Automatic Stabilizer Cheat Sheet
Thursday, October 7, 2021
Monday, October 4, 2021
Saturday, October 2, 2021
Friday, September 17, 2021
2021 (Set 1) AP Macro FRQ#3
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A) What is the numerical value of the cyclical rate of unemployment in Flowerland?
The NRU (Natural rate of unemployment) is 5%
The NRU consists of Frictional & Structural unemployment
NRU = 5% = Frictional 4% + Structural 1%
Actual Unemployment = 7% = (Recession) in recessions we have cyclical unemployment
Actual Unemployment = 7% - NRU (5%) = 2% cyclical unemployment
B) Assume the foreign demand for lavendar oil produced in Flowerland increases. What will happen to each of the following in Flowerland in the short-run?
(i) Aggregate Demand? Explain.
Foreign demand increases meaning that exports increase which increases aggregate demand.
(ii) Cyclical Unemployment?
As Aggregate Demand increases cyclical unemployment will decrease as we move further and further out of a recession.
C) Assume 2019 is the base year. Calculate the 2020 Price Index.
Understand that in the Base Year NGDP = RGDP and the CPI is always 100
NGDP/RGDP x 100 = CPI
so
200/200 = 1 (x 100) = CPI of 100 for 2019
Understand that in 2020 the NGDP = 260
2020 RGDP is (Quantity x Prices in the Base Year) or 200 = RGDP
NGDP/RGDP x 100 = CPI
so
260/200 = 1.3
1.3 x 100 = 130
CPI for 2020 = 130
D) If nominal income in Flower increased by 20% from 2019-2020, what happens to the standard of living? Explain.
In 2019 the CPI (inflation was 0) was 100 , always 100 in the base year
In 2020 the CPI is 130 therefore the inflation rate increase by 30% from 2019
If the people's wages (nominl income) only increased by 20%
but the price of everything (inflation) increased by 30%
then
their real wages (real income) decreased by 10%
They can buy 10% less stuff after their raises and inflation take effect.
Their purchasing power, standard of living and real wages decreased by 10%
Saturday, September 11, 2021
2021 (Set 2) AP Macro FRQ#2
2021 (Set 2) AP Macro FRQ#2
a) Draw a single CLG with both SR & LR Phillips curve. Showing the initial SR equilibrium point as X.
Recession = a movement down the SRPC
AD shifting left is a movement down the SRPC
b) Suppose the government impements fiscal policy in order to achieve full employment output and the MPC is .75.
i) Calculate the minimum government spending needed to get back to full employment. Understand the recessionary output gap is 600 billion. So we need 600 billion of RGDP to get to full employment.
The government does not have to spend the full 600b to get us back to full employment because of the magical (multiplier)
The MPC = .75
The MPS = .25
MPC (.75) + MPS (.25) always = 1
The multiplier is 1/MPS = 1/.25 = 4 , The multiplier is 4
Government spending x multiplier = change in RGDP
Gov't spending ? x 4 = 600b
or we can rewrite it as 600b/4 = 150b
Government needs to spend 150b x 4 = the 600b to get us back to full employment
ii) Suppose instead the gov't wants to change taxes. Calculate the minimum change in taxes needed to push aggregate demand by the amount of the output gap (600b).
((The Tax Multiplier is always (1 less) than the Government Spending Multiplier))
Put it in your brain and don't forget it.Since the Government Spending multiplier in (i) was 4 the Tax multiplier is 3
so 600b/3 = 200b
The government must lower taxes by 200b to push Aggregate Demand back to the 600b full employment point as less taxes is expansionary.
The Tax multiplier formula is -MPC/MPS or 600b/3 = -200b
Taxes need to be reduced by 200b that is why the minus is there
c) Assume instead the government takes no policy actions to close the output gap. Explain how the economy will adjust in the long-run.
Recognize that this is now a Classical View question.
If we are in a recession and there is no Fiscal or Monetary policy
in the long run wages, prices, inflationary expectations will decrease
wages and input prices decreasing shifts the SRAS curve to the right
We return back to full employment at a lower PL (price level)
2021 (Set 1) AP Macro FRQ#2
2021 (Set 1) AP Macro FRQ#2
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2. Assume the country is operating below full employment.
Below full employment = Recession
a) Identify a fiscal policy that could restore the economy back to full employment.
Fiscal Policy is either (Government spending or Taxes)
Recession = (More Government Spending or Reduce Taxes)
b) Draw a CLG of the loanable funds market and show the effects of the fiscal policy chosen on the equilibrium real interest rate.
Government spending = an increase in the RIR (Real Interest Rate)
If the government wants to spend more money they must either tax citizens more or borrow the funds. Borrowing of the funds means selling bonds to citizens.
The citizens must take the money out of the banks to pay for the bonds.
(Demand shift) = People walking into banks needing to take out money to buy bonds
increases (rightward shift) of the demand for loanable funds
(Supply Shift) = As people take the money out of the bank it
reduces (shifts leftward) the supply of loanable funds in the banks.
