PPC Cheat Sheet
Friday, June 9, 2017
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.
(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
(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.
(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.