2023 AP Macroeconomics FRQ Set 2 #1

 2023 AP Macroeconomics FRQ Set 2 #1

A) Using the relevant numerical values given, draw a correctly labeled graph of the short-run & long-run Phillips curves. Label the current short-run equilibrium point as X. Plot the relevant numerical values provided on the graph.

The NRU is 5% and the actual rate of unemployment is 7%

The economy is in a recession as the 

Actual Rate of Unemployment > Natural Rate of Unemployment = Recession

 

B) Is the expected inflation rate greater than, less than, or equal to 1%? Explain.

Expected rate is where the SRPC & LRPC intersect

As the economy is in a recession

The actual rate of inflation must be lower than the expected rate

As recessions are high unemployment and low-price levels (inflation)

 

C) Assume the marginal propensity to consume is 0.9.

(i) if the government decreases income taxes by 20 billion, calculate the maximum change in aggregate demand. Show your work.

(ii) If instead the government increases spending by 20 billion, calculate the maximum change in

Aggregate demand. Show your work.

 

 The formula for finding the spending multiplier is 1/MPS (Marginal Propensity to Spend)

Or

1/1-MPC (Marginal Propensity to Consume)

 

I’m simple like a child,,, so I’m always going to use the 1/MPS

 

The MPC + MPS = 1 (as there are only two things to do with a dollar, spend it or save it.)

 

If the MPC is 0.9 then the MPS must be 0.1 as 0.9 + 0.1 = 1 (Use your calculator, now usable on the exam)

 

So, 1/MPS = 1/.1 = 10, the spending multiplier is 10 (AGAIN, use your calculator)

 

Let’s start with (ii) first, 

 

 If the spending multiplier is 10 and the government increases spending by 20b

 

Then the 20b is multiplied by the multiplier and that gives you the increase in GDP

 

GS = 20B x 10 (spending multiplier) = 200b increase in aggregate demand.

 

Now, (i)

 

The Tax Multiplier’s (yes there are two multipliers you need to know) formula is MPC/MPS.

 

MPC = 0.9

MPS = 0.1

 

0.9/0.1 = 9 (The taxing multiplier is 9) Hint: The tax Multiplier is always 1 less than the spending multiplier

 

Don’t believe me,,, use you calculator again.

 

If the government cuts taxes (expansionary fiscal policy) by 20b and the Tax Multiplier is 9

 

20b x 9 = 180b increase in aggregate demand.

D) On your graph in part (a), show a possible new short-run equilibrium point labeled Z that would result if the government increases spending and there is no change in inflationary expectations.

 

That last part is a worded a bit funny (strange). Teachers sometimes inadvertently skip over the phrase inflationary expectations.

 

Inflationary Expectations occurs anytime your SRAS (Short-run aggregate supply) curve shifts left or right.

 

Government spending only shifts the aggregate demand curve so there is no inflationary expectation changes,, 

Tricky, tricky, college board.

The economy is in a recession.

 If the government is spending it will push aggregate demand to the right

This is a movement sliding up the SRPC (Short-run Phillips curve)

Back toward full employment on the LRPC (Long-run Phillips curve)

E) How would an increase in unemployment compensation affect aggregate demand in the short-run?

Explain.

 

If unemployment compensation is increased citizens who are unemployed are going to have more money given to them from the government (tax payers). They will spend this money and consumption will increase in the economy as a whole shifting aggregate demand rightward in the short run.

F) Assume instead the government takes none of the preceding policy actions. (Northland is still in a recession) What will happen to each of the following.

 

(i) The SRAS curve. Explain.

(ii) The short run Phillips curve

(iii) The actual unemployment rate.

 

(i) The SRAS curve will shift to the right as during a recession the PL is low and people will accept lower wages to go back to work.

 

Lower PL and Lower wages are lower costs to businesses and therefore the SRAS curve shifts right.

You could also have said that inflationary expectations are thought to be decreasing also shifts the SRAS rightward.

 

(ii) The SRPC will shift leftward (Recognize that the SRAS & SRPC always do the opposite of each other)

Rightward shift of the SRAS is a leftward shift of the SRPC

 

(iii) The actual unemployment rate will decrease as people go back to work in the long run.

 

You must think on this Padiwan.

2023 AP Microeconomics FRQ Set 2 #3 (Natural Monopoly)

 2023 AP Microeconomics FRQ Set 2 #3 (Natural Monopoly)

A) Is the firm shown in this graph a natural monopoly? Explain.

 

Yes! The firm is a natural monopoly in that the firm’s ATC curve is downward sloping throughout the range of the demand curve.

 

B) Using the labeling from the graph, identify the area representing the deadweight loss for this profit-maximizing monopoly.

