2002 AP Macro Exam (Question 3)

2002 AP Macro Exam (Question 3)

 Go to Learn, I'm talking to you Jayne/Jane.

(a) How & why will capital flows be affected by this change in Real Interest Rates?

If the RIR increases in the US then the Japanese will want to buy US dollars in the FOREX market to be able to purchase the higher interest rate assets. Capital will flow toward the US in hopes of gaining profits from being paid the higher interest rates.

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(b) Using a CLG for the Yen market, show an explain how the value of the yen will change relative to the value of the dollar.

As the RIR in the US increases, the Japanese hunting higher profits and better returns will sell their Yen in the FOREX market for US dollars. This causes their to be an increase in the supply of ¥ in the FOREX market. A larger supply of ¥ will cause the value of the ¥ to decrease in value relative to the US dollar.

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(c) Explain how a change in the value of the Yen (¥) will affect each of the following in the US.

(i) Imports from Japan

(ii) Exports to Japan

If the RIR's in the US are increasing then the Japanese are dumping their ¥ in the FOREX market and buying  US $, and therefore the demand for the US $ is increasing the value of the US dollar. A strong (appreciating value) dollar means that Americans citizens can purchase more Japanese imports. The increasing value of the dollar makes Japanese goods seem relatively less expensive than US goods. (Imports increase)

A strong $ would make US goods appear relatively more expensive to the Japanese and therefore less exports will be bought by the Japanese. (Exports Decrease)

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Sherlock!!

What did I get on the AP exam?

2002 AP Macro Exam FRQ #2

2002 AP Macro Exam (Question 2)

I love this question as it is one of the best FRQ's to further your 

understanding of the LRAS Curve.

KNOW THIS!!

1^st. Understand that (potential real gross domestic production) is the boundary of the production possibility curve. (on the curve)

2^nd. Understand that what increases/decreases the PPC does the same to the LRAS curve. (Population, Trade, Resources, Human Capital ,Technology (productivity, capital formation))

Past Blog Post on this subject/topic

(a) A decrease in the labor force participation rate. (Population)

If the population decreases there are less people to work (overall) and therefore LRAS will decrease. This is not to be confused with unemployment, which is a short-run view of idle resources and is inefficiency, not a reduction in potential)

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(b) An increase in the government deficit following a reduction in personal income taxes. (Technology)

A reduction in personal income taxes is contractionary fiscal policy.

The increase in government deficits implies an increase in government spending which is expansionary.

Which one is more powerful and why?

A decrease in taxes will increase disposable income and increase consumption and investment and thus aggregate demand but some of that tax decrease will be saved and not spent and therefore will have a less of an effect than government spending.

Government spending will be consumed in its entirety and has a larger multiplier.

More importantly, government spending implies that some of that increase in investment will be toward capital formation, (ports, technology, equipment and factories) and therefore will increase the long-run aggregate supply/potential real gross domestic production.

Government spending will increase potential real gross domestic production thus increasing long-run aggregate supply.

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(c) A decrease in the quantity of inputs needed to produce a unit of output. (productivity/technology)

A decrease in the quantity of inputs needed to produce a unit of output implies there has been an increase in technology/productivity. An increase in technology allows the production possibility curve boundary to shift outward and LRAS curve shifts rightward.

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(d) An increase in the quality and quantity of education. (human capital)

Increases in the quality/quantity of education is an increase in human capital is a shifter of the PPC curve (outward) and therefore would cause the LRAS curve to shift rightward.

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(e) An increase in the rate of savings.

An increase in the rate of savings means that the supply of loanable funds has increased which lowers the Real Interest Rate and spurs investment. Some of that investment will be capital formation and will shift the LRAS curve to the right.

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2002 AP Macro Exam FRQ #1

2002 AP Micro Exam (Question 1)

(a) Identify one fiscal policy action that Congress might initiate to decrease the unemployment rate.

Expansionary fiscal policy would decrease unemployment either Government Spending increase or Tax decrease.

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(b) Assume the policy you identified in part (a) reduced unemployment, but the economy is still operating below full employment. Using a CLG of aggregate demand/aggregate supply, show and explain, how the action you identified would affect each of the following

(i) Price

(ii) Output

Expansionary fiscal policy would increase output and the price level as Government spending will increase AD and thus output and will also increase the PL.

Cheat Sheet Fiscal

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(c) Explain how the policy identified in part (a) would affect short-term interest rates.

Government Spending will increase the demand for loanable funds and therefore the Real interest rate will increase. Nominal interest rates are increased as the demand for money increases. Demand for money increases when incomes (Y) increase.

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(d) Given the economy is still below full employment, identify the open market operation that the Federal reserve could implement to increase the money supply.

Monetary expansion = Open market operation = Buy Bonds

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(e) Using a CLG, show and Explain, how an increase in the money supply will affect each of the following in the short run

(i) Short term interest rates

(ii) Output

(iii) Price levels

From the Monetary Cheat Sheet - (Fiscal Monetary Blog Post)

Money supply increases will decrease the nominal interest rates that will spur investment and consumption which will shift aggregate demand rightward increasing output and pushing up the price level. (Output & Price levels increase while Interest rates decrease)

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