ALL (Transfer Payments) FRQ's

ALL  Transfer Payments FRQ's

2011B AP Macroeconomics Exam

(A.) Economy is in Long-run Equilibrium, draw a graph

(B.) Consumer confidence falls.

Consumer confidence falls means that consumers are worried about the economy
and therefore will spend less
consumption (C) decreases and AD decreases

(E.) Draw a graph of the loanable funds market showing the effect on transfer payments on the real interest rate.

Transfer payments are payments for things like 

Welfare Benefits = payments to poorer citizens

Unemployment benefits = payments to citizens who have become unemployed

both of these increase when the country slides into a recession

More transfer payments implies the government must pay for these 

so Government Spending increases

If we slide into a recession and transfer payments increase then
Gs must increase to pay for the increase in transfer payments
the government has to borrow to pay for these transfer payments
this reduces the supply of loanable funds in the banks
driving up the RIR

It is also acceptable to say that as the Gs increases
then the demand for loanable funds increases
as the government borrows from the banks to pay for transfer payments
this increase in the demand for loanable funds
drives up the RIR,  increases.