 

First, Find the Profit Maximizing Price & Quantity

Second, Find the Socially Optimal Quantity

Area of DWL is equal to (bfg)

C) In order to improve resource allocation, the government sets a price that results in the firm earning zero economic profit.

(i) Using labeling from the graph, identify the price and resulting quantity the firm would produce.

 

The firm would earn zero economic profit when it produces where the 

P = ATC

P = P3 & Quantity = Q3

(ii) Will this government policy eliminate the deadweight loss? Explain using labeling from the graph.

When the firm is producing at break-even (P=ATC) (Q3)

It still isn’t producing at the socially optimal quantity (P = MC)

There is no DWL at the Socially Optimal Quantity (Q4)

There will still be DWL

And is equal to the triangle (cjg)

D) Instead, the government decides to set a price that results in the socially optimal quantity of output. Will the firm earn a positive, negative or zero economic profit? Explain using the labeling from the graph.

The firm is making a negative economic profit (loss) as the 

Price is less than the ATC at the socially optimal quantity (Q4)

Area of economic loss is (P2 - P1) x Q4

2023 AP Micro FRQ Set 1 #3

 2023 AP Micro FRQ Set 1 #3

A) Calculate Hansel Hangout’s total fixed cost. Show your work.

 

Hansel is a profit maximizing firm, which means they produce where MC = MR.

 

We should know that ATC = AVC + AFC

 

Average Total Costs = Average Variable Costs + Average Fixed Costs

Or 

We could rearrange it and recognize that ATC – AVC = AFC

 

So, at 6 units of output/production the ATC = $21 & the AVC = $9

How to find the ATC & AVC? 

Go to the output of production (6 units) and go straight up.

We hit the AVC curve at $9 and if we keep going up, we hit the ATC at $21.

ATC = $21

AVC = $9

So, the AFC = $12

 

Now you are scratching your head and saying, “Charles how does that help me find TFC”?

 

You should know that to go from AFC to TFC, we take AFC and multiply it by the output.

 

Or to say it differently

AFC x Quantity = Total Fixed Cost 

ATC x Quantity/output = Total Cost

AVC x Quantity/output = Total Variable Cost

 

Recognize that Total Fixed Cost & Fixed Cost are the same thing. :0

 

AFC x Quantity = Total Fixed Cost 

Answer A) $12 x 6 units produced = TFC of $72

 

 

B) Identify the price and quantity for Hansel’s at Profit max.

 

I believe we already did it, 

 

Profit Maximization for Hansel’s Hangout for Good X is where MC = MR

Answer B) Price $14 Quantity $6

C) Calculate the economic profit at the quantity identified in part (b). Show your work.

 

Economic profit = Total Revenue – Total Costs

 

6 quantity/outputs/units sold x $14 = Total Revenue of $84

 

To find Total Costs we find average total costs x quantity produced

Or

ATC x Quantity = TC

 

The firm at profit max (MR=MC) produces 6 units 

and at 6 units the ATC is $21 (we found it earlier)

 

$21 x 6 = a TC of $126

Hansel isn’t doing very well.

Total Revenue = $84

Total Costs $126

 

Remember Profit = TR – TC

 

$84 - $126 = -$42

 

Answer C) Hansel has a Negative economic profit of $42

Or we could say Hansel has a loss of $42

D) As the market for Good X adjusts to the long-run equilibrium, what will happen to the price of Good X? Explain.

From the 2023 Cheat Sheet for Perfect Competition.

How do we know that firm is a perfectly competitive firm = The MRDARP curve is horizontal

 

The price is constant which is a characteristic of perfectly competitive firms.

 

Losses in an industry cause some firms to Exit/go broke and the supply of the Good X decreases/shifts left as those firms quit producing Good X.

 

Answer D) The price increases as supply shifts left.

 

E) Assume the cross-price elasticity of demand between Good X and Good C is positive. Given the change in the long-run price of Good X in part (d), will the quantity demanded of Good C increase, decrease, or remain the same? Explain.

 

You should know that if the cross-price elasticity is positive that means the two goods are substitutes.

 

Also, substitutes are positively related in price. 

 

Example: As the price of Coke increase people switch to Pepsi, increasing the demand for Pepsi.

Answer E) Increasing demand which will increase the quantity demanded for the good.

2023 AP Macroeconomics FRQ Set 2 #3 (Unemployment)

 2023 AP Macroeconomics FRQ Set 2 #3 (Unemployment)

3. Assume that in the country of Zeta, the civilian noninstitutional population aged 16 and over is 1,000,000. The labor force participation rate is 70%, the unemployment rate is 9%, and the natural rate if unemployment is 5%.

 

A) Calculate the number of people in Zeta that are unemployed. Show your work.

