2016 AP Macroeconomics Exam FRQ #3

2016 AP Macroeconomics Exam FRQ #3

Watch me answer it here

https://youtu.be/gyNQlVDG6xE

It is very nice of the College Board to have set the problem up in this helpful way.

THANK YOU!!

(A) Who has the absolute advantage  in producing donuts? Explain.

If we look at the chart above we see that John can produce 200 donuts and Erica can produce 150. Therefore John has an absolute advantage in the production of donuts.

From the Cheat Sheet

Draw a Graph

We can clearly see that John has an absolute advantage in production of donuts and cupcakes.

(B) Who has the comparative advantage in producing donuts? Explain.

John can either produce 200 donuts or 100 cupcakes. If he makes 200 donuts he gives up 100 cupcakes (100/200 = .5 or 1/2). Said in a different way, for every donut John makes he gives up 1/2 of a cupcake or for every cupcake he makes he gives up 2 donuts. (200/100 = 2)

Erica, on the other hand, can either make 150 donuts or 50 cupcakes. If she makes 150 donuts she gives up 50 cupcakes (50/150 = .333... or 1/3). Said in a different way, for every donut Erica makes she gives up a 1/3 of a cupcake or for every cupcake she makes she gives up 3 donuts.  (150/50 = 3)

As Erica's opportunity cost of producing 1 donut is 1/3 of a cupcake, which is less than John's opportunity cost which is 1/2 of a cupcake for every donut he makes.

Erica gives up less cupcakes by producing donuts than John does. She is more efficient.

Remember that comparative advantage is about who gives up less than the other person, as lower opportunity cost is the key.

(C) Assume that John and Erica decide to specialise according to their comparative advantages and that one cupcake is exchanged for four donuts.

If John and Erica specialise then Erica would make the donuts and John would make cupcakes. 

(i) Indicate wether or not specialisation and trade would be beneficial to John.

Before specialisation John could make a cupcake or two donuts,  said another way, if John makes two donuts he gives up a cupcake. After trade and specialisation John can trade a cupcake for 4 donuts. He would be better off.

(ii) Indicate wether or not specialisation and trade would be beneficial to Erica.

Before specialisation Erica could make a donut and give up 1/3 of a cupcake. Said another way, Erica could make a cupcake and give up 3 donuts. After trade and specialisation Erica would have to give up 4 donuts for 1 cupcake. This would not be beneficial for Erica.

(D) Assume that Erica discovers a new cupcake production technique that will increase her daily production of cupcakes only. Using donuts on the horizontal axis, draw a correctly labeled  production possibility curve for Erica, before and after the technology change in cupcake production.

Understand, that Erica's production of donuts will not increase but her ability to produce more cupcakes with the same resources will increase.

2016 AP Macroeconomics FRQ #2

2016 AP Macroeconomics FRQ #2

Nothing in this world is free, and that if you want something out of life you've got to work to get it

Watch me answer it here

https://youtu.be/c7k0R5klqU4

(A) What is the dollar value of new loans that First Superior Bank can make? Explain.

Demand deposits = amount of money deposited into the bank. 

If $2,000 dollars has been deposited into the bank the bank must keep 10% of it in reserve. So, $200 must be kept in the bank in reserve as that is required by the FED, (Federal Reserve). Then the bank loaned out $1,800 to some other customer.

So if the bank has to hold in reserve $200 and loans out $1,800 then that $2000 is not able to be loaned out to anyone else. The bank has no excess reserves to loan.

If Mr. Smith deposits $100 of cash 10% of it must be held in reserve.(As the FED requires) So 10% of $100 is $10 and $100 - $10 = $90. Therefore $90 is the maximum amount of new loans that can be made, (Loaned Out).

(C) As a result of Mr. Smith's $100 cash deposit, calculate the maximum change over time in each of the following banking system.

(i) Loans.

