## Wednesday, November 30, 2016

### AD/AS Recession FRQ Review

AD/AS Recession FRQ Review

Developing a workbook for AP - Thoughts are appreciated (wcwaugh@aol.com)

Over the last 22 AP Macro Exams the Recession Graph of the economy has been requested 12 times. It is expected that you not only be able to graph an economy in recession but you must be able to recognise an economy in recession by the AP's language (phraseology)

2003B - Assume that the country's economy is operating below full-employment.
2003 - Assume the economy is in a severe recession with no inflation.
2004 - Assume the economy is operating at less than full-employment
2006B - Assume the economy is operating at less than full-employment
2006 - Assume the economy is currently at equilibrium below full-employment
2007 - The economy is currently in recession but recovering
2009B - The unemployment rate is greater than the natural rate of unemployment
2010B - Assume the country's economy is in short-run equilibrium with an output level less than the full employment output level.
2011 - Assume the economy is currently in recession in a short-run equilibrium.
2012 - Assume the country is in recession
2014 - Assume the economy is operating below the full-employment level of real gross domestic product with a balanced budget
2015 - Suppose the economy is operating below full employment
2016 - Assume the economy is currently in a short-run equilibrium with the actual rate above the natural rate of unemployment.

So, if we deconstruct this a bit, we see a few phrases that keep repeating.

1. Recession (easy)
2. less than full employment or below full employment (full employment is the NRU)
3. unemployment rate is greater than (above) the natural rate of unemployment (NRU)
So, if you see any of these phrases, its a tip that a recession curve will be asked to be drawn.

So, how would this look.

1. Assume the economy is in recession.
(a) Draw a CLG (clearly labelled graph) of the AD/AS curve of the economy below full employment.

List all of these, every time to check your own thinking. (ROUPY)

RGDP - Decreasing
Output - Decreasing
Unemployment - Increasing (above the natural rate of unemployment) (Understand this!!!!)
Price Level - Decreasing at PL2
Y = Income - Decreasing at Y2

2. Assume the economy is operating below the full-employment level.
(a) Draw a CLG (clearly labelled graph) of the AD/AS curve of the economy below the full employment level and (ROUPY).
(b)The government decides to lower individual income tax rates to achieve full employment.
(c) Explain (WHY) how the government's decision to lower income tax rates will affect the AD & SRAS curve.
(d) List using (ROUPY) what happens in the economy when the government lowers the tax rates.

(a)
RGDP - Decreasing

Output - Decreasing
Unemployment - Increasing
Price Level - Decreasing to PL2
Y = Income - Decreasing to Y2

(b) The government lowers individual tax rates (this is a determinate of AD)
Be careful not to get this confused with a lowering of business tax rates as that would be a determinate of AS)

(c) The lowering of individual income tax rates (expansionary policy) will increase the levels of disposable incomes in the economy and lead to more (C) consumption and (I) investment and therefore AD will increase. The SRAS curve will not be affected.

(d)
RGDP - Increases as (C) & (I) increases
Output - Increases as more disposable income in the economy stimulate AD.
Unemployment - Decreases as more people are put back to work as output increases.
Price Level - Increases (Businesses raise prices as demand increases)
Y = Increasing Incomes due to demand for labor because of rising demand for goods

Understand the flow of these questions.

The economy is at a point (equilibrium, recession, inflation)
You can be asked to graph (AD/AS) the above.
Then the government, or the FED does something, or something happens in the economy (oil prices fall, Consumer confidence rises, government spending increases, the FED buys bonds)
You are asked to graph (AD/AS) the affects of the above and or explain.

The last section pertaining to the AD/AS curve is if the government does nothing.

The AP exam has asked this 5 times over the last 22 FRQ exams.

2004 - No policy action is taken
2006B - no policy action is taken and wages and prices are flexible
2009B - Government decides to take no policy action
2011B - In the absence of any fiscal (government) or monetary (FED) policy
2011 - Now assume the government and the Federal reserve take no policy action

Equilibrium
Equilibrium to Recession
Recession in the Long-Run (No Policy (Gov't/FED) Actions)

### AD/AS Equilibrium FRQ Review

Ok, so I'm working on a review booklet for the AP Macro Course.

Equilibrium: Understanding and Practice

Over the last 22 AP Macro Exams the Equilibrium Graph of the economy has been requested 8 times. It is expected that you not only be able to graph an economy in equilibrium but you must be able to recognise an economy in equilibrium by the AP language (phraseology)

2004B - Assume the economy is in Equilibrium.
2005B - Assume the country's economy is in Equilibrium
2005 - Assume the economy is in equilibrium at the full-employment level of real gross domestic product.
2007 - Assume the economy is in equilibrium.
2008 - Assume the economy is at full employment and has a balanced budget.
2009 - Assume the economy is in long-run equilibrium.
2010 - Assume the government is currently in long-run equilibrium.
2011B - Assume the economy is in long-run equilibrium with a balanced government budget.
2013 - Assume the economy is operating at full employment.

The words that tip you off for equilibrium are: Equilibrium (Obviously), Full-employment, and Long-Run Equilibrium - These all mean an Equilibrium graph

Be able to draw a country's economy in equilibrium using a LRAS, SRAS, and AD curve. Know that the axis are labelled PL (price level) and RGDP (real gross domestic product). Understand that the Y stands for Income.

I always start every problem from Equilibrium. From the AD/AS cheat Sheet Here

There are literally only 5 (five) main graphs that you need to be able to draw to answer the AD/AS sections of the course.

These are: Equilibrium, Recession, Inflation, Stagflation and Growth.

If you can draw the above with their long-run companions then you are well on your way to be able to master this section of the course. At least for the FRQ portion of the exam.

I also find it helpful to answer all questions using the acronym (ROUPY)

Show when you answer a section of the question what is happening.

R - RGDP
O - Output
U - Unemployment
P - Price Level (PL)
Y - Income

Understand that RGDP/Output/Incomes all travel in the same directions

You might be tempted to say that the PL will increase also when the three above increase but during deep recessions the Keynesians would argue the point. They believe that during deep recessions the AS curve is flat/horizontal in the beginning range and therefore if AD increases price levels don't necessarily rise..... Be aware of this, it isn't quizzed very often but it should be in the back of your mind.

So, how would this look on an AP exam.

1. Assume the economy is in equilibrium with full employment.
(a) Draw a CLG (clearly labelled graph) of the AD/AS curve of the economy at full employment.

(ROUPY)

RGDP - Stable (stable means not decreasing or increasing)
Output - Stable
Unemployment - NRU (at the natural rate of unemployment) (Understand this!!!!)
Price Level - Stable at PL1
Y = Income - Stable at Y1

You must draw this graph at least 100 times,, as all questions should (in my opinion) start from this point.