## Friday, October 28, 2016

### AP 2007 B Macroeconomics Exam FRQ#1

AP 2007 B Macroeconomics Exam FRQ#1

(A) Assume that Australia begins to recover from its recession. Using a CLG (correctly labelled graph) of aggregate demand and aggregate supply for New Zealand, show the impact of Australia's rising income on each of the following in the short-run.

(i) Aggregate demand in New Zealand, Explain.
(ii) Output in New Zealand

Ok, so if Australia's citizens are recovering from a recession they are buying more New Zealand goods. New Zealand's exports are increasing. Aggregate demand must be increasing and therefore output must also be increasing.

(B) Using a correctly labeled graph of the money market for New Zealand, show the effects of the output change in part (a)(ii) on the following.

(i) Demand for Money. Explain.
(ii) The nominal interest rate. (NIR)

Understand - As incomes increase (Y1 to Y2) the demand for money increases. Why? If output is increasing it means that the PL is increasing, if the price level is increasing then the demand for money is increasing. If the demand for money is increasing the demand for loanable funds is increasing, therefore the NIR (nominal interest rate) is increasing.

From the Fiscal Policy Cheat Sheet, Here.

You want more? OK. As the economy improves (output/GDP increases) then people are being hired back to work. Prices are rising as more and more people have the incomes to buy the goods they want pushing the prices ever higher. The citizens need more cash on hand for daily purchases as the prices rise (demand for loanable funds increases). This means that they are either taking the money out of the bank as prices rise (supply of loanable funds decreases. Either way the Real Interest Rate is going to increase. If the real rate is increasing the nominal rate is also increasing.

The Real Rate is the opportunity cost of borrowing money (price of money borrowed) or the purchasing value of the money when borrowed.

The nominal rate is the opportunity cost of holding money or the change in the value due to inflation.

Check out the Real vs Nominal blogpost here.

(C) Assume that the price level in New Zealand rises. Given your answer to part (b)(ii), explain what will happen to Real interest rates.

 College Board Suck It.

** For the Record, this question is looking for the Geniuses**

IF, the nominal rate is rising the real rate is rising. Inflation causes the Real rate to fall but if the nominal rate is rising faster than inflation then the real rate is still increasing, but if inflation is rising faster that the nominal the real rate is falling.

Remember the Unemployment/Inflation/Phillips curve cheat sheet Here.

(Real Interest Rate = Nominal Interest Rate -(minus) Inflation Rate)

Consider that if there is no inflation the RIR = NIR
(6%NIR - 0%Inf) with the rise in Inflation being 0%  = (RIR6%)
but, what if:
(6%NIR - 2%Inf) with the rise in Inflation being 2%  = (RIR4%)  the RIR is 4%
but, what if:
(6%NIR - 4%Inf) with the rise in Inflation being 4% = (RIR2%) the RIR has fallen to 2%
but what if:
(6%NIR - 1%Inf) with the rise in Inflation being 1% = (RIR5%) the RIR has increased to 5%

(D) Although recovering, Australia remains in recession and its government takes no action. Indicate wether each of the following curves will shift, left, right or no change in the long run in Australia.

(i) Aggregate Supply
(ii) Aggregate Demand

Recession, government takes no action, what shifts in the long-run.

SRAS shifts rightward. AD no change.

### 2007 Macroeconomics FRQ#3

2007 Macroeconomics FRQ#3

(A) The value of a used textbook sold through an online auction in 2006.

Check out GDP cheat sheet, Here

Used means second hand and implies that the value of this textbook was already counted in a previous year, therefore it is not counted this year.

(B) Rent paid in 2006 by residents in an apartment building built in 2000.

Rent is payment (income earned) for the service of using someones property therefore it is counted in GDP for 2006.

(C) Commissions earned in 2006 by a stockbroker.

Commissions paid on sale (a service) of stock or bonds,,, above.

(D) The value of an automobile produced in 2006 entirely in South Korea by a firm fully owned by US citizens.

from the cheat sheet -
((Total Value of all Final goods and services produced in the US in a year))

Excludes - production outside the US even by Americans,

### 2007 Macroeconomic Exam FRQ #2

2007 Macroeconomic Exam FRQ #2

(A) Define the Federal Funds Rate.

From, the Fiscal Cheat Sheet, Here

(B) If the Federal Reserve wants to lower the federal funds rate, what open-market operation would be appropriate?

The OMO (open market operation) to lower the Federal Funds Rate is for the FED to buy bonds. The FED buys bonds and the cash is injected into the economy. The money supply has been increased due to the injection of cash. The Nom IR (nominal interest rate) falls/decreases and so does the Federal Funds Rate.

(C) Assume that the OMO operation you indicted in part (b) is equal to 10 million. If the required reserve ratio (RRR) is 0.2 calculate the maximum change in loans throughout the banking system.

Required Reserves are .2 or 20% of all deposits must be kept in reserve, and that implies that 80% can be loaned out. The multiplier works here. Check out the MPC/MPS Cheat Sheet Here.

If the banks can loan out 80% of the 10 million that is 8 million dollars. BUT, it asks for the maximum change in loans,, and that money will be multiplied/created/expanded into 8 x 5 = 40 million.

(D) Indicate the effect on the OMO that you indicated for part (b) on the nominal interest rate.

In part (b) the FED's plan was to buy bonds, buy bonds and the nominal interest rate falls.

Check out the monetary cheat sheet Here.

(E) Assume that the FED's actions cause some inflation (you think!!!) What would be the impact of the OMO (buying bonds) on the real rate of interest. ((EXPLAIN..))

So, the real rate of interest as we have learned is the Loanable Funds graph. If the FED is dumping money into the economy by buying bonds, we can assume much of the cash is finding its way into the banks. That implies that the supply of loanable funds is increasing in the banks. Supply of loanable funds increases and this pushes the Real Interest Rate down as banks compete for customers.. Graph??

Supply increases, RIR decreases

EXPLAIN.. It appears that explanation that is acceptable is that the Real Rate has fallen because the Nominal Rate has fallen and inflation has increased.

### Reserve Requirement Cheat Sheet

Reserve Requirement Cheat Sheet

This is a cheat sheet to help with those pesky reserve requirement like questions posed by the college board.

Read it critically as I haven't thoroughly gone over it. In other words trust but verify.