2023 AP Macroeconomics FRQ Set 2 #1

 2023 AP Macroeconomics FRQ Set 2 #1

A) Using the relevant numerical values given, draw a correctly labeled graph of the short-run & long-run Phillips curves. Label the current short-run equilibrium point as X. Plot the relevant numerical values provided on the graph.

The NRU is 5% and the actual rate of unemployment is 7%

The economy is in a recession as the 

Actual Rate of Unemployment > Natural Rate of Unemployment = Recession

 

B) Is the expected inflation rate greater than, less than, or equal to 1%? Explain.

Expected rate is where the SRPC & LRPC intersect

As the economy is in a recession

The actual rate of inflation must be lower than the expected rate

As recessions are high unemployment and low-price levels (inflation)

 

C) Assume the marginal propensity to consume is 0.9.

(i) if the government decreases income taxes by 20 billion, calculate the maximum change in aggregate demand. Show your work.

(ii) If instead the government increases spending by 20 billion, calculate the maximum change in

Aggregate demand. Show your work.

 

 The formula for finding the spending multiplier is 1/MPS (Marginal Propensity to Spend)

Or

1/1-MPC (Marginal Propensity to Consume)

 

I’m simple like a child,,, so I’m always going to use the 1/MPS

 

The MPC + MPS = 1 (as there are only two things to do with a dollar, spend it or save it.)

 

If the MPC is 0.9 then the MPS must be 0.1 as 0.9 + 0.1 = 1 (Use your calculator, now usable on the exam)

 

So, 1/MPS = 1/.1 = 10, the spending multiplier is 10 (AGAIN, use your calculator)

 

Let’s start with (ii) first, 

 

 If the spending multiplier is 10 and the government increases spending by 20b

 

Then the 20b is multiplied by the multiplier and that gives you the increase in GDP

 

GS = 20B x 10 (spending multiplier) = 200b increase in aggregate demand.

 

Now, (i)

 

The Tax Multiplier’s (yes there are two multipliers you need to know) formula is MPC/MPS.

 

MPC = 0.9

MPS = 0.1

 

0.9/0.1 = 9 (The taxing multiplier is 9) Hint: The tax Multiplier is always 1 less than the spending multiplier

 

Don’t believe me,,, use you calculator again.

 

If the government cuts taxes (expansionary fiscal policy) by 20b and the Tax Multiplier is 9

 

20b x 9 = 180b increase in aggregate demand.

D) On your graph in part (a), show a possible new short-run equilibrium point labeled Z that would result if the government increases spending and there is no change in inflationary expectations.

 

That last part is a worded a bit funny (strange). Teachers sometimes inadvertently skip over the phrase inflationary expectations.

 

Inflationary Expectations occurs anytime your SRAS (Short-run aggregate supply) curve shifts left or right.

 

Government spending only shifts the aggregate demand curve so there is no inflationary expectation changes,, 

Tricky, tricky, college board.

The economy is in a recession.

 If the government is spending it will push aggregate demand to the right

This is a movement sliding up the SRPC (Short-run Phillips curve)

Back toward full employment on the LRPC (Long-run Phillips curve)

E) How would an increase in unemployment compensation affect aggregate demand in the short-run?

Explain.

 

If unemployment compensation is increased citizens who are unemployed are going to have more money given to them from the government (tax payers). They will spend this money and consumption will increase in the economy as a whole shifting aggregate demand rightward in the short run.

F) Assume instead the government takes none of the preceding policy actions. (Northland is still in a recession) What will happen to each of the following.

 

(i) The SRAS curve. Explain.

(ii) The short run Phillips curve

(iii) The actual unemployment rate.

 

(i) The SRAS curve will shift to the right as during a recession the PL is low and people will accept lower wages to go back to work.

 

Lower PL and Lower wages are lower costs to businesses and therefore the SRAS curve shifts right.

You could also have said that inflationary expectations are thought to be decreasing also shifts the SRAS rightward.

 

(ii) The SRPC will shift leftward (Recognize that the SRAS & SRPC always do the opposite of each other)

Rightward shift of the SRAS is a leftward shift of the SRPC

 

(iii) The actual unemployment rate will decrease as people go back to work in the long run.

 

You must think on this Padiwan.

2023 AP Microeconomics FRQ Set 2 #3 (Natural Monopoly)

 2023 AP Microeconomics FRQ Set 2 #3 (Natural Monopoly)

A) Is the firm shown in this graph a natural monopoly? Explain.

