Friday, August 26, 2016

2016 AP Macroeconomics Exam FRQ #3

2016 AP Macroeconomics Exam FRQ #3

It is very nice of the College Board to have set the problem up in this helpful way.

(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.

From the Cheat Sheet

Draw a Graph
We can clearly see that John has an absolute advantage in production of donuts and cupcakes.

(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.

Thursday, August 25, 2016

2016 AP Macroeconomics FRQ #2

2016 AP Macroeconomics FRQ #2
Nothing in this world is free, and that if you want something out of life you've got to work to get it

(A) What is the dollar value of new loans that First Superior Bank can make? Explain.

Demand deposits = amount of money deposited into the bank. 
If $2,000 dollars has been deposited into the bank the bank must keep 10% of it in reserve. So, $200 must be kept in the bank in reserve as that is required by the FED, (Federal Reserve). Then the bank loaned out $1,800 to some other customer.

So if the bank has to hold in reserve $200 and loans out $1,800 then that $2000 is not able to be loaned out to anyone else. The bank has no excess reserves to loan.

If Mr. Smith deposits $100 of cash 10% of it must be held in reserve.(As the FED requires) So 10% of $100 is $10 and $100 - $10 = $90. Therefore $90 is the maximum amount of new loans that can be made, (Loaned Out).

(C) As a result of Mr. Smith's $100 cash deposit, calculate the maximum change over time in each of the following banking system.

(i) Loans.

If Mr. Smith deposits $100 in the bank and $10 is kept in reserves then $90 can be loaned out. If that $90 is deposited in another bank then 10% of the $90 or $9 must be kept in reserve and therefore $81 can then be loaned out in the next round and 10% of that must be kept in reserve and so on and so on and so on. Until all is loaned out.

The quick way to figure this out is to understand that the formula for this is the Required Reserve Ratio or 1/RR, so, 1/10% or 1/.1 which will equal 10.

Answer - $90 x 10 = $900

(ii) Demand Deposits.

The maximum amount of demand deposits in the banking system due to Mr. Smith's $100 deposit is $100 x 10 = $1,000.

(D) As a result of Mr. Smith's $100 deposit, calculate the maximum change over time in the money supply.

 The original $100 was already part of the money supply so you can't include that in the calculation.

(E) Provide one reason why the actual change in the money supply can be smaller than the maximum change you identified in part (D).

If credit card rates increase (past AP question) then people will be inclined to hold more cash and this will decrease the effects of the money multiplier. 

If banks voluntarily hold excess reserves then the money multiplier will have less of an effect on the money supply.

(Not entirely happy with my explanations for this section, stay tuned for a more thorough explanation.)

Monday, August 22, 2016

2016 AP Macroeconomics FRQ #1

2016 AP Macroeconomics FRQ #1

(A) Draw a single CLG with both the long-run Phillips curve and the short-run Phillips curve. Label the current short-run equilibrium point P.

Understand that when the actual unemployment rate is above the natural rate of unemployment (NRU) the economy is in a recession.

(B) Assume no policy action is taken, will the short-run phillips curve shift to the left (downwards), shift to the right (upwards), or remain the same?

NO POLICY ACTION TAKEN - translated =  (In the Long-Run)

So in the long run with a recession the SRAS curve for AD/AS will shift to the right (downward) as prices and wages fall and output will therefore increase. 
When the SRAS curve shifts, the SRPC will  shift left (down). This makes sense as in the long run, employees will accept lower wages and choose to go back to work, decreasing unemployment. As prices (inflation) falls also.

I like the way I say it better :).

(C) If the FED wants to lower unemployment, what expansionary what expansionary open-market operation should it use.

From the cheat sheet - Monetary Policy

Notice, that when the FED buys bonds, money is injected into the economy and AD will increase, output will increase and unemployment will be lowered as people go to work.
Output increase - unemployment must decrease.

(D) How will the open-market operation from part (C) affect?

(i) Federal Funds Rate? 

(ii) Real Interest Rate in the short-run ? Explain.

(E) Given your answer in part (d)(ii), what is the effect on the Real GDP in the short-run? Explain?

Looking at the same cheat sheet above we can see that as the MS increases that Consumption and Investment will increase as Interest Rates fall, and therefore AD will increase and RGDP will 
(F) Japan and The US are major trading partners. Indicate how the change in Real GDP will effect the demand for Japanese Yen (¥) in the foreign exchange market?

If the US has increasing AD/Output, Real GDP, then we also expect US incomes to be increasing and therefore Imports (from Japan) will increase.

Increasing imports into the US from Japan means that US citizens are demanding Japanese goods and therefore the demand for ¥ is increasing in the FOREX.
(G) Draw a CLG of the FOREX market for the Japanese Yen (¥), showing the effect of the change in demand  for the Yen identified in part (F) on the value of the Japanese Yen relative to the US dollar.

Friday, August 19, 2016

2016 Microeconomics FRQ #3

You should have been able to recognise that the business above is in a monopolistically competitive market - differentiated products, no barriers to entry.

(A) Draw a CLG showing Camden's demand curve, marginal revenue curve, marginal cost curve, and long-run average total cost curve. Label Camden's profit maximising output Qm & Pm.

(B) On your graph in part (a) label the output at which total revenue is maximised QR.

Max revenue is where MR = 0, at that quantity revenue is maximised.

(C) Do firms in this market experience economies of scale, diseconomies of scale, or neither in long-run equilibrium? Explain.

College Board! "YOU SICK BASTARD"!
Refer back to the EOS - Economies of Scale post

Notice that where MR=MC intersect and we find our price and quantity the LRATC curve is sloping downward. This is the section of the LRATC (long run average total cost curve) where resource prices are decreasing in the industry. It's a decreasing cost industry or an increasing returns industry or this industry is experiencing economies of scale.