2007 B Macroeconomics FRQ#2

2007 B Macroeconomics FRQ#2

watch me answer it here

https://youtu.be/oXWJLq81Ba8

(A) Assume that businesses are granted a tax credit on spending for machinery. Using a CLG of the loanable funds market, show the effect of the business sector's response on the real interest rate.

OK, so if business are getting a tax credit (a tax credit means that they will get money from the government for buying machinery) for buying machinery. We can assume that more businesses will take out loans to buy machinery. 

I think of loanable funds as money (funds) sitting in the banks and if businesses are going to the bank and taking out those funds then the supply of loanable funds must be decreasing.

It is also acceptable to think of this as government spending, if the government is giving money to businesses then we can think of it as government spending. 

If you remember anything, when government spends the RIR increases.

Real interest rates is increasing.

(B) Now assume that the tax rate on interest income from household savings is lowered and there is no change in government budget deficits. Using a second loanable funds graph show the effects of the household's response on the real interest rates.

This means that the tax you pay, on interest you earn, from your savings account is lowered. So we can assume that more people will save. This implies that people will save more money in the banks and that the supply of loanable funds will increase.

If the supply of loanable funds increases then the RIR will fall.

Fiscal policy cheat sheet, Here.

(C) Given your answer to part (b) what will happen to the countries PPC in the Long-Run?

If people are saving more money, then the RIR is falling and more people will be taking out loans. Why? A lower interest rate means the cost of borrowing is lower and therefore more people borrow.

If more people borrow, we can assume that businesses are borrowing and that they are investing some of that money into Capital Goods. (Also called Capital Stock)

Capital Goods are goods like, factories, equipment, tools, shipping containers, cranes, etc and these are used to create other goods and in the long-run we expect society's ability to produce more goods to increase.

In essence the PPC will shift outward.

This post links, Growth, PPC, Productivity, Here.

** Productivity is linked with Capital Goods, as most people buying new machinery for their businesses are buying better machinery, this will make their workers more productive.**

AP 2007 B Macroeconomics Exam FRQ#1

AP 2007 B Macroeconomics Exam FRQ#1

Watch me answer it here

https://youtu.be/zZw7ER5gzYg

(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

Watch me answer it here

https://youtu.be/91lo4cetSWA

(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

Watch me answer it

https://youtu.be/BnJSiAHQJoY

(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.

** Understand that there is a mistake (I believe) in this problem's answer.

If the FED buys bonds on the open-market and wants the maximum change in the MS

it would buy bonds from banks

If bought from banks there is no reason that some of the funds would need to be held

in the Required Reserves as none of the money would go into checkable deposits,

Buying Bonds from a bank would cause all of the 10m to flow directly into Excess Reserves

All 10m could be loaned out

10m x 5 = 50m maximum increase in the MS.

(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.

2007 Macroeconomic Exam FRQ #1

2007 Macroeconomic Exam FRQ #1

WHAT GOES UP.

Ok, so investors are running to their computers trying to sell their stocks. On the other side investors are rushing to the bank to try and take the money out of their banks to buy the stocks. This implies that the supply of loanable funds is decreasing and/or the demand for loanable funds is increasing,, Yes, they both are happening at the same time because they are the same thing. Check out the graph below. Either one I believe would have been acceptable on the exam.

Supply of loanable funds is decreasing as people take the money out.

Demand for loanable funds is increasing as more and more people rush to take the money out.

Notice, that both cause the RIR to increase. If the RIR is increasing then the NIR (Nominal Interest Rate) is also increasing. Check out this post, Here.

If an economies stock market is decreasing very fast then investors will be trying to get their money out of stocks and into cash. Why? Cash values don't fall as quickly, whereas stock values can plummet over night. So cash is safer.

This implies that the Demand for Money will be increasing.

(B) Due to the decline in wealth caused by the change in the stock prices, the general price level in the US falls relative to the general price level in Japan, a trading partner. Use a CLG (correctly labeled graph) of the FOREX (foreign exchange market) for the US dollar to show the impact of the change in relative price levels on each of the following.

(i) Demand for the dollar.

(ii) Price of the dollar (Yen/dollar)

When you see the phrase "fall in the price level", you should think of inflation. Inflation and the price level are most often the same thing. So, if the price level (inflation level) is falling it means that US goods are getting relatively cheaper than Japanese goods.

This means that Japanese citizens will be buying more US made goods. Japanese will be importing US goods. To buy the US goods Japanese housewives will be dumping money into the FOREX market to purchase US dollars. (Demand for the US $ is increasing therefore the Value of the US$ is increasing, or said another way, the price of the dollar is increasing relative to the Yen) Why? because they will be demanding US dollars $ to buy the US goods as US suppliers don't accept Yen ¥.

* To buy US goods Yen must be exchanged for US dollars. Yen is sold in the FOREX and US dollars are bought.

Check out the FOREX cheat Sheet, Here. 

(C) How will the change in the price of the dollar you indicated in part (b)(ii) affect net exports of the US? Explain.

As the value of the US dollar increases our US goods will become more expensive relative to Japanese goods and those same Japanese housewives will buy less US goods and more Japanese goods. The US exports will decrease.

(D) Using an AD/AS curve show how changes in net exports in part (C) will affect each of the following in the short-run.

(i) Aggregate Demand

(ii) Output & Price Level

If Net Exports are declining then AD is falling as Net Exports (Xn) is a determinant of AD/GDP.

Check out AD/AS Cheat Sheet, Here.

(E) Given your answer in part (D), what will happen to unemployment in the short-run. Explain.

As output decreases then less workers are needed so some are let-go and unemployment will increase. 

Read careful here as the College Board likes to use employment/unemployment and if read incorrectly easy to give the wrong answer.