2021 (Set 2) AP Macro FRQ#2

 2021 (Set 2) AP Macro FRQ#2

Watch me answer it here

https://youtu.be/33MXyLESSdU

a) Draw a single CLG with both SR & LR Phillips curve. Showing the initial SR equilibrium point as X.

Recession = a movement down the SRPC

AD shifting left is a movement down the SRPC

b) Suppose the government impements fiscal policy in order to achieve full employment output and the MPC is .75.

i) Calculate the minimum government spending needed to get back to full employment. Understand the recessionary output gap is 600 billion. So we need 600 billion of RGDP to get to full employment.

The government does not have to spend the full 600b to get us back to full employment because of the magical (multiplier)

 The MPC = .75

The MPS = .25

MPC (.75) + MPS (.25) always = 1

The multiplier is 1/MPS = 1/.25 = 4 , The multiplier is 4

Government spending x multiplier = change in RGDP

Gov't spending ? x  4 = 600b

or we can rewrite it as 600b/4 = 150b

Government needs to spend 150b x 4 = the 600b to get us back to full employment

ii) Suppose instead the gov't wants to change taxes. Calculate the minimum change in taxes needed to push aggregate demand by the amount of the output gap (600b).

((The Tax Multiplier is always (1 less) than the Government Spending Multiplier))

Put it in your brain and don't forget it.

Since the Government Spending multiplier in (i) was 4 the Tax multiplier is 3

so 600b/3 = 200b

The government must lower taxes by 200b to push Aggregate Demand back to the 600b full employment point as less taxes is expansionary.

The Tax multiplier formula is -MPC/MPS or 600b/3 = -200b

Taxes need to be reduced by 200b that is why the minus is there

c) Assume instead the government takes no policy actions to close the output gap. Explain how the economy will adjust in the long-run.

Recognize that this is now a Classical View question.

If we are in a recession and there is no Fiscal or Monetary policy

in the long run wages, prices, inflationary expectations will decrease

wages and input prices decreasing shifts the SRAS curve to the right

We return back to full employment at a lower PL (price level)

ALL Classical View FRQ's

Classical View - FRQ's
Need to know how the Classical View has been tested on FRQ's
Below are examples.

2019 AP Macroeconomics Exam (Set 1)

(A.)

Recession

(B.) The Central Bank and the Government take no policy actions to close the output gap.

(i) Explain how the economy will adjust in the Long-Run

If there are no Fiscal or Monetary policy actions

in the long run,

We are in a recession, workers will accept lower wages to return to work, 

when wages fall the SRAS curve will shift to the right, 

when wages fall business can lower their prices

lower prices cause output to increase

we return to LR equilibrium at a lower PL

PL falls, RGDP returns to full employment.

(ii)

2019 AP Macroeconomics Exam (Set 2)

(A.)

Inflation

(B.) Assume the Central Bank and the Government take no policy actions to close the gap.

(i) On your graph, show how the economy automatically adjusts in the Long-Run.

(ii) Explain the Long-Run adjustment.

The economy is in an Inflationary scenario,

Unemployment is low and business is competing for workers

Wages are bid up (increased) and the SRAS curve shifts to the left because of higher wages

prices must also increase to pay for the higher wages,

Higher prices cause output to fall

when output falls we

return to Long Run equilibrium

at a higher price level

2017 AP Macroeconomics Exam

(A.) 

Actual Unemployment > Natural Rate of Unemployment = Recession

(B.) The Government takes no policy action what happens in the Long-Run?

(i) Short-Run Aggregate Supply Curve. Explain.

We are in a Recession, 

If there is no monetary or Fiscal Policy, In the Long-Run

Wages will decrease, shifting the SRAS curve to the right

Business will lower their Prices as wages fall

we will return to LR Equilibrium at a Lower PL

2016 AP Macroeconomics Exam

(A.) 

Actual Unemployment > Natural Rate of Unemployment = Recession

(B.) No policy actions are taken (Fiscal or Monetary), will the SRPC shift right, left, or remain the same in the long-run? Explain.

We know that we are in a recession

In a recession in the long-run the SRAS curve will shift to the right, 

as wages and prices fall

This is a leftward shift of the SRPC

The inflation rate will decrease 

and 

we will return to the Natural Rate of Unemployment (NRU)

2013 AP Macroeconomics Exam

(A.) 

(B.) (C.)

We are in a Recession at Point C

(D.) Government Spending or Reducing Taxes is Expansionary Fiscal Policy

(E.) No discretionary (Fiscal or Monetary) policy actions are taken. What will happen to the SRAS curve in the Long Run. Explain.

If we are in a recession, 

people are out of work, unemployment is high,

workers will accept lower wages to return to work, 

lower wages and the SRAS curve shifts right, 

lower wages allow business to lower prices,

lower prices cause people to buy more,

output increases back to Full Employment

at a lower PL

2011 AP Macroeconomics Exam

(A.) Draw a Phillips curve graph, show a recession labelled A.

(B.) Draw a AD/AS graph in recession.

(E.) No Fiscal or Monetary Policy during the recession.

(i) In the Long Run, SRAS?

In a Recession

Wages and Prices fall

SRAS shifts right

We return to LR Equilibrium

at a lower PL

(ii) In the Long Run, what will happen to the Natural Rate of Unemployment (NRU)

The NRU is unaffected.

2011B AP Macroeconomics Exam

(A.) Using a AD/AS curve show Equilibrium. 

(B) Consumer Confidence falls = Recession

Consumer Confidence falls = Recession

(F.) No Fiscal or Monetary policy changes, SRAS? Explain.

This is getting repetitive

-

In a Recession

Wages and Prices fall

SRAS shifts right

We return to LR Equilibrium

at a lower PL

2010 AP Macroeconomics Exam

(A.) AD/AS in Equilibrium

(B.) Government increases spending on National Defense without raising taxes.

(C.) Economy adjusts to a new Long-Run Equilibrium after the increase in Government Spending.

(i) SRAS? Explain

We are in a recession, workers will accept lower wages to return to work, 

when wages fall the SRAS curve will shift to the right, 

when wages fall business can lower their prices

lower prices cause output to increase

we return to LR equilibrium at a lower PL

PL falls, RGDP returns to full employment.

2007B AP Macroeconomics Exam

(A.)

(D.) In a recession, no fiscal or monetary policy changes, what happens to the SRAS and AD curve?

In a Recession

Wages and Prices fall

SRAS shifts right

We return to LR Equilibrium

at a lower PL

2004 AP Macroeconomics Exam

(A.)

Less than Full Employment = Recession

(F.) No policy actions are taken (Fiscal or Monetary), what happens to the SRAS, Output and PL?

In a Recession

Wages and Prices fall

SRAS shifts right

We return to LR Equilibrium

at a lower PL