ALL LR Growth FRQ's

ALL - LR Growth - FRQ's

LRAS/ LR Growth Cheat Sheet here

Understand that LR Growth is a Rightward shift of the LRAS Curve

The LRAS Curve shifts due to the 6 things above

but

the College Board mostly

links LR Growth with an increase in Capital Formation (Stock)

Capital Stock is more equipment/factories/machinery

that will allow us to produce more in the future

and

Capital Stock (Formation) is created when there is more investment

and

Investment increases when Interest Rates are lowered

So, 

When Interest Rates decrease there is an increase in Investment, 

some of this Investment is in the form of Capital Formation and 

therefore LR Growth Increases

2019 AP Macroeconomics Exam (Set 2)

(A.) Above Full Employment =  Demand Pull Inflation

(C.) Government = Fiscal Policy action = GS decreases, Taxes Increased, Transfer Payments Decrease

(D.) Due to Fiscal Policy actions draw a loanable funds graph

If Government spending decreases there will be less demand in the 

loanable funds market shifting the DLF curve to the left, the RIR decreases

either of the Loanable Funds graphs below are acceptable as both show the

RIR decreasing

Understand - If the DLF is decreasing that implies there must

be a larger amount of Loanable Funds in the banks

therefore the SLF increases

decreasing the RIR

***(E.) Given the RIR decreasing what is the affect on the LRAS curve (LR Growth)? Explain.

If the RIR is decreasing 

Then investment will increase

If investment increases then we can assume

some of that investment will be in Capital Formation

more capital formation

is a rightward shift of the LRAS curve

and therefore more LR Growth

2018 AP Macroeconomics Exam

(A.) What will happen to private savings?

If the tax on savings is reduced then people will save more

private savings will increase

(B.) Loanable funds graph, show the effect of an increase in private savings on the interest rate.

More savings shifts the SLF curve to the right.

(C.) 

(i) What happens to the AD curve?

If the Interest rate falls investment increases therefore AD increases, shifts right.

***(ii) What is the Long Run effect on the Potential GDP? Explain.

If the RIR decreases then investment will increase

capital formation increases

Potential GDP, LRAS, LR Growth increases

2017 AP Macroeconomics FRQ

(A.) Draw a PPC, X = Full Employment = Potential GDP

(B.) Assume there is an increase in national savings, draw a Loanable funds graph showing the change in the real interest rate.

Savings increase the SLF shifts right

more loanable funds, lower RIR

(C.) Show a new combination of consumer and capital goods on your PPC and label it Z, that is consistent with the increase in an increase in savings.

An increase in savings, causes the SLF to increase
Lowering the RIR, which increases investment
More investment means more capital goods
Therefore Z is an increase in capital goods
production

(D.) Due to C will the LRAS curve shift? Explain.

If the SLF shifts right the RIR will fall

Lower real interest rates will increase investment as

investors like cheaper loans

they will invest by creating capital goods

this increase in capital goods will increase the LRAS curve

LR growth will increase as 

will potential GDP

2015 AP Macroeconomics Exam

(A.) Operating below full employment = Recession Draw a Graph.

(B.) The government lowers taxes (expansionary fiscal policy). What happens to?

(i) Aggregate Demand --- Increases

****(ii) Long Run Aggregate Supply? Explain.

Lowering taxes will increase disposable income

some of this tax savings will make it into the banks

increasing the supply of loanable funds

this will decrease the RIR

Investment will increase

Some of this investment will be capital formation

More capital formation =LRAS curve shifts right

As you can read above,, explanation is important
do what you think is best and what makes the most sense to you

2014 AP Macroeconomics Exam

1. Below full employment level of Real GDP = Recession

(A.) Draw a AD/AS

(B.) US Increases government spending by 100b, financed by borrowing (from the loanable funds market), how will the following be affected?

(i) Cyclical Rate of Unemployment

The cyclical rate of unemployment is only during recessions and inflation

therefore if we are in a recession the cyclical rate of unemployment is quite high

government spending will increase consumption and AD

output increases putting people back to work

therefore cyclical unemployment will decrease.

(ii) The Natural Rate of Unemployment = NRU

The NRU is composed of Frictional and Structural unemployment

not cyclical

therefore government spending and a rightward shift of

aggregate demand doesn't affect the the NRU

NO change to the NRU

(D.) Using a loanable funds graph show the effects of the 100b of Government spending.

Government Spending Increases the RIR

as the government spends its borrowing

the SLF decreases driving up the RIR

 

**(E.) Based on the RIR change in (D.) what is the effect on the LR growth Rate?

When the Government spends the government has to borrow

 the borrowing reduces the supply of loanable funds

this drives up the RIR

this reduces investment (loans)

therefore there is less 

capital investment

capital formation

capital stock

capital accumulation

and less LR Growth

2013 AP Macroeconomics Exam

(A.) Using a AD/AS graph, show the economy in equilibrium

(B.) Personal Savings increase, draw a graph of the loanable funds market show the impact on the RIR.