If Mr. Smith deposits $100 in the bank and $10 is kept in reserves then $90 can be loaned out. If that $90 is deposited in another bank then 10% of the $90 or $9 must be kept in reserve and therefore $81 can then be loaned out in the next round and 10% of that must be kept in reserve and so on and so on and so on. Until all is loaned out.

The quick way to figure this out is to understand that the formula for this is the Required Reserve Ratio or 1/RR, so, 1/10% or 1/.1 which will equal 10.

Monetary Policy Cheat Sheet

Answer - $90 x 10 = $900

(ii) Demand Deposits.

The maximum amount of demand deposits in the banking system due to Mr. Smith's $100 deposit is $100 x 10 = $1,000.

(D) As a result of Mr. Smith's $100 deposit, calculate the maximum change over time in the money supply.

 The original $100 was already part of the money supply so you can't include that in the calculation.

(E) Provide one reason why the actual change in the money supply can be smaller than the maximum change you identified in part (D).

If credit card rates increase (past AP question) then people will be inclined to hold more cash and this will decrease the effects of the money multiplier. 

If banks voluntarily hold excess reserves then the money multiplier will have less of an effect on the money supply.

(Not entirely happy with my explanations for this section, stay tuned for a more thorough explanation.)

2016 AP Macroeconomics FRQ #1

2016 AP Macroeconomics FRQ #1

(A) Draw a single CLG with both the long-run Phillips curve and the short-run Phillips curve. Label the current short-run equilibrium point P.

Understand that when the actual unemployment rate is above the natural rate of unemployment (NRU) the economy is in a recession.

(B) Assume no policy action is taken, will the short-run phillips curve shift to the left (downwards), shift to the right (upwards), or remain the same?

NO POLICY ACTION TAKEN - translated =  (In the Long-Run)

So in the long run with a recession the SRAS curve for AD/AS will shift to the right (downward) as prices and wages fall and output will therefore increase. 

When the SRAS curve shifts, the SRPC will  shift left (down). This makes sense as in the long run, employees will accept lower wages and choose to go back to work, decreasing unemployment. As prices (inflation) falls also.

I like the way I say it better :).

(C) If the FED wants to lower unemployment, what expansionary what expansionary open-market operation should it use.

From the cheat sheet - Monetary Policy

Notice, that when the FED buys bonds, money is injected into the economy and AD will increase, output will increase and unemployment will be lowered as people go to work.

Output increase - unemployment must decrease.

(D) How will the open-market operation from part (C) affect?

(i) Federal Funds Rate? 

(ii) Real Interest Rate in the short-run ? Explain.

Monetary and Fiscal - Nominal and Real Rates

(E) Given your answer in part (d)(ii), what is the effect on the Real GDP in the short-run? Explain?

Looking at the same cheat sheet above we can see that as the MS increases that Consumption and Investment will increase as Interest Rates fall, and therefore AD will increase and RGDP will 

increase.

(F) Japan and The US are major trading partners. Indicate how the change in Real GDP will effect the demand for Japanese Yen (¥) in the foreign exchange market?

If the US has increasing AD/Output, Real GDP, then we also expect US incomes to be increasing and therefore Imports (from Japan) will increase.

Increasing imports into the US from Japan means that US citizens are demanding Japanese goods and therefore the demand for ¥ is increasing in the FOREX.

(G) Draw a CLG of the FOREX market for the Japanese Yen (¥), showing the effect of the change in demand  for the Yen identified in part (F) on the value of the Japanese Yen relative to the US dollar.

2016 Microeconomics FRQ #3

You should have been able to recognise that the business above is in a monopolistically competitive market - differentiated products, no barriers to entry.

(A) Draw a CLG showing Camden's demand curve, marginal revenue curve, marginal cost curve, and long-run average total cost curve. Label Camden's profit maximising output Qm & Pm.

(B) On your graph in part (a) label the output at which total revenue is maximised QR.

Max revenue is where MR = 0, at that quantity revenue is maximised.

