2002B AP Macro Exam (Form B) Question 1

2002 AP Macro Exam (Form B)

Good question for the College Board.

Watch me answer it here,

https://youtu.be/uLNxuZDJO5I

Answer - Investment is a component of aggregate demand, so when investment decreases, AD decreases (shifts left) as indicated on the graph above. This decreases output from Y to Y', and the price level falls from PL to PL'. 

(b) Using the results in part (a), explain how employment is affected.

When private investment decreases then Aggregate Demand (AD) shifts leftward which means that output decreases and therefore employment decreases. 

Answer - Employment rises and falls with the (real) output level. In this case employment will decrease because output decreases. 

(c) Identify one specific fiscal policy that might be implemented to offset the decrease in investment, and explain how the policy would affect each of the following in the short run.

(i) Aggregate Demand

(ii) Output & Price Level

(iii) Real Interest Rates

One fiscal policy that could be implemented would be an increase in government spending (Gs), in the short run an increase in government spending would increase aggregate demand (AD), output and the price level & real interest rates would also increase.

(Notice that they have in the short-run) because in the long-run Government spending will decrease aggregate demand due to rising real interest rates. As Keynes said, we are all dead in the long-run and therefore we sacrifice long run investment (capital formation) to gain short term boosts in aggregate demand.) This is asked about a lot,, know it...

From the Fiscal Policy cheat sheet.

Answer - To off set the effects of the decrease in investment, the government could increase its expenditures (G) or decrease taxes. With an increase in Gs, AD will increase since G is a component of AD. The increase in AD will increase output and the price level. Increases in government borrowing in the loanable funds market will increase the interest rate, as will increases in the demand for money resulting from increases in income. 

(d) Identify an open market operation that the central bank might implement to offset the effects of the decrease in investment, and explain how the policy would affect each of the following in the short run.

(i) Real Interest Rates

(ii) Aggregate Demand

(iii) Output and the Price Level

One Monetary policy would be to buy bonds, thus injecting cash into the economy.

From the Monetary Cheat Sheet.

Answer - The central bank could buy government bonds to increase the money supply. The increase in the money supply will cause real interest rates to fall. AD will increase because investment and interest-sensitive consumption will both increase, and both investment and consumption are components of AD. The increase in AD will cause the price level and output to increase. 

(e) If the central bank continues the open market operation described in (d) , explain the long-run effects on each of the following.

(i) Inflation

(ii) The value of the currency in the foreign exchange market (FOREX).

If the Price level (PL) is increasing then inflation is increasing as they are the same thing. 

Careful,, College Board is being tricky.

If the FED (Central Bank) is increasing the money supply then the value of the currency is decreasing as our goods are going up in price (PL increasing) and therefore our goods look relatively more expensive compared to foreign goods prices therefore there is less demand for our goods and less demand for our currency in the FOREX. Less demand = value decreases. 

Also lower interest rates caused by an increase in the money supply will reduce capital flows as investors are looking for higher rates of interest rates than their own. At the margin with lower interest rates there will be less demand for our currency to invest in our interest bearing assets. Less demand less value.

Answer - If the central bank continues to increase the money supply, the price level will continue to increase as explained in part (d), resulting in an increase in inflation. The higher price level and lower interest rate that result from an increase in the money supply will make domestic prices and interest rates relatively unattractive. The domestic currency will be exchanged for foreign currency by those wishing to purchase goods and invest capital elsewhere, and less domestic currency will be demanded by foreigners, causing a devaluation of the domestic currency in foreign exchange markets. 

College Board give me my 5

2004 Macro FRQ #3 (FED Buys Bonds/ Reserve Requirements)

FED Buys Bonds (Money Supply)

So, lately I was stumped in class.

The 2004 Macro FRQ #3

A) As a result of the FED's action, what is the change in the money supply if the required reserve ratio is 100%??

Answer - If the RRR is 100%, the amount held by the bank in Required Reserves is all $5000 dollars. But  the thing is,, the FED dropped $5,000 into the market initially by buying the bonds. That is where the increase comes from (the initial purchase of bonds from the FED)

B) If the Required reserve ration is reduced to 10%, calculate the following.

(i) The maximum amount this bank could lend from this deposit.

If the required reserve is reduced to 10%, then that means the bank is required to keep in reserve 10% of the $5,000 dollars deposited. So .10 x 5,000 = $500 in Reserve

This means that $4,500 of the amount deposited is put in excess reserves that can be loaned out. 