 

The unemployment rate is the unemployed/ labor force

Or

Unemployment / employed + unemployed

The labor force is the unemployed + employed

 

1,000,000 x .7 = 700,000 is the labor force

 

The unemployment rate is 9% and 9% of 700,000 = 63,000 (unemployment number)

The employed would be 91% = 700,000 x .91 = 637,000 (employed number)

 

(a) 700,000 x 9% = 63,000

B) Is the economy of Zeta currently experiencing a recessionary gap, an inflationary gap or no output gap? Explain.

 

The natural rate of unemployment (also called the full employment level of unemployment)

 is 5% (as said in the question) but the actual rate of unemployment is 9%.

 

There is a higher level of unemployment than the natural rate of unemployment therefore there is a recessionary gap.

 

C) Consumer goods and capital goods are produced in the country of Zeta. Draw a correctly labeled graph of the production possibilities curve for Zeta. Indicate a point labeled A, that represents the current state of Zeta’s economy.

D) If some individuals that are counted as unemployed in Zeta stop looking for work, what will happen to each of the following:

 

(i) The labor force participation rate. Explain.

 

If some unemployed stop looking for work, they become discouraged workers. Discouraged workers are not considered part of the labor force as they aren’t unemployed or employed.

So, the labor force participation rate will decrease

 

(ii) The unemployment rate.

 

If people who were unemployed then choose to stop looking for work they get kicked off the unemployment rolls (list) becoming discouraged workers, therefore the unemployment rate has to decrease.

2023 AP Macroeconomics FRQ Set 1 #2 (Phillips Curve, Ample Reserves, FOREX)

 2023 AP Macroeconomics FRQ Set 1 #2

(From the Ample Reserves Cheat Sheet)

2. The economy of Norlandia is in short-run equilibrium with an actual inflation rate that is currently higher than the expected inflation rate.

This implies that the economy is in an inflationary gap.

Look at this graph from the Phillips curve cheat sheet.

Notice that expected inflation is the same as full employment

If the inflation rate is greater than expected inflation we must have an inflationary gap.

A) Draw a correctly labeled graph (CLG) of the short run and long run Phillips curve. Label the current short run equilibrium point as X.

B) The banking system in Norlandia has ample reserves. Identify a specific monetary policy action that the central bank of Norlandia would take to bring the inflation rate closer to the expected rate of inflation.

Ample Reserves used to decrease the Price Level (PL) Inflation

would need to be contractionary.

Contractionary Monetary Policy with Ample Reserves is 

Increasing the Administered Interest Rate (AIR)

or

Increasing the Interest on Reserve Balances (IORB)

A specific monetary policy to lower inflation toward the expected inflation rate 

is to increase the (AIR) Administered Interest Rate

C) Based solely on the effect of the monetary policy action identified in part (b) on interest rates in Norlandia, will there be an increase, decrease or no change in the flow of international capital into Norlandia? Explain.

We should understand that foreign capital (money) is always looking for higher rates of return.

Higher interest rates in Norlandia will attract more/increase foreign capital as these investors want to put their money into Norlandia to make higher profits on the higher interest rates paid in Norlandia banks.

(we are speaking about people putting their money into Norlandia banks 

and earning a higher interest rate on their savings/capital)

D) Based on the answer in part (c), what will happen to international value of Norlandia's currency? Explain.

For foreign capital to flow into Norlandia's banks and get the higher interest rates it first must be converted into Norlandia dollars as Norlandia banks only accept Norlandian currency.

If people are buying more Norlandian currency 

then the supply of Norlandian currency in the FOREX is decreasing/shifting leftward

this will cause the value of Norlandian currency to appreciate.

2023 AP Microeconomics FRQ Set 2 #2 (Comparative Advantage & Terms of Trade)

 2023 AP Microeconomics FRQ Set 2 #2 (Comparative Advantage & Terms of Trade)

First think about the steps of comparative advantage questions

1. Is it an output or input problem?

The PPC’s of each country show the amount of each good that can be produced.

Production of goods = output problem

2. Identify absolute advantage

Absolute advantage for an output problem is which country can produce the most

They both can produce 100 wheat – so no one has an absolute advantage for wheat

South can produce 50 cloth while North can produce 300 cloth

North has absolute advantage in cloth as it can produce more.

3. Comparative Advantage: Draw a table – do the math.

Answered Below

4. Check answer using quick method

Answered Below

A) Which country has a comparative advantage in producing wheat? Explain using numbers.

 

Set up your table Step #3

I like countries or people on the left and goods on the top

An output problem so the math is over

Output = Over

Look at Southland first, the 50 goes over the 100 & the 100 goes over the 50

Then do

Northland, the 300 goes over the 100 and the 100 goes over the 300

Your table should look like this, but better :0

Do the math & explain 

Southland

Southland 50/100 = .5

The .5 is the opportunity cost of producing 1 bushel of wheat for Southland

Let’s say it a bit differently – for every 1 bushel of  wheat produced 

Southland gives up .5 cloth

Let’s look on the cloth side for Southland

Southland 100/50 = 2

The 2 is the opportunity cost of producing 1 cloth for Southland

For every 1 cloth produced Southland gives up 2 bushels of wheat

To find comparative advantage we need to do the math for both countries and compare

Northland

Northland 300/100 = 3

Know how to read the table correctly – 

For every 1 bushel of wheat produced Northland gives up 3 cloth

Northland 100/300 = .33

For every 1 cloth produced Northland gives up .33 bushels of wheat

We then want to compare the opportunity costs in the columns for Wheat

The country with the lowest opportunity cost for wheat should produce wheat.

For every 1 wheat produced Southland gives up .5 cloth

For every 1 wheat produced Northland gives up 3 cloth

.5 is the lowest opportunity cost for wheat so Southland should produce/export wheat

 

Let’s look in the column for Cloth and compare

The country with the lowest opportunity cost for cloth should produce cloth.

For every 1 cloth produced Southland gives up 2 wheat

For every 1 cloth produced Northland gives up .33 wheat

.33 is the lowest opportunity cost for cloth so Northland should produce/export cloth

 

With comparative advantage each country should produce one of the goods

You will never have a situation where 1 country will produce both goods

That was a lot of work

Let’s say it again & explain using Numbers

Southland has a comparative advantage in wheat as it has the lowest opportunity cost.

Southland gives up .5 cloth for 1 wheat while Northland gives up 3 cloth for 1 wheat.

Southland should produce/export wheat as it has the lowest opportunity cost.

 

Northland has a comparative advantage in cloth as it has the lowest opportunity cost

Northland gives up .33 wheat for 1 cloth and Southland gives up 2 wheat for 1 cloth

Northland should produce/export cloth as it has the lowest opportunity cost.

 

((Southland should produce wheat & Northland should produce cloth))

 

Step 4. Check answers using quick method.

First cross multiply

 As 100 x 300 = 30,000 The 30,000 is larger than 5,000

We use the two numbers that gave us the 30,000 

and those two numbers show who should produce.

((Southland should produce wheat & Northland should produce cloth))

We have done something right as the slow and the fast method both gave us the same answers

 

B) Identify a specific number of yards of cloth that could be traded for 10 bushels of wheat and would be beneficial to North & South.

First let’s find the mutually beneficial terms of trade for 1 wheat,

If we are looking for what would be could be traded for 10 wheat, we just need to multiply the opportunity costs by 10 and then pick a number between the two opportunity costs.

.5 x 10 = 5

&

3 x 10 = 30

Mutually beneficial terms of trade is a number between 5 & 30

10 wheat for 15 cloth would work

Or 

10 wheat for 20 cloth would work

For 10 wheat Southland (the producer of wheat) needs to get more than 5 and Northland (the consumer of wheat) needs to give up less than 30

For 10 wheat a number of cloth between 5 & 30 would be mutually beneficial

 

C) Southland’s maximum possible output of wheat from 100 bushels to 75 bushels. Assuming no other changes, will Southland have a comparative advantage in producing cloth? Explain using numbers.

Southland’s production of wheat falls to 75 bushels.

It is still an output problem and the math is over

50/75 = .66

75/50 = 1.5

We look in the columns and notice that Southland should still produce wheat as it has the lowest opportunity cost and Northland should produce cloth

 

Explain using the numbers for cloth.

Northland should produce cloth as for every 1 cloth produced Southland gives up 1.5 wheat 

And Northland for every 1 cloth produced gives up .33 wheat, as Northland gives up the least wheat “has the lowest opportunity cost” it should produce cloth.

D) Turnips are produced in a perfectly competitive market in Alderia, a third country, which does not engage in international trade. Runoff from turnip fields pollutes Alderia’s rivers hurting its citizens.

 

(i)  Does the turnip market equilibrium result in an efficient allocation of resources? Explain using marginal analysis.

 

Pollution implies our analysis should be graphed using the production of turnips 

as a negative production externality.

Explain using marginal analysis.

There is a negative production externality as the marginal social cost of producing turnips is greater than the marginal personal cost causing harm to citizens due to the runoff pollution. The allocatively efficient quantity of production should be where the marginal social benefit of consumption of turnips equals the marginal social cost of producing turnips. There is market failure as the market is not producing at the allocatively efficient quantity.

(ii) In an effort to reduce pollution Alderia’s government imposes a lump-sum tax on turnip production. What will be the impact on the turnip market equilibrium price and quantity in the short-run?

 

Lump sum taxes do not affect the marginal cost of the companies and therefore do not change the price or the quantity of production in the short-run.

 

If the government had wanted to reduce the production of turnips, they should have imposed a per-unit tax. As per-unit tax is treated like variable costs in that they shift the marginal cost curve leftward reducing the amount of the good produced.