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.

Monetary and Fiscal - Nominal and Real Rates

(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 

increase.

(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.