Answer (i) - So, the maximum amount that can be loaned out from the initial deposit of $5,000 is $4,500.

The part below is where I had a bit of a brain-fart.

(ii) The maximum increase in the total money supply from the FED's purchase of bonds.

The maximum increase in the money supply is happening from two different actions.

1) The bank is able to loan out the $4,500 and that amount is multiplied throughout the economy. We calculate this as 1/RRR = 1/.1 = 10,, so the $4,500 x 10 = $45,000 increase in the money supply. This is the amount of money that the banks can increase the money supply by the deposit. BUT,, there is someone we forgot about.

2) The FED had increased the money supply by buying bonds from our friends at the Clark Consulting Service of $5,000. 

Answer - the maximum amount the money supply can be increased is $50,000,, $45,000 from the actions of the bank and $5,000 from the initial buying of bonds from Clarks.

C) If the bank keeps some of its excess reserves how will this influence the change in the money supply? 

Answer - if the banks don't use all of there excess reserves to loan out,, then the money supply will not be increased by as much as it could. It would be less than the $50,000 of maximum increase.

D) If the public decides to not put the cash into the banks how will this effect the money supply?

Answer - this is the same as question (C),, if people don't put their deposits in the bank,, then the money supply cannot be increased. If Clark had just kept the $5,000 in cash,, then the money supply would only have increased by $5,000,, no more.

College Board, I salute you.

Thanks, Jung-Sub

2015 AP Macroeconomics FRQ #3

FOREX

Watch me answer it here

https://youtu.be/13xyH2d9WBE

2015 AP Macroeconomics FRQ #3

(a)

     (i) If Japan's deficit increases then the Japanese Government spends more than it takes in in tax revenue.

It must borrow to make up the deficit. It borrows by selling bonds. It sells bonds to the public/banks and therefore the money supply decreases. People pay for the bonds with cash, so cash leaves the banks and people's pockets and flows to the government. Money supply decreases.

Less money in the banks means the supply of loanable funds have decreased. 

If the government has the cash,, the banks cannot loan it out. Supply of loanable funds decreases.

From the Fiscal Policy Cheat Sheet

Less money in the banks means that the demand for loanable funds will increase.

Both, supply decreasing and demand increasing raises the RIR (real interest rate).

If demand increases then the banks raise interest rates to deal with the increased demand.

Answer -  (a) i

(a)

   (ii) If there is an increase in Japan's deficit, again,, they must borrow funds from the public. This lowers the supply of loanable funds and because the government has borrowed funds from the public demand increases. Real Interest Rates increase, with higher rates of interest less people can afford to invest.

From the Fiscal Policy Cheat Sheet

Answer (a) ii

If the Real Interest Rate increases due to the borrowing by the government then what happens to the supply of Euros and the price of Yen to Euro.

Ok, so if the RIR (real interest rate) increases in Japan, people from the Euro Zone will want to deposit money into the Japanese banks to take advantage of the high interest rates.

So the supply of Euros (money)  traveling to Japan will increase as people are searching for a higher return on their investment.

From the FOREX Cheat Sheet

If the RIR in Japan increases there will be a rush by Euro zone citizens to deposit money and buy financial assets in Japanese banks to gain the higher interest rates. That means that the supply of Euros in the FOREX market will increase. A larger supply will decrease the value of the Euro relative to the Yen.  The value of the Euro compared to the Yen will start to decrease in value as there is a larger and larger supply in the FOREX market.

Supply increases, value decreases

The opposite happens with the Yen,

As more and more Euros flow into the FOREX market to purchase the Yen  needed to buy these financial products the Yen will become relatively more valuable.  As the Yen becomes more valuable it will take less and less Yen to buy a Euro.

Again, as the supply of Euros increases, the value of the Euro decreases,,, as more people need to buy Japanese financial products they have to exchange their Euros for Yen increasing the demand for Yen, driving up the value of the Yen.

The graph above shows that as the Euro's supply increases it takes less and less Yen to buy a Euro.

If the European Central bank buys the Euro it will reduce the supply of Euros in the FOREX market increasing the value of the Euro relative to the Yen.

Phillips Curve FRQ Cheat Sheet

Aggregate Demand & Aggregate Supply FRQ Cheat Sheet

FOREX FRQ Cheat Sheet

FOREX FRQ Cheat Sheet

Tentative cheat sheet for the FRQ's for Forex.
Use this in tandem with the FOREX cheat sheet.

NOT!! this kind of Foreign Exchange.

2012 Microeconomics Exam FRQ # 2

2012 Microeconomics Exam FRQ # 2

Watch me answer it on Youtube https://youtu.be/pu9aX-eOWYg

(a) The table above shows Theresa's marginal utility from bagels and toy cars.
(i) What is here total utility from purchasing three toy cars?

So simple it's easy to get wrong... overthinking again?

3 toy cars (10+8+6) = 24 utils

Answer - One point is earned for determining the total utility, which is 24. 

(ii) Theresa's weekly income is $11, the price of a bagel is $2 dollars, and the price of a toy car is $1.

What quantity of bagels and toy cars will maximise Theresa's utility if she spends her entire weekly income on bagels and toy cars?

Explain using marginal analysis.

First, you must know the formula..

Then make a chart------

If you get to a place where both purchases have the same utility then you will be indifferent,, either one will do as long as you have cash to spend.

or

Using Marginal Analysis

MU/PB = 6/2 = 3 and MU/PTC = 3/1 = 3

the marginal utility per dollar spent on bagels equals the marginal utility per dollar spent on toy cars.  

Answer - One point is earned for stating that three bagels and five toy cars will be purchased.

Answer - One point is earned for explaining that with this combination of bagels and toys, the marginal utility per dollar spent on bagels equals the marginal utility per dollar spent on toy cars.   

Using Marginal Analysis

MU/PB = 6/2 = 3 and MU/PTC = 3/1 = 3

(b) Assume that the price of wheat, an input for the price of bagels, increases. Will Theresa's demand for bagels increase, decrease, or remain unchanged. Explain.

Remember, that input prices affect suppliers of a good,, not demanders.. So, Theresa will not change her demand for bagels if the price of wheat increases.

Answer - One point is earned for stating that Theresa’s demand for bagels will not change because the increase in the price of wheat will affect the supply of bagels, not the demand.

(c) Suppose that Theresa's income elasticity for bagels is -0.2. Does the value of Theresa's income elasticity indicate that bagels are a normal good, inferior good, substitute, or compliments?
  

Answer - One point is earned for stating that bagels are inferior goods.

(d) Suppose the price of toy cars increase by 10%. Theresa buys 5% fewer toy cars and 4% less of a different toy, blocks. Calculate the cross-price elasticity for toy cars and blocks, and indicate if it is positive or negative.

You gotta be *&(6%^# kidding me.

If the Price of Toy Cars is given then we need the Qd of another good and in this situation the Qd we need is for blocks. 

Xed is the comparison between 2 different goods

Toy Cars & Blocks

 Formula - 

% change in   Qd = -.04   (4% less) (Blocks)
% change in Price = .10 (Toy Cars)

Answer - One point is earned for calculating the cross-price elasticity for toy cars and blocks:

-0.04/0.10 = -0.4 

2012 Macroeconomics Exam FRQ #2

2012 Macroeconomics Exam FRQ #2

Watch me answer it on youtube https://youtu.be/WPH4Pmot8aM

(a) What is the reserve requirement?

If demand deposits are $100,000 and required reserves are $10,000 we can assume that the reserve requirements are 10%.

Answer - One point is earned for calculating the correct reserve requirement of 10 percent

($10,000/$100,000). 

(b) Assume that Luis withdraws $5,000in cash from his checking account at Mi Tierra Bank.

(i) By how much will Mi Tierra Bank's reserves change based on Luis's withdrawal.

So, Luis deposited $100,000 into the bank, of which 10% is required by the Fed to be held as required reserves. The banks has loaned out $85,000 dollars of the amount Luis deposited into the bank, leaving $5,000 in cash on hand,, called excess reserves.

If Luis takes out $5,000 then reserves will decrease by $5,000.

Answer - One point is earned for stating that total bank reserves will decrease by $5,000 

(ii) What is the initial effect of the withdrawal on the M1 measure of money supply? Explain.

First, you must know what the M1 money supply actually is.. 

Monetary Policy Cheat Sheet

M1 is paper money, coins and checkable deposits,,, no matter if the money is in the bank as checkable deposits or in Luis's pocket as cash it doesