2023 AP Macroeconomics FRQ Set 2 #3 (Unemployment)

 2023 AP Macroeconomics FRQ Set 2 #3 (Unemployment)

3. Assume that in the country of Zeta, the civilian noninstitutional population aged 16 and over is 1,000,000. The labor force participation rate is 70%, the unemployment rate is 9%, and the natural rate if unemployment is 5%.

 

A) Calculate the number of people in Zeta that are unemployed. Show your work.

 

The unemployment rate is the unemployed/ labor force

Or

Unemployment / employed + unemployed

The labor force is the unemployed + employed

 

1,000,000 x .7 = 700,000 is the labor force

 

The unemployment rate is 9% and 9% of 700,000 = 63,000 (unemployment number)

The employed would be 91% = 700,000 x .91 = 637,000 (employed number)

 

(a) 700,000 x 9% = 63,000

B) Is the economy of Zeta currently experiencing a recessionary gap, an inflationary gap or no output gap? Explain.

 

The natural rate of unemployment (also called the full employment level of unemployment)

 is 5% (as said in the question) but the actual rate of unemployment is 9%.

 

There is a higher level of unemployment than the natural rate of unemployment therefore there is a recessionary gap.

 

C) Consumer goods and capital goods are produced in the country of Zeta. Draw a correctly labeled graph of the production possibilities curve for Zeta. Indicate a point labeled A, that represents the current state of Zeta’s economy.

D) If some individuals that are counted as unemployed in Zeta stop looking for work, what will happen to each of the following:

 

(i) The labor force participation rate. Explain.

 

If some unemployed stop looking for work, they become discouraged workers. Discouraged workers are not considered part of the labor force as they aren’t unemployed or employed.

So, the labor force participation rate will decrease

 

(ii) The unemployment rate.

 

If people who were unemployed then choose to stop looking for work they get kicked off the unemployment rolls (list) becoming discouraged workers, therefore the unemployment rate has to decrease.

2023 AP Macroeconomics FRQ Set 1 #2 (Phillips Curve, Ample Reserves, FOREX)

 2023 AP Macroeconomics FRQ Set 1 #2

(From the Ample Reserves Cheat Sheet)

2. The economy of Norlandia is in short-run equilibrium with an actual inflation rate that is currently higher than the expected inflation rate.

This implies that the economy is in an inflationary gap.

Look at this graph from the Phillips curve cheat sheet.

Notice that expected inflation is the same as full employment

If the inflation rate is greater than expected inflation we must have an inflationary gap.

A) Draw a correctly labeled graph (CLG) of the short run and long run Phillips curve. Label the current short run equilibrium point as X.

B) The banking system in Norlandia has ample reserves. Identify a specific monetary policy action that the central bank of Norlandia would take to bring the inflation rate closer to the expected rate of inflation.

Ample Reserves used to decrease the Price Level (PL) Inflation

would need to be contractionary.

Contractionary Monetary Policy with Ample Reserves is 

Increasing the Administered Interest Rate (AIR)

or

Increasing the Interest on Reserve Balances (IORB)

A specific monetary policy to lower inflation toward the expected inflation rate 

is to increase the (AIR) Administered Interest Rate

C) Based solely on the effect of the monetary policy action identified in part (b) on interest rates in Norlandia, will there be an increase, decrease or no change in the flow of international capital into Norlandia? Explain.

We should understand that foreign capital (money) is always looking for higher rates of return.

Higher interest rates in Norlandia will attract more/increase foreign capital as these investors want to put their money into Norlandia to make higher profits on the higher interest rates paid in Norlandia banks.

(we are speaking about people putting their money into Norlandia banks 

and earning a higher interest rate on their savings/capital)

D) Based on the answer in part (c), what will happen to international value of Norlandia's currency? Explain.

For foreign capital to flow into Norlandia's banks and get the higher interest rates it first must be converted into Norlandia dollars as Norlandia banks only accept Norlandian currency.

If people are buying more Norlandian currency 

then the supply of Norlandian currency in the FOREX is decreasing/shifting leftward

this will cause the value of Norlandian currency to appreciate.

2023 AP Microeconomics FRQ Set 2 #2 (Comparative Advantage & Terms of Trade)

 2023 AP Microeconomics FRQ Set 2 #2 (Comparative Advantage & Terms of Trade)

First think about the steps of comparative advantage questions

1. Is it an output or input problem?

The PPC’s of each country show the amount of each good that can be produced.

Production of goods = output problem

2. Identify absolute advantage

Absolute advantage for an output problem is which country can produce the most

They both can produce 100 wheat – so no one has an absolute advantage for wheat

South can produce 50 cloth while North can produce 300 cloth

North has absolute advantage in cloth as it can produce more.

3. Comparative Advantage: Draw a table – do the math.

Answered Below

4. Check answer using quick method

Answered Below

A) Which country has a comparative advantage in producing wheat? Explain using numbers.

 

Set up your table Step #3

I like countries or people on the left and goods on the top

An output problem so the math is over

Output = Over

Look at Southland first, the 50 goes over the 100 & the 100 goes over the 50

Then do

Northland, the 300 goes over the 100 and the 100 goes over the 300

Your table should look like this, but better :0

Do the math & explain 

Southland

Southland 50/100 = .5

The .5 is the opportunity cost of producing 1 bushel of wheat for Southland

Let’s say it a bit differently – for every 1 bushel of  wheat produced 

Southland gives up .5 cloth

Let’s look on the cloth side for Southland

Southland 100/50 = 2

The 2 is the opportunity cost of producing 1 cloth for Southland

For every 1 cloth produced Southland gives up 2 bushels of wheat

To find comparative advantage we need to do the math for both countries and compare

Northland

Northland 300/100 = 3

Know how to read the table correctly – 

For every 1 bushel of wheat produced Northland gives up 3 cloth

Northland 100/300 = .33

For every 1 cloth produced Northland gives up .33 bushels of wheat

We then want to compare the opportunity costs in the columns for Wheat

The country with the lowest opportunity cost for wheat should produce wheat.

For every 1 wheat produced Southland gives up .5 cloth

For every 1 wheat produced Northland gives up 3 cloth

.5 is the lowest opportunity cost for wheat so Southland should produce/export wheat

 

Let’s look in the column for Cloth and compare

The country with the lowest opportunity cost for cloth should produce cloth.

For every 1 cloth produced Southland gives up 2 wheat

For every 1 cloth produced Northland gives up .33 wheat

.33 is the lowest opportunity cost for cloth so Northland should produce/export cloth

 

With comparative advantage each country should produce one of the goods

You will never have a situation where 1 country will produce both goods

That was a lot of work

Let’s say it again & explain using Numbers

Southland has a comparative advantage in wheat as it has the lowest opportunity cost.

Southland gives up .5 cloth for 1 wheat while Northland gives up 3 cloth for 1 wheat.

Southland should produce/export wheat as it has the lowest opportunity cost.

 

Northland has a comparative advantage in cloth as it has the lowest opportunity cost

Northland gives up .33 wheat for 1 cloth and Southland gives up 2 wheat for 1 cloth

Northland should produce/export cloth as it has the lowest opportunity cost.

 

((Southland should produce wheat & Northland should produce cloth))

 

Step 4. Check answers using quick method.

First cross multiply

 As 100 x 300 = 30,000 The 30,000 is larger than 5,000

We use the two numbers that gave us the 30,000 

and those two numbers show who should produce.

((Southland should produce wheat & Northland should produce cloth))

We have done something right as the slow and the fast method both gave us the same answers

 

B) Identify a specific number of yards of cloth that could be traded for 10 bushels of wheat and would be beneficial to North & South.

First let’s find the mutually beneficial terms of trade for 1 wheat,

If we are looking for what would be could be traded for 10 wheat, we just need to multiply the opportunity costs by 10 and then pick a number between the two opportunity costs.

.5 x 10 = 5

&

3 x 10 = 30

Mutually beneficial terms of trade is a number between 5 & 30

10 wheat for 15 cloth would work

Or 

10 wheat for 20 cloth would work

For 10 wheat Southland (the producer of wheat) needs to get more than 5 and Northland (the consumer of wheat) needs to give up less than 30

For 10 wheat a number of cloth between 5 & 30 would be mutually beneficial

 

C) Southland’s maximum possible output of wheat from 100 bushels to 75 bushels. Assuming no other changes, will Southland have a comparative advantage in producing cloth? Explain using numbers.

Southland’s production of wheat falls to 75 bushels.

It is still an output problem and the math is over

50/75 = .66

75/50 = 1.5

We look in the columns and notice that Southland should still produce wheat as it has the lowest opportunity cost and Northland should produce cloth

 

Explain using the numbers for cloth.

Northland should produce cloth as for every 1 cloth produced Southland gives up 1.5 wheat 

And Northland for every 1 cloth produced gives up .33 wheat, as Northland gives up the least wheat “has the lowest opportunity cost” it should produce cloth.

D) Turnips are produced in a perfectly competitive market in Alderia, a third country, which does not engage in international trade. Runoff from turnip fields pollutes Alderia’s rivers hurting its citizens.

 

(i)  Does the turnip market equilibrium result in an efficient allocation of resources? Explain using marginal analysis.

 

Pollution implies our analysis should be graphed using the production of turnips 

as a negative production externality.

Explain using marginal analysis.

There is a negative production externality as the marginal social cost of producing turnips is greater than the marginal personal cost causing harm to citizens due to the runoff pollution. The allocatively efficient quantity of production should be where the marginal social benefit of consumption of turnips equals the marginal social cost of producing turnips. There is market failure as the market is not producing at the allocatively efficient quantity.

(ii) In an effort to reduce pollution Alderia’s government imposes a lump-sum tax on turnip production. What will be the impact on the turnip market equilibrium price and quantity in the short-run?

 

Lump sum taxes do not affect the marginal cost of the companies and therefore do not change the price or the quantity of production in the short-run.

 

If the government had wanted to reduce the production of turnips, they should have imposed a per-unit tax. As per-unit tax is treated like variable costs in that they shift the marginal cost curve leftward reducing the amount of the good produced.

2023 AP Macroeconomics Set 1 #1 FRQ

1. The economy of Vanderlandia is in short-run equilibrium with a real GDP of $500m. The full-employment level of RGDP is $550m.

A) Draw a correctly label graph (CLG) of the aggregate demand, SRAS and LRAS curves showing, 

        (i) The current equilibrium real output (RGDP - Y1) and Price level (PL1).

        (ii) The full employment output, labeled Yf.

(The economy is in a recession gap as the current equilibrium (Y1 - $500m) 

has less output than the full employment equilibrium at (Yf - $550m)

B) Assume no policy action is taken to restore to full employment.

        (i) Explain how the economy will adjust in the long-run.

        (ii) Following the long-run adjustment process, will the price level in Vanderlandia be greater than,                    less than, or equal to PL1, shown in part (a).

This is a Classical View question. How do we know? 

It says that there are No Policy Actions - which implies there is no fiscal or monetary policies 

The economy must fix itself in the long-run 

"and we answer it the same way every time."

If we are in a recessionary gap this implies that many people are out of work and will take lower wages to go back to work and input prices are falling due to a recession.

 Lower wages and lower input costs for business will shift their SRAS curve to the right.

This lowers the price level (PL) and increases output back to the full employment level at a lower PL

Let's explain it tightly.

(i) In a recessionary gap people will accept lower wages and input prices are falling. Lower wages and lower input prices will shift the SRAS curve rightward until full employment is achieved at a lower price level in the long-run.

(ii) The PL will be less than PL1 in the long run. (No explanation needed)

C) Assume instead that policy makers in Vanderlandia are considering changing government spending to restore full employment in the short run and the marginal propensity to save is 0.2.

(i) Calculate the minimum change and state the direction of change in government spending required to completely close the output gap in the short-run. (Show your work)

(ii) On your graph in part (a), show the short-run effect of the change in government spending 

in part (c)(i), labeling the new equilibrium price level PL2.

(i) If the MPS is 0.2 we find the spending multiplier with the formula 1/MPS and 1/MPS = 5

When government spending increases it will increase the RGDP/Outputs by a multiple of 5

If we remember we needed 50million to close the output gap back to full employment, so if the government spends 10million the money will multiply through the economy and give us the needed 50million increase in RGDP/output

10m x 5 = 50m

GS increase x Multiplier = increase in RGDP

(ii) If in a recessionary gap and the government starts spending it pushes the AD curve to the right toward full employment. Output increases to full employment (Yf) 

the PL increases a higher level at PL2.

D) Draw a correctly labeled graph of the loanable funds market, and show the effect of the change in government spending in part (c)(i) on the equilibrium real interest rate.

Understand that this is the Crowding-Out Effect

When government spends it has to borrow from the loanable funds market

it takes money out of the banks & this reduces the supply of loanable funds

RIR's increase 

E) Based on the change in the real interest rate (RIR), what will happen to each of the following.

(i) The price of previously issued bonds

Understand that interest rates and previously issued bond's prices are inversely related

RIR increases and bond prices decrease

(ii) The rate of economic growth in the long-run. Explain.

We answer these questions the same every time.

As RIR's increase there will be less investment & less capital formation 

and therefore less LR Growth