ALL Loanable Funds FRQ's

ALL Loanable Funds FRQ's

2019 AP Macroeconomics (Set 1)

(A.) Use a graph of the loanable funds market, showing an increase in savings will affect the Real interest Rate

(B.) Based on the RIR change in (A) what will happen to Econoland's purchase of foreign assets?

Explain.

2019 AP Macroeconomics Exam (Set 2)

(A.) Draw a AD/AS graph as the economy is operating above full employment = Inflation

(C.) The government wants to close the output gap = Fiscal Policy

(i) Identify a Fiscal policy action to close the gap.

(ii) How will the fiscal policy action affect?

• The Unemployment Rate
• The Natural Rate of Unemployment

(D.) Draw a correctly labelled graph of the loanable funds market. Show the effects of the fiscal policy action on the loanable funds market.

If the Government (Fiscal Policy) is contractionary then a reduction on
government spending or raising taxes will decrease the DLF or increase the 
SLF lowering the RIR.

2018 AP Macroeconomics Exam 

(A.) What will happen to private savings?

(B.) Draw a loanable funds graph showing the changes in private savings.

As the tax on savings is reduced more people will save
shifting the SLF curve to the right
More loanable funds means the RIR (price of money)
will decrease.

2014 AP Macroeconomics Exam
 
(A.) Draw a AD/AS graph showing the economy below full employment.

Below full employment = Recession

(B.) The US increases spending financed by borrowing, how does it effect the 

(i) Cyclical Unemployment

(ii) The Natural Rate of Unemployment

Cyclical Unemployment is greater during recessions and is therefore reduced

when AD returns to full employment

The Natural Rate of Unemployment is Frictional & Structural Unemployment

Increasing AD doesn't change Frictional or Structural so the NRU is not changed.

(D.) Using a CLG of the loanable funds market, show the effect of the 100b government spending on the RIR.

If the Government is spending then it is borrowing from the loanable funds market
both the DLF increases and the SLF decreases.
This drives up the RIR.

2013 AP Macroeconomics Exam


(A.) 

(B.) Personal Savings increase, draw a loanable funds graph showing the effects on the RIR.

As personal savings increase the SLF shifts right
lowering the RIR

2011 AP Macroeconomics Exam

As the investment from other countries flow into the Japanese banks
SLF increases lowering the RIR
Lower RIR increases investment and AD
PL increases along with RGDP and Output
as output increases employment increases

2011B AP Macroeconomics Exam


(A.) Using a AD/AS graph show the economy in equilibrium
(B.) Consumer confidence falls, show the effect on the AD/AS curve.

Consumer Confidence falls - AD falls

(D.) If the government and the central bank do not pursue any discretionary policy how would transfer payments be effected.

If AD falls transfer payments increase

Transfer payments are for welfare, unemployment benefits

(E.) Draw a CLG of the loanable funds market and show the effects of a change in government transfer payments on the RIR.

As the government spends on transfer payments it must borrow from the banks
this reduces the SLF in the banks driving up the RIR.

2010 AP Macroeconomics Exam

(A.) Draw a AD/AS graph showing the economy in equilibrium.
(B.) The government increases spending on national defense without increasing taxes.
(i) Show how this affects aggregate demand.
(ii) How will this government action affect the unemployment rate in the short run, Explain.

Increases in government spending increase consumption and therefore AD
Unemployment will decrease in the short run.

(D.) In order to finance the increase in government spending the government borrows from the public. Using a CLG show the effect of the increased spending on the loanable funds market and on the RIR.

As the government spends it borrows
reducing the SLF in the banks
driving up the RIR.

2010B AP Macroeconomics Exam

(A.) Using a AD/AS graph show the economy at less than full employment = Recession.

(B.) Assume the country spends more on the military how does this effect the following in the short-run?

(i) AD

(ii) PL and output

Below full employment = Recession
More government spending increases consumption and increases AD
PL and output both increase

(D.) Assume more government spending what will happen to the RIR? Explain.

As the government spends it has to borrow from the banks

this reduces the amount of loanable funds in the banks

driving the RIR (price of money) up

this higher interest rate

will Crowd Out Private investment

2009 AP Macroeconomics Exam


(A.) How will this decision affect the value of Tara's currency on the foreign exchange market?
Explain.

As the Tarans move their currency out of the country 

they dump it into the FOREX buying other countries currencies

as they dump their Tarans into the FOREX the Supply of Tarans increase

an increase of the Taran drives down the value.

(B.) Using a loanable funds graph show the impact of the decision by Tarans on the RIR.

As the Tarans take their currency out of their banks

the SLF in Tara decrease

a decrease in the SLF drives the RIR higher.

(C.) Given your answer in part (B) what happens to Tara's long run growth rate? Explain.

