2019 Macro Set 2, FRQ #1, Long-Run, Fiscal, LRAS Shift

2019 Macro FRQ #1 - Set 2

watch me answer it here

https://youtu.be/V-l6jzJQw9I

1) Assume Artland is operating above full employment.

                           (Above full employment = Inflationary scenario)

(ii) If there is no Fiscal or Monetary policy workers will demand higher wages in an inflationary scenario, this shifts the SRAS curve to the left. Higher wages cause business to raise the prices for their goods and services they produce and output returns to the full employment level as demand for these more expensive goods and services falls.

(i) Government spending can decrease

(ii) The unemployment rate will increase - the NRU will not be affected

(iii) Price level in (b) higher or lower than in (c) - (b) has a higher PL

GS decreases & AD shifts left
Lowering the PL

The price level in (c) is lower as Aggregate Demand shifts to the left with the fiscal policy action of a reduction in government spending.

Equilibrium interest rate will decrease as less government spending implies the government isn't borrowing from the loanable funds market. This could have been shown with either an increase in SLF (like I did) or even better a decrease in the demand for loanable funds.

Either is correct and acceptable

2) LRAS curve will shift to the right in the long run as a lower interest rate will increase investment and therefore capital formation causing LR economic growth.

2019 Macro FRQ #3

2019 Macro FRQ #3

If Econoland's Real Interest Rate is falling citizens take their currency into the FOREX buying foreign currency's to invest in the foreign investment assets to get higher Real rates of interest.

More Foreign Investment Assets

(c)(i)(1) & (2) Currency value will decrease

(c)(ii) Econoland's central bank will buy currency reducing the supply of Econoland's currency and driving the value back up.

2019 Macro FRQ #2

2019 Macro FRQ #2

Actual inflation is less than the Expected Inflation

As the actual rate of inflation is below the expected rate lenders are better off.

Think of it like this.

Your a banker you need 5% profit and you expect inflation to be 3% this year, 

If you just charged 5% at the end of the year the 3% inflation 

would have decreased what you gained on the loan to 2%

5% Nominal rate - 3% Inflation rate = 2% Real rate

so,

If you know you need to make 5% and inflation is expected to be 3% 

you make the rate of interest on your loan to be 8%.

8% nominal rate - 3% Inflation rate = 5% Real rate

as,

The actual inflation rate was less than the 3% expected rate

lenders would be better off as they make more profit 

due to lower actual inflation rates.

The natural rate of unemployment is not affected by by changes in the price level in the LR.

Remember that the NRU includes frictional and structural

Cyclical is not included into the NRU 

Cyclical has to do with recessions and inflationary scenarios

So changes due to AD/AS changes do not effect the NRU

What would affect the LRPC

1) Increased Unemployment Benefits attract citizens to stay unemployed longer shifting the LRPC to the right (Higher Natural Rate of Unemployment)

2) Higher Minimum wage rates - shifts the LRPC to the right

3) Frictional Unemployment increases - LRPC shifts right

4) Structural Unemployment Increases - due to better tech making jobs obsolete. LRPC shifts right.

5) Better ways for unemployed and employers to meet would shift the LRPC left reducing unemployment in the long run.

2019 AP Macro FRQ #1

2019 AP Macro FRQ #1

Understand that "no policy action" implies a classical view.

(b)(i) If no policy actions are taken then workers will accept lower wages, lower wages will shift the SRAS curve rightward, as wages fall business owners will lower the prices of goods and services, lower prices means people buy more stuff and output increases back to the full employment level.

The classical view implies that the economy has flexible prices and wages

and therefore will always return back to LR equilibrium just at a lower price level.

(b)(ii)

If the MPC is .8 then the MPS is .2 as they together always equal 1.

To find the government spending multiplier we can use the formula 

1/MPS or 1/1-MPC

I'm like a child and always use the simplest of 1/MPS or 1/.2 = 5

Our spending Multiplier is 5

This implies that anything spent by the Government will be multiplied by 5

If we are in a recession at $500b and full employment is $540b

then we need $40b of GDP increase to close the recessionary gap.

40b/5 = 8b

If the government spends 8b and we multiply that by the GS Multiplier (5)

we get an increase in GDP of 40b.

(c)(i) Minimum change in spending increase of 8b.

Understand that the short understanding is to recognize that the 

Government Taxing Multiplier is always 1 less 

than the Government Spending Multiplier

(Explanation here)

So, our taxing multiplier is going to be 4

The government would have to reduce taxes by 

40b/4 = 10b

to get the aggregate demand curve to full employment.

Reducing taxes is expansionary and we are in a recession so reduce taxes.

(c)(ii) Minimum change by decreasing taxes of 10b.

As the Canadian Central Bank (FED) buys bonds the MS will increase, driving down the

Nominal Interest Rates, lower interest rates stimulate investment, increasing aggregate demand

getting us back to full employment.

Recognize that lower interest rates inside the country 

attracts investors that want to take out loans from banks.

Charge an interest rate

Understand that capital flows of currency from one country to another

are about putting money into banks to get a higher return.

As the rate of interest in Canada falls, Canadian citizens look to put

their money into Mexican banks that pay a relatively higher interest rate.

Pay an interest rate.

Canadians will dump their monies into the FOREX increasing the supply of

Canadian dollars in the FOREX, therefore the value of the Canadian dollar decreases

 relatively to the Mexican Peso