Long-Run Aggregate Supply
&
PPC Cheat Sheet
Showing posts with label AD/AS. Show all posts
Showing posts with label AD/AS. Show all posts
Saturday, December 28, 2019
Friday, June 9, 2017
2017 AP Macroeconomics FRQ #1
2017 AP Macroeconomics FRQ #1
(A) Using the numerical values above, draw a CLG of the short-run and long-run Phillips curves. Label the current short run equilibrium as point B. Plot the numerical values above on the graph.
I find it's most beneficial to draw AD/AS curve with Phillips curves.
Phillips Curve Cheat Sheet here.
Understand that a country with a higher unemployment 7% compared to 5%, and with a low inflation rate of 3% that the appropriate AD?AS curve would be a recessionary curve.
The Phillips curve is fairly simple, helps to know that
a shift of the AD curve is a movement on the SRPC.
It also helps to know that the NRU or natural rate of unemployment is at full employment (equilibrium)
Answer
(B) Assume the government of X takes no policy action to reduce unemployment. In the long-run, will each of the following shift to the right, left or remain the same?
(i) Short-run aggregate supply curve. Explain.
In the long-run employees will accept lower wages, wages are a resource cost, lower wages will shift the SRAS curve rightward, prices will fall and therefore output will increase back to long-run equilibrium at a lower price level.
(ii) Long-run phillips curve
The long-run phillips curve is unaffected but the short-run phillips curve would shift leftward, inflation would decrease and unemployment would decrease back to the NRU, natural rate of unemployment.
Answer
(C) Identify a fiscal policy action that could be used to reduce the unemployment rate in the short-run.
In the short run the government could use an expansionary fiscal policy (tax lowered or more government spending),
Fiscal Policy Cheat Sheet here.
Answer
(D) Draw a CLG of the AD/AS graph, showing the effects on equilibrium, PL and RGDP from an expansionary fiscal policy.
As the government spends, consumption increases pushing AD rightward, PL increases and RGDP increases along with (Y) real incomes.
Answer
(E) Based on the change in real GDP identified in part (D), will the supply of County X's currency in the FOREX, increase , decrease, or remain the same? Explain.
Look at the Y, real income above. It is increasing, if incomes are increasing and the PL is increasing then
PL increases - foreigners buy less of our goods - exports fall
Y, real incomes increase - domestic consumers demand foreign goods - imports increase
AS imports increase, the supply of our currency increases in the FOREX.
Again, if we are importing goods, we must be dumping our currency into the FOREX to buy the foreign currency to pay the foreign producers of the imported goods we want to buy.
Simple, Yes.
Answer
(F) Based on (E) does our currency appreciate, depreciate, no change.
Understand that the valuation of our currency is calculated in relation to the demand/supply of our currency in the FOREX.
So if the supply of our currency increases in the FOREX, we can use a simple supply/demand graph to explain what is going on.
Our currency will depreciate as more and more of it is dumped into the FOREX market buying imported goods.
Answer
Thursday, February 16, 2017
2012 Macro Multiple Choice - AD/AS
2012 Macro Multiple Choice - AD/AS
Answer - (C) an increase in the interest rate
From the post about investment and growth - here
Let's step a bit back, If business men are to invest in investment projects they want cheaper rates of interest compared to higher rates of interest.
So, all of the above except for (C) will increase investment.
Answer - (D)
This is an equilibrium problem and you should have learned enough in the beginning supply and demand section of the course to be able to answer this.
Answer - (D)
If income taxes increase, then people have less disposable income and will consume less, if (C) consumption decreases then AD will shift less, (decrease).
Answer - (C)
An increase in Government spending will increase the AD curve, thus PL and RGDP and
Y(incomes) will increase.
Answer - (C)
Understand that PL = Inflation rate & Output = RGDP
Answer - (A)
Understand that an increase in investment is an increase in capital formation, so naturally there is more capital per worker.
Answer - (E)
This sounds a lot like stagflation.