As Tara's RIR increases

the amount of investment will decrease due to the higher interest rates

making taking out loans more expensive

less investment means less capital formation which

means less LR Growth.

2009B AP Macroeconomics Exam


(A.) Using a CLG of the FOREX for the Canadian Dollar show the effects of the higher RIR in India on the following,
(i) Supply of Canadian Dollars. Explain.
(ii) The value of the Canadian Dollar.

A higher interest rate attracts currency from other countries

as those countries investors want to deposit this monies into banks that pay higher interest rates

Since India has a higher interest rate the Canadian investors will dump their

Loonies into the FOREX increasing the supply of Loonies in the FOREX

driving down depreciating the value of the Canadian Dollar.

(B.) Using a loanable funds graph show how the higher RIR in India affects the RIR in Canada.

The higher RIR in India causes Canadians to have a capital outflow
Canadians take their monies out of Canadian banks causing the SLF to decrease
this drives the RIR in Canada higher

2008 AP Macroeconomics Exam


(C.) The economy is in Recession we need 500b of RGDP growth and the MPC is .8.
(i) Calculate the minimum increase in Government Spending that could move us to full-employment.

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

the Government Spending Multiplier formula is 1/MPS

so 1/.2 = 5

Recognize that the Government if it spends 100b 

will be multiplied by the 5 to increase GDP by 500b

(ii) Assume instead the gov't reduces taxes.

If the Government spending multiplier is 5 then the Taxing Multiplier is 4

the Taxing Multiplier is always 1 less than the Gov't Spending Multiplier

the Taxing Multiplier's Formula is MPC/MPS

or

.8/.2 = 4

therefore, to get the 500b increase in GDP the Gov't would reduce taxes by

500b/4 = 125b

125b x 4 = 500b

(D.) Using a loanable funds graph show the effect of an increase in gov't spending on the RIR.

As the government comes into the loanable funds market and borrows
the demand for Loanable funds will increase driving up the RIR

2008B AP Macroeconomics Exam


(A.) Increase in gov't spending will affect
(i) AD
(ii) SRAS
(B.)

As the gov't spends AD increases as consumption increases
SRAS is not affected
PL & RGDP (Output) Increased

(C.) The gov't spending is funded by borrowing from the banks using a loanable funds graph show the effect on the RIR.

As gov't spending increase the gov't borrows from the banks
increasing the demand for loanable funds
driving up the RIR

2007 AP Macroeconomics Exam

(A.) Government is giving tax credits for spending on machinery, draw a loanable funds graph showing the effect of the business sectors response to the tax credits on the RIR.

Understand that Tax Credits are a lot like subsidies, 

if you spend 1m on machinery at the end of the year the gov't gives you back 1m

free machinery in essence.

As tax credits are in essence free machinery business will take out loans to buy
new machinery so the DLF will increase.

(B.) Tax rates on interest income from household savings decreases show the effect on the loanable funds market and the RIR.

Understand that a reduction in taxes on households savings will entice people

to save more

more savings = an increase in the SLF's in the banks

the rightward shift of the SLF lowers the RIR

(C.) Due to the lower RIR what happens to the PPC in the long run? Explain.

As the RIR decreases investment increases and

therefore there is more capital formation

which implies more LR Growth

rightward shift of the LRAS curve

and 

an outward shift of the PPC

2006 AP Macroeconomics Exam


(A.) Using a money market graph show how the increase in incomes will effect the Nominal interest rate in the short-run.

As incomes increase people consume more and
need to hold more cash for their increased purchases
the DM shifts right increasing the nominal interest rate

(B.) House holds increase savings for retirement draw a loanable funds graph and show how it effects the RIR.

As people deposit more money savings in the banks the SLF increase
driving down the RIR

2006B AP Macroeconomics Exam

1. Less than full employment = Recession

(A.) Draw a AD/AS graph showing recession

(C.) The gov't implements a tax incentive to encourage individuals to save more for retirement.

as more savings for retirement SLF shifts rightward
increasing of SLF drives down the RIR

2005 AP Macroeconomics Exam

An increase in deficit (gov't) spending

will reduce the SLF as the government must borrow from the banks to spend

this reduces the SLF or increases the DLF

RIR increase

2005B AP Macroeconomics Exam

Gs increases and the government borrows from the banks
reducing the SLF increasing the RIR

2004 AP Macroeconomics Exam

2003B AP Macroeconomics Exam

1. Below full employment = Recession

(A.) Draw a AD/AS graph showing recession
(B.) Show the effects of gov't spending

(C.) Gov't increases spending, show the effects of deficit spending

Gov't spending increases then the DLF increases and the RIR increases

2002 AP Macroeconomics Exam