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.