2009 Macroeconomics FRQ #1

2009 Macroeconomics FRQ #1

(A) Using a CLG with both short-run and long-run Phillips curves and the relevant numbers from above, show the current long-run equilibrium as point A.

Understand that the expected inflation rate in long-run equilibrium is the NRU (Natural Rate of Unemployment) --- A is the NRU.

(B) Calculate the real interest rate in the long run equilibrium.

Understand that: Real = Nominal (with no inflation)

                            Real = Nominal - Inflation

                            Nominal = Real + Inflation

Real (6%) = Nominal Rate (8%)  - Inflation (Expected Rate 2%)

(C) Assume now that the Fed targets an inflation (price level) rate of 3%. What open market operation should the FED undertake.

If the FED sells bonds (Contractionary policy) it will reduce the Money Supply raising the nominal interest rates. Think about it: if the inflation rate (PL) is 6% and the FED wants a lower price level (inflation rate) then it needs to decrease the (C) and (I), consumption and investment. It needs to lower the PL by decreasing the AD (aggregate demand). AD decreases and the PL / Inflation rate falls  from 6% to 3%.

Crazy tricky college board:

Looking at you college board.

 (D) Using a CLG of the money market, show how the actions of the FED in part (C), will affect the nominal interest rate.

You must have recognised that selling bonds was contractionary.

(E) How will the interest rate change you identified in part (D), affects aggregate demand in the short-run.

If the FED sells bonds (Contractionary policy) it will reduce the Money Supply raising the nominal interest rates. Think about it: if the inflation rate (PL) is 6% and the FED wants a lower price level (inflation rate) then it needs to decrease the (C) and (I), consumption and investment. It needs to lower the PL by decreasing the AD (aggregate demand). AD decreases and the PL / Inflation rate falls  from 6% to 3%.

(F) Assume that the FED's actions are successful. What will happen to the following  as the economy approaches a new long-run equilibrium.

(i) Short-run phillips curve 

(ii) The NRU (natural rate of unemployment)

The NRU (natural rate of unemployment) remains unchanged at 5%

2009 Microeconomics FRQ #3

2009 Microeconomics FRQ #3

Watch me answer it here

https://youtu.be/b5o-oYRxY2E

1st make a chart

(A) If Red chooses a location south of the city, which location is better for Blue? Explain.

  

If red goes South, then Blue should go North as $4000 > $1000

(B) Is choosing a location to the South of the city a dominant strategy for Red Shop? Explain. 

Red shop has no dominant strategy and neither does Blue. Both are better off doing the opposite of the other's choice.

(C) If the two firms cooperate in choosing locations, where will each firm locate?

If they cooperate they will collude and choose the locations that give off the biggest payoff.

 (D) Assume that the South suburb has enacted an incentive package to attract new businesses. Any firm firm that locates south of the city will receive a subsidy of $2000 per day. Redraw the payoff matrix to include the subsidy.

2009 B Microeconomics FRQ #3

2009 B Microeconomics FRQ #3

Watch me answer it here

https://youtu.be/o0Byq2fLBQU

1st, make a chart.

(A) If Easy chooses to maintain its current fare, which strategy is better for City Wheels? Explain.

Look at your chart - If Easy maintains then City should maintain. Explain = Why? $180>$120

If Easy maintains then City has two choices, to maintain or lower the fare.
City will choose the choice with the higher payoff.
To maintain for a payoff of $180.

(B) Is there a dominant strategy for Easy Ride. Explain.

Know what a dominant strategy is.

From the Oligopoly Cheat Sheet here.

Easy does not have a dominant strategy. WHY? Easy rides best move (highest payoff) depends on City.

(C) Assume the companies must make their decisions without cooperating. What will be the daily profit for each Company.

Without cooperating/knowing the moves of the other firm we can expect both company's to try and choose the highest payoff.

 

(D) If the two firms were to cooperate, which strategy (maintain/lower) would each firm choose?

This problem is a bit unique in that no matter if they cooperate or don't they will choose the left upward quadrant with Easy and City maintaining the fare.

(E) Local government subsidises the fare of only a company that will lower its fare. Draw a new payoff that reflects the question. (Only the quadrants with LOWER FARE are changed.)

2009 B Microeconomics FRQ #2

2009 B Microeconomics FRQ #2

Watch me answer it here

https://youtu.be/Bv5i6-9NvRg

(A) Assume the last unit of peanuts consumed increased Sasha's total utility from 40 utils to 48 utils and that the last unit of bananas consumed increase her total utility from 52 to 56 utils.

(i) If the price of a unit of peanuts is $1 and Sasha is maximizing utility, calculate the price of a unit of bananas.

Anytime, you see a utility question use the formula:

(ii) If the price of a unit of peanuts increases and the price of a unit of bananas remains unchanged from the price you determined in (a)(i), how will Sasha's purchase of peanuts change?

Understand that if the price of peanuts increases, then the value of MU (marginal utility) to price will decrease. If the price of peanuts increase then for every dollar spent on peanuts I will be able to buy fewer and fewer peanuts.

(B) Assume that the cross price elasticity (XED) of demand between peanuts and bananas is positive. A widespread disease has destroyed the banana crop. What will happen to the equilibrium price and quantity of peanuts in the short-run? Explain.

Understand what a positive XED means, from the elasticity cheat sheet here.

Since peanuts and bananas are substitutes, when the crop of bananas are destroyed (banana's supply curve shifts leftward) the price of bananas will rise and consumers will demand more peanuts as they are a substitute for bananas they (peanuts) are relatively cheaper. You must understand that if the price of bananas rises and the price of peanuts stays the same, then, per dollar spent, peanuts have now become cheaper. 

(C) Assume the price of bananas increase.

(i) Will the substitution effect increase, decrease, or have no effect on the quantity of bananas demanded?

The substitution effect will decrease the quantity of bananas demanded. Price goes up the quantity demanded goes down. The substitution effect is one of the very reasons that the demand curve slopes down....

(ii) What happens to Sasha's real income?

 If prices rise/Inflation increases then real incomes/wages fall.

From an earlier post on nominal and real wages here.