Understand that (real = nominal minus inflation)
Real wages vs Nominal wages post is here
If the PL is increasing we assume that real wages are falling. (ceteris paribus)
Answer - (C)
(A) - Pension Payments - an increase would increase disposable income thus increasing AD but not LRAS = LR Growth
(B) Unemployment Compensation - an increase will increase AD but not LRAS
(C) Subsidies for capital goods - an increase will shift LRAS curve rightward (more capital formation = more LR growth)
(D) Tariffs on capital goods - an increase of tariffs would shift LRAS leftward (less LR growth)
(E) Tariffs on oil - increase would cause the SRAS curve to shift leftward (Cost push inflation) (Stagflation)
Answer - (D)
Wages increasing would affect the SRAS curve as wages are an input or resource costs for businesses. The SRAS curve shifts leftward.
Answer - (A)
From the AD cheat sheet.
This one is a bit tricky,
As the PL (inflation) increases then each individual dollar spent looses purchasing power.
Purchasing power decreasing means that each dollar received can by less goods.
You might receive a higher amount of money for your asset (good) but with that higher amount you can actually buy less as the value of each additional dollar has decreased.
This is the Wealth Effect - if prices (inflation) is rising the value of your assets are falling.
Real = nominal minus inflation
Friday, December 16, 2016
2010 Macro FRQ #1
2010 Macro FRQ #1
(A) Draw a CLG of AD/AS and show each of the following.
(i) The Long Run Supply Curve.
(ii) The current equilibrium output/price levels, labeled a sYE & PLE.
(B) Assume the government increases spending on national defence without raising taxes.
(i) On your graph in part (a), show the effect on AD.
Government spending on national defence is government spending that increases the G in the GDP formula. So, C + I + G + XN = GDP,,, If, G increases (defence spending) then AD increases, increasing GDP.
(ii) How will this action affect the unemployment rate in the short-run? Explain.
If the government is spending then the G is increasing, people are supplying goods to the government, so GDP is increasing and output is increasing which means businesses are hiring to keep up with the increased demand from government spending and increased output.
(C) Assume that the economy adjusts to a new long-run equilibrium after the increase in government spending.
(i) How will the new short-run aggregate supply curve compare to the initial SRAS curve in part (a)? Explain.
The college board is simply asking you what happens in the long-run, after inflation happens in the economy. Notice that when an economy is in equilibrium and then the government spends, that we are in an inflationary gap. If the government does nothing in the long run the SRAS curve will shift leftward as prices and wages adjust. In essence during an inflationary gap, there isn't enough labor to handle the increased demand for goods and services, so wages rise to entice more people into the workforce and prices also rise.
(D) In order to finance the increase in government spending national defence in part (B), the government borrows from the public. Using a CLG of the loanable funds market, show the effect of the government's borrowing on the real interest rate.
If the government is borrowing from the public then the demand for loanable funds is increasing driving up the interest rate.
(E) Given the change in the Real Interest Rate in part (d), what is the impact of the following.
(i) Investment.
Crowding out will occur as the real interest rate rises it deters people from taking out loans to invest. As the government drives up the interest rates by borrowing there is less and less private investment.
(ii) Economic growth rate. Explain.
If there is less private investment there will be less long-term growth as there will be less capital formation, less capital goods produced so in the long-run society will suffer.
Sunday, December 11, 2016
2010 B Macro FRQ #3
2010 B Macro FRQ #3
Notice (in the short-run) & (Explain each)
(A) An increase in the price of crude oil, an important natural resource.
Understand that crude oil is oil and therefore is a resource cost of business. Stagflation for the AP exam is usually caused by rising oil prices that shift the SRAS curve leftward. Raising costs (PL) and lowering RGDP.
(B) A technological change that increases the productivity of labor.
Productivity of labor implies that citizens of a country can produce more goods with the same resources due to technological change. This (in the short-run) is the graph that shows Growth.
(C) An increase in spending by consumers.
An increase in spending by consumers will increase the PL and increase the RGDP.
(D) The depreciation of the country's currency in the FOREX.
If a country's currency depreciates, the value of the currency falls, this will stimulate exports. Exports will increase as the currency value falls.
Why?
As the currency's value decreases foreigners can buy more of our goods. In essence our goods become relatively less expensive compared to foreign goods.
If Exports increase then AD increases, PL and RGDP increases.
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