 

Yes! The firm is a natural monopoly in that the firm’s ATC curve is downward sloping throughout the range of the demand curve.

 

B) Using the labeling from the graph, identify the area representing the deadweight loss for this profit-maximizing monopoly.

 

First, Find the Profit Maximizing Price & Quantity

Second, Find the Socially Optimal Quantity

Area of DWL is equal to (bfg)

C) In order to improve resource allocation, the government sets a price that results in the firm earning zero economic profit.

(i) Using labeling from the graph, identify the price and resulting quantity the firm would produce.

 

The firm would earn zero economic profit when it produces where the 

P = ATC

P = P3 & Quantity = Q3

(ii) Will this government policy eliminate the deadweight loss? Explain using labeling from the graph.

When the firm is producing at break-even (P=ATC) (Q3)

It still isn’t producing at the socially optimal quantity (P = MC)

There is no DWL at the Socially Optimal Quantity (Q4)

There will still be DWL

And is equal to the triangle (cjg)

D) Instead, the government decides to set a price that results in the socially optimal quantity of output. Will the firm earn a positive, negative or zero economic profit? Explain using the labeling from the graph.

The firm is making a negative economic profit (loss) as the 

Price is less than the ATC at the socially optimal quantity (Q4)

Area of economic loss is (P2 - P1) x Q4

2023 AP Micro FRQ Set 1 #3

 2023 AP Micro FRQ Set 1 #3

A) Calculate Hansel Hangout’s total fixed cost. Show your work.

 

Hansel is a profit maximizing firm, which means they produce where MC = MR.

 

We should know that ATC = AVC + AFC

 

Average Total Costs = Average Variable Costs + Average Fixed Costs

Or 

We could rearrange it and recognize that ATC – AVC = AFC

 

So, at 6 units of output/production the ATC = $21 & the AVC = $9

How to find the ATC & AVC? 

Go to the output of production (6 units) and go straight up.

We hit the AVC curve at $9 and if we keep going up, we hit the ATC at $21.

ATC = $21

AVC = $9

So, the AFC = $12

 

Now you are scratching your head and saying, “Charles how does that help me find TFC”?

 

You should know that to go from AFC to TFC, we take AFC and multiply it by the output.

 

Or to say it differently

AFC x Quantity = Total Fixed Cost 

ATC x Quantity/output = Total Cost

AVC x Quantity/output = Total Variable Cost

 

Recognize that Total Fixed Cost & Fixed Cost are the same thing. :0

 

AFC x Quantity = Total Fixed Cost 

Answer A) $12 x 6 units produced = TFC of $72

 

 

B) Identify the price and quantity for Hansel’s at Profit max.

 

I believe we already did it, 

 

Profit Maximization for Hansel’s Hangout for Good X is where MC = MR

Answer B) Price $14 Quantity $6

C) Calculate the economic profit at the quantity identified in part (b). Show your work.

 

Economic profit = Total Revenue – Total Costs

 

6 quantity/outputs/units sold x $14 = Total Revenue of $84

 

To find Total Costs we find average total costs x quantity produced

Or

ATC x Quantity = TC

 

The firm at profit max (MR=MC) produces 6 units 

and at 6 units the ATC is $21 (we found it earlier)

 

$21 x 6 = a TC of $126

Hansel isn’t doing very well.

Total Revenue = $84

Total Costs $126

 

Remember Profit = TR – TC

 

$84 - $126 = -$42

 

Answer C) Hansel has a Negative economic profit of $42

Or we could say Hansel has a loss of $42

D) As the market for Good X adjusts to the long-run equilibrium, what will happen to the price of Good X? Explain.

From the 2023 Cheat Sheet for Perfect Competition.

How do we know that firm is a perfectly competitive firm = The MRDARP curve is horizontal

 

The price is constant which is a characteristic of perfectly competitive firms.

 

Losses in an industry cause some firms to Exit/go broke and the supply of the Good X decreases/shifts left as those firms quit producing Good X.

 

Answer D) The price increases as supply shifts left.

 

E) Assume the cross-price elasticity of demand between Good X and Good C is positive. Given the change in the long-run price of Good X in part (d), will the quantity demanded of Good C increase, decrease, or remain the same? Explain.

 

You should know that if the cross-price elasticity is positive that means the two goods are substitutes.

 

Also, substitutes are positively related in price. 

 

Example: As the price of Coke increase people switch to Pepsi, increasing the demand for Pepsi.

Answer E) Increasing demand which will increase the quantity demanded for the good.