Both shifts are technically correct (Use the one that seems correct to you)
Easiest for me to recognize that anytime the govenment is spending they are borrowing from the Banks reducing the supply of lonable funds which increases the RIR.
c) Based solely (only) on the real interest rate change what will happen to the following?
i) Net Exports. Explain.
If the RIR increases then the demand for the currency will increase causing the currency to appreciate which will decrease the amount of exports for the country.
As the RIR increases citizens of other countries will want to put their money in our banks to get the higher interest rate (they want higher profits)
To put their money in our banks they must exchange it in the FOREX, causing the demand for our currency to increase which drives up the value of our currency.
Since our currency is increasing in value our goods are becoming more expensive.
More expensive goods means less people will want to buy our goods therefore
our exports will decline.
ii) Stock of physical capital (capital goods) . Explain.
As the RIR increases (Loans are now more expensive)
Domestic Investment (taking out of loans) will decrease which implies that less capital goods will be produced in our country. Less physical stock (capital formation/goods) means that the country's long-run growth will be damaged.
RIR increase = Less physical stock (capital goods/formation)
Wednesday, September 8, 2021
2021 (Set 1) AP MAcro FRQ#1
2021 (Set 1) AP Macro FRQ#1
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1. Assume the economy of Sweden is in long-run equilibrium and has a surplus in its current account.
a) Is the Swedish capital account and financial account in deficit, surplus or in balance? Explain.
If the Capital account is in a surplus that implies the financial account must be in a deficit as
CA + FA = 0
b) Draw a CLG of the AD/AS curve for Sweden showing the PL and Y.
Recognize that you must have read #1, Sweden is in long-run equilibrium.
c) The UK decreases its imports from Sweden. On the graph show the new eqilibrium PL & Y.
A decrease in UK imports is a decrease in Swedens exports.
If exports decrease, then AD decreases along with the Price Level (PL), RGDP and Output
d) As a result of the decrease in imports into the UK will Sweden's policy makers be more worried about cyclical unemployment or inflation in the short-run? Explain.
Cyclical unemployment occurs due to a downturn in the economy = recession.
If we are at long-run equilibrium and exports in Sweden decrease we move into a
recessionary gap = cyclical unemployment
e) If the Swedish central bank's (Monetary policy) goal is to return the econmy to long-run equilibrium what open market operation must it use?
FED = Open market operations means either buying bonds or selling bonds.
To move us from a recession to long-run equilibrium the central bank must use expansionary policy by buying bonds.
Buying bonds causes the Money Supply (MS) to increases which causes the
Nominal Interest Rate (NIR) to fall, causing Investment to increase,
AD to increase, RGDP & Output to increase pushing the economy
back to Long-run Equilibrium
f) Draw a CLG of the Sedish krona showing the effects in the FOREX of the UK's decrease in imports from Sweden on the Krona's value in the FOREX.
As UK citizens buy less goods from Sweden the demand for Swedish krona decreases.
g) If the Swedish central banks goal is to reverse the exchange rate change shown in part f, by changing the interest rate, what open market operation would it use?
Open market operations buy the central bank is either buying or selling bonds.
The Swedish Central Bank would sell bonds
Selling bonds, decreases the Money Supply (MS), increasing the Nominal Interest Rate (NIR)
When the NIR is increasing the Real Interest Rate (RIR) is increasing
Larger RIR's attract inflows of currency from the UK into Sweden
meaning that the demand for the Swedish krona will increase
as UK citizens wants to make more profits by depositing money in Swedish
banks to receive the higher Real Interest Rates
to put money in Swedish banks the UK citizens must buy krona
in the FOREX
this increases the demand for the krona
causing the value of the krona to increase.
h) Explain G
Monday, September 6, 2021
2021 (Set 2) AP Micro FRQ#3 (Utility/ MC=MB)
2021 (Set 2) AP Micro FRQ#3 (Utility/ MC=MB)
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a) Calculate the total net benefit of placing three advertisments.
Net = Benefits - Costs
Total Benefit of 3 advertisements = $3,000
Total Cost of 3 advertisements = $800
Total NET Benefit = Total Benefit - Total Cost = Total Net Benefit
$3,000 - $800 = $2,200
b) Calculate the marginal net benefit of the third advertisement.
Marginal = Change in Total / Change in Quantity
c) What is the optimal number of advertisements? Explain using marginal analysis.
The Optimal number of advertisements is where the MC = MB
If we can't get there then we want to get as close as possible to the MC = MB
without having the MC > MB.
The 4th advertisement has a MC of 500 and a MB of 600 = a 100 difference which is as close to where the MC=MB without having the MC > MB.
the 5th advertisement the MC > MB and we would never want to buy advertisements where the MC is greater than the MB as we would be losing money on that advertisement.
d) Suppose over the next year the MB for each advertisement increases by $300. Identify the optimal number of advertisements.
The MB for the 4th unit is now 900and the MC for the 4th unit is still 500 a 400 difference.
The 5th units MC is now greater than its MB and we never want our MC to be greater than the MB or we will be loosing money on that Unit.
So we stay at the 4th unit.
e) There are many firms and they advertise.
We only have one market structure that advertises for the AP.
Monopolistic Competition
Natural Monopoly Cheat Sheet
