 10%
The worker received a 20% raise. Inflation ate up 10%, so his real wages increased by 10%.

Answer (B) an increase in inflation
A decrease in unemployment (8% to 6%) results in a movement up the SRPC indicating an increasing PL.

Answer (C) 8%
Nominal Interest Rate 8% = Real IR (3%) + Expected Inflation (5%) 

Answer (D) structural employment
Technology eliminates jobs so that workers have to be retrained or reeducated = Structural unemployment.

Answer (C) discouraged workers
Only those looking for work are counted as unemployed. Discouraged workers are not looking.

Answer (D) a recent college graduate who is looking for her first job.

Answer (C) it is vertical at the Natural Rate of Unemployment (NRU)

Micro & Macro Reviews (Reffonomics)

Micro Review

Macro Review

Wednesday, March 11, 2015

Monetary Policy (Reserve Requirements) FRQ's & MC

Monetary Policy (Reserve Requirements) FRQ's & MC

So I have started to try and create a google site for all of my information. Don't laugh.

I'm posting a link to the google site so you can download the FRQ's & MC questions for the Reserve Requirements (T-accounts) for the Monetary Policy section of the course.

Here is the link,, problems? e-mail me

mjmfoodie - video - Reserve Requirements (Money Creation)

Excellent summary of monetary policy and how banks create money.
Take the time to read it as it touches upon most of what you will need to do well on the AP Exam.

Let's go through a few and see if we can understand what the college board is testing.

Money Multiplier (Creation) Money Supply Increase

1995 AP Macro Exam
Answer (D) $500
(money already in excess reserves)

So, The Reserve Requirement is 20% (they must keep on reserve 20% of the checkable deposited amount), there is $100 dollars worth of excess reserves, how much money creation can happen within the money supply. (Think: money multiplier)

If the RR is 20% or .2 and the multiplier is (1/RRR) = 1/.2 = 5 ,, so the multiplier is 5

If there is $100 in excess reserves we simply take the 100 x 5 = $500 increase in the Money Supply.

  1. Don't get confused,, you need the 20% RR to figure out the multiple (1/.2 = 5)
  2. Not to subtract the 20% from the $100. 
  3. As the $100 dollars is already in excess reserves
  4. If the $100 dollars had been a checking deposit (deposited by someone) then you would have subtracted the $20 from the $100 and multiplied $80 x 5 and the money supply would have increased by $400.
  5. AS the amount was already in excess reserves, the whole amount in excess reserves is multiplied by the 5.
2008 AP Macro Exam
Answer (C) $900
(money deposited in checking account)

So, the RR is 10%,,  and the multiplier is (1/RRR) =  1/.1 = 10 is the multiplier.

There is a checkable deposit of $100 - (the RRR = 10% of $100 = $10 dollars) = $100 - $10 = $90

So, now we have $90 in excess reserves, & the money supply is expanded by the multiplier x the change in the excess reserves.

$90 x 10 = $900
  1. You needed the RR 10% to have the multiple
  2. Since it was a deposit you have to subtract out the RR
  3. The difference is it goes into excess reserves and can be re-loaned out again.
  4. This is the essence of fractional reserve banking.
  5. What if the RR had been 20%
  6. If the RR was 20% the multiple would be 5 not 10 like above.
  7. This makes sense as the higher the RR the less money creation (loans) can take place.
  8. 20% would be subtracted from the $100 checkable deposit to leave $80
  9. The $80 dollars would be placed in excess reserves to be re-loaned.
  10. Then the MS would increase by 5 x 80 = $400

Tuesday, March 10, 2015

Monetary Policy Cheat Sheet

Monetary Policy
Purchasing Power of the US Dollar

M1 Money Supply

Monetary Policy Cheat Sheet

2010 Multiple Choice Questions (FED, Banking, Monetary Policy & Money Creation)

2010 Multiple Choice Questions (FED, Banking, Monetary Policy & Money Creation)

This section, along with AD/AS is the second most tested.
Here are the multiple choice questions for the 2010, AP Macroeconomics exam.

Notice, topics questioned include: 
T-accounts, Velocity of Money, Bond Prices, Res. Requirements, Rational Expectations

*(the FRQ's for this section are quite easy compared to the wealth of knowledge you need to be able to answer the Multiple choice)

Answer (A) Reduce Inflation

 Answer (A) increase in the nominal output

 Answer (C) Interest rates will decline

Answer (C) increasing the reserve requirements

Answer (C) selling bonds on the open market

Answer (B) Rational Expectations

Answer (B) demand deposits

Answer (D) Engage in Open Market Purchases

Answer (B) It falls when interest rates rise, because the opportunity cost of holding money increases.

Answer (B) Increase - Decrease

Answer (D) Decrease - Decrease

Answer (E) Buying Bonds increases the MS, which lowers the interest rate

Answer (E) a decrease of $5 million