2021 (Set 1) AP Macro FRQ#2

 2021 (Set 1) AP Macro FRQ#2

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2. Assume the country is operating below full employment.

Below full employment = Recession

a) Identify a fiscal policy that could restore the economy back to full employment.

Fiscal Policy is either (Government spending or Taxes)

Recession = (More Government Spending or Reduce Taxes)

b) Draw a CLG of the loanable funds market and show the effects of the fiscal policy chosen on the equilibrium real interest rate.

Government spending  = an increase in the RIR (Real Interest Rate)

If the government wants to spend more money they must either tax citizens more or borrow the funds. Borrowing of the funds means selling bonds to citizens.

The citizens must take the money out of the banks to pay for the bonds.

(Demand shift) = People walking into banks needing to take out money to buy bonds 

increases (rightward shift) of the demand for loanable funds

(Supply Shift) = As people take the money out of the bank it 

reduces (shifts leftward) the supply of loanable funds in the banks.

Both shifts are technically correct (Use the one that seems correct to you)

Easiest for me to recognize that anytime the govenment is spending they are borrowing from the Banks reducing the supply of lonable funds which increases the RIR.

c) Based solely (only) on the real interest rate change what will happen to the following?

i) Net Exports. Explain.

If the RIR increases then the demand for the currency will increase causing the currency to appreciate which will decrease the amount of exports for the country.

As the RIR increases citizens of other countries will want to put their money in our banks to get the higher interest rate (they want higher profits)

To put their money in our banks they must exchange it in the FOREX, causing the demand for our currency to increase which drives up the value of our currency.

Since our currency is increasing in value our goods are becoming more expensive.

More expensive goods means less people will want to buy our goods therefore

our exports will decline.

ii) Stock of physical capital (capital goods) . Explain.

As the RIR increases (Loans are now more expensive)

Domestic Investment (taking out of loans) will decrease which implies that less capital goods will be produced in our country. Less physical stock (capital formation/goods) means that the country's long-run growth will be damaged.

RIR increase = Less physical stock (capital goods/formation)

2021 (Set 1) AP MAcro FRQ#1

 2021 (Set 1) AP Macro FRQ#1

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1. Assume the economy of Sweden is in long-run equilibrium and has a surplus in its current account.

a) Is the Swedish capital account and financial account in deficit, surplus or in balance? Explain.

If the Capital account is in a surplus that implies the financial account must be in a deficit as

CA + FA = 0

b) Draw a CLG of the AD/AS curve for Sweden showing the PL and Y.

Recognize that you must have read #1, Sweden is in long-run equilibrium.

c) The UK decreases its imports from Sweden. On the graph show the new eqilibrium PL & Y.

A decrease in UK imports is a decrease in Swedens exports.

If exports decrease, then AD decreases along with the Price Level (PL), RGDP and Output

d) As a result of the decrease in imports into the UK will Sweden's policy makers be more worried about cyclical unemployment or inflation in the short-run? Explain.

Cyclical unemployment occurs due to a downturn in the economy = recession.

If we are at long-run equilibrium and exports in Sweden decrease we move into a 

recessionary gap = cyclical unemployment

e) If the Swedish central bank's (Monetary policy) goal is to return the econmy to long-run equilibrium what open market operation must it use?

FED = Open market operations means either buying bonds or selling bonds.

To move us from a recession to long-run equilibrium the central bank must use expansionary policy by buying bonds.

Buying bonds causes the Money Supply (MS) to increases which causes the 

Nominal Interest Rate (NIR) to fall, causing Investment to increase, 

AD to increase, RGDP & Output to increase pushing the economy

back to Long-run Equilibrium

f) Draw a CLG of the Sedish krona showing the effects in the FOREX of the UK's decrease in imports from Sweden on the Krona's value in the FOREX.

As UK citizens buy less goods from Sweden the demand for Swedish krona decreases.

g) If the Swedish central banks goal is to reverse the exchange rate change shown in part f, by changing the interest rate, what open market operation would it use?

Open market operations buy the central bank is either buying or selling bonds.

The Swedish Central Bank would sell bonds

Selling bonds, decreases the Money Supply (MS), increasing the Nominal Interest Rate (NIR)

When the NIR is increasing the Real Interest Rate (RIR) is increasing 

Larger RIR's attract inflows of currency from the UK into Sweden

meaning that the demand for the Swedish krona will increase

as UK citizens wants to make more profits by depositing money in Swedish 

banks to receive the higher Real Interest Rates

to put money in Swedish banks the UK citizens must buy krona

in the FOREX

this increases the demand for the krona

causing the value of the krona to increase.

h) Explain G

FOREX Cheat Sheet

FOREX Cheat Sheet

DO NOT WAIT, START NOW

2019 Macro Set 2, FRQ #2, FOREX

2019 Macro FRQ #2 Set 2

 a) Current account balance is zero or balanced therefore (exports = imports)
If real US income increases then we could assume that imports will increase. Think about this from the perspective that a society that is wealthier will tend toward importing more goods from other countries. If imports > Exports then we have a current account deficit.

b) Understanding that as real income increases, imports increase. US citizens are importing more goods from the EU and therefore the EU is exporting more goods to the US. US citizens therefore dump US$ into the Forex demanding and buying Euros. Value of the € increases as demand for the € increases.

(i) If the interest rate is increasing in the EU then US citizens will buy Euros and deposit them into EU banks to get the higher rate of interest. The US will have a capital outflow as currency leaves the US and is a capital inflow into the EU. As US citizens dump their $ into the FOREX the demand for the US$ decreases and the value of the US$ decreases.

2019 Macro FRQ #3

2019 Macro FRQ #3

If Econoland's Real Interest Rate is falling citizens take their currency into the FOREX buying foreign currency's to invest in the foreign investment assets to get higher Real rates of interest.

More Foreign Investment Assets

(c)(i)(1) & (2) Currency value will decrease

(c)(ii) Econoland's central bank will buy currency reducing the supply of Econoland's currency and driving the value back up.

2017 AP Macroeconomics FRQ #1

2017 AP Macroeconomics FRQ #1

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(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