2021 (Set 1) AP Macro FRQ#3
watch me answer it here
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%