(C) Do firms in this market experience economies of scale, diseconomies of scale, or neither in long-run equilibrium? Explain.

College Board! "YOU SICK BASTARD"!

Refer back to the EOS - Economies of Scale post

Notice that where MR=MC intersect and we find our price and quantity the LRATC curve is sloping downward. This is the section of the LRATC (long run average total cost curve) where resource prices are decreasing in the industry. It's a decreasing cost industry or an increasing returns industry or this industry is experiencing economies of scale.

2016 AP Microeconomics Exam FRQ#2

2016 AP Microeconomics Exam FRQ#2

(A) What is Martha’s marginal benefit of the fifth unit of good X?    

At a quantity of 0, we haven’t purchased any units so there is no marginal benefit.

As we purchase from 0 quantity to the first unit of X, we gain a marginal benefit of $16.

As we purchase from the first to the second unit of X, we gain a marginal benefit of $12.

As we purchase from the second to the third unit of X, we gain a marginal benefit of $8.

As we purchase from the third to the fourth unit of X, we gain a marginal benefit of $4.

As we purchase from the fourth to the fifth unit of X, we gain a marginal benefit of $1.

Think of marginal as meaning the next purchase. Obviously we can only purchase full units, so when we have 4 units purchased our next marginal purchase is the 5^th one and we receive a marginal benefit of $1 from the additional/marginal purchase of that 5^th unit.

(B) Calculate the total consumer surplus if Martha consumes 5 units of X. (show your work)

Remember, that consumer surplus is the additional value gained from consumption of a good subtracting what has been paid for that good.

Answer - Total Consumer Surplus = $12 + $8 + $4 + $0 + $ -3 = $21 of Total Consumer Surplus

·      Understand that the $4 Cost is also part of the benefit. Confusing at first, but understand that if I give you $4 for unit X then unit X is still worth $4, at least to me.

       

(C) Martha is currently consuming 4 units of X and 2 units of Y. Use marginal analysis to explain why this combination is not optimal.

This combination of Units X and Units Y are not optimal as the marginal benefit gained from purchasing units X and Y is not equal.

We are use to seeing these problems as Utility problems and recognizing that the Marginal Benefits and Marginal Utility formula’s are the same.

(D) What is Martha’s optimal combination of X & Y?           

1^st – using the formula set the two goods equal by using the formula above. Table is helpful. (:

2^nd – Martha chooses her purchases according to the greatest benefit gained with each purchase.

3^rd – Martha purchases until her income is all spent.

E) Indicate whether each of the following will cause the optimal quantity of good Y to increase, decrease or stay the same.

(I) The price of good Y doubles.

If the benefit per unit of Y decreases, then we would purchase less of the good.  Martha’s first purchase would have been X as the benefit is 4, which is greater than the benefit of 2.5 for a unit of Y.

Answer - The optimal quantity purchased will decrease.

(II) Martha’s income falls to $10 with no change in prices.

If Martha’s income falls to $10, then she will not be able to purchase 4 units of good Y.

She will purchase the first 3 units of good X & Y exactly the same way, but then she has spent $8 and only has $2 left, so she will then only be able to purchase a unit of Y.

So 1 unit of X and 3 units of Y will be purchased, this will use all of her income. The question above asks if the optimal quantity of good Y will decrease, increase, or stay the same.

Originally Martha, with $20 of income bought 4 units of good Y, so her purchase of good Y has decreased.

Answer – Martha’s purchase of good Y has decreased.

(III) Martha’s income doubles and the price of both goods double.

The answer to this question should be intuitive in that if Martha’s income doubles and all goods prices double then Martha is no better off with a doubling of her income as the ratio of prices to incomes are the same.

3 units of X at $8 each is $24 spent and 4 units of Y at 4 each is $16 and $24 + $16 = $40

Martha has spent $40 (all) of her income and bought the same combination of goods X & Y.

Answer - No change in optimal combination of goods X & Y.