More savings = more SLF = RIR decreases

(C.) Based on the RIR in (B.) what will happen to

(i) Interest sensitive expenditures = Investment = Increase

(ii) Rate of Growth? Explain.

Are we bored yet?

If the RIR decreases, more investment = more capital formation = more LR Growth

2012 AP Macroeconomics Exam

(A.) Draw a AD/AS in LR Equilibrium

(B.) There is an increase in Exports.

(C.) What is the impact of higher exports on the real wage? Explain.

An increase in exports increases AD and increases the PL

PL increase reduces the Real wage

the Real wage is the amount of stuff your Real wage can actually buy

If the PL increases your wage buys less stuff

your purchasing power has decreased

If Nominal Wages (the wage you get paid)increase by 10%

but

Inflation (the PL) increases by 20%

your real wage has decreased by 10%

(D.) Due to an increase in Exports the shipping company invests in new container ships and equipment (Capital goods).

(i) What component of Aggregate demand will change - Investment

(ii) What is the impact on the LRAS curve? Explain.

More capital goods means a rightward shift of the LRAS curve

more LR Growth

2010 AP Macroeconomics Exam


(A.) Draw a AD/AS graph of the economy in LR Equilibrium.
(B.) Government spending increases on national defense.

(D.) The government borrows from the public, using the loanable funds graph show how the borrowing effects the RIR.

As the Government Borrows the Demand for Loanable funds increases
the RIR Increases

(E.) Given the change in Interest Rates in (D.) what is the impact on

(i) Investment - Decreases

Interest Rates are the Price of Money

If interest rates are high the Price of Money is high

Less people Borrow/invest when the interest rates are high

(ii) Economic Growth Rate, Explain.

If the RIR is increasing, there is less investment

less investment means less capital formation

less capital formation means less LR-Growth 

2009 AP Macroeconomics FRQ


(A.) People move their money out of Tara, how does this affect the value of Tara's currency.

As Tara's citizens move their currency out of Tara

they dump it into the FOREX, this increases the supply of Tara dollars in the FOREX

as the supply increases (in the FOREX) the value of the Tara decreases

(B.) Using a graph of the Loanable Funds market show the impact of of this decision on the RIR.

as the Tara, leaves Tara banks the SLF of Tara dollars decreases

the RIR increases

(C.) Given your answer in (B.), what happens to the rate of growth in Tara. Explain.

As the RIR in Tara increases there is less investment

less investment means less capital formation

less capital formation means less LR Growth

2008 AP Macroeconomics Exam

(C.) We need 500b of GDP
(i) Calculate the minimum increase in Government spending to get to full employment.

If the MPC is 0.8 then the MPS is 0.2

The GS multiplier is 1/MPS = 5

500b/5 = 100b of GS

(ii) Assume instead taxes are reduced. Larger or Smaller. Explain.

The Taxing Multiplier  = MPC/MPS or .8/.2 = 4 Taxing Multiplier

or

Just know that the Taxing Multiplier is always 1 less than the Gov't Spending Multiplier.

500b/4 = 125b of a Tax Decrease

The Taxing multiplier is less than the Gov't Spending multiplier because if the Government Spends all of that spending immediately flows into the economy increasing consumption and people's incomes and therefore GDP

but if taxes are reduced some of that tax savings will saved not spent and 

therefore

taxes will have to be reduced by a larger amount than Government Spending

(D.) Loanable funds graph showing the increase in Government spending.

(E.) How will the interest rate change effect the Growth Rate of the economy? Explain.

If the Government spends it must be borrowing

therefore the SLF is decreasing and the RIR increases

Higher RIR will decrease investment

and capital formation

Less capital formation means less LR Growth.

2007 AP Macroeconomics Exam

(A.) Business are granted a tax credit, draw a loanable funds graph showing the effect of the tax credit on the Real Interest Rate

Tax Credits are best explained as money the Government

will give to you for spending on certain things that the Gov't wants more of.

If you spend $1m on Technology then at the end of the year the Gov't gives you $1m

Think of it like a subsidy - 

The government wants more people to invest in Technology and Investment

so they will replace any money that you spend on technology and investment

If a business knows it's money spent on research, technology, machinery will be refunded by the government at the end of the year it will be more inclined to take out a loan to fund the research, technology, machinery.

More loans demanded = RIR Increases

This is a very tiring explanation, sorry

(B.) Now instead, the government reduces the tax you must pay on savings. Draw a loanable funds graph showing the effect on the RIR.

As the government lowers the tax on savings, more
families will save and therefore the SLF curve
shifts right as more
people put their savings in the banks.
More loanable funds RIR decreases.

(C.) Given your answer to part B what happens to the PPC curve (LRAS) in the Long-Run?

As the RIR falls more people will be inclined to take out loans

some of that investment will be in the form of capital formation

more capital formation implies LR Growth

LRAS curve shifts right

PPC shifts out

I know I said all, but seriously if you don't know what's going on by this point???
2005, 2003, 2002, 2001 and 2000 all have 
LR Growth questions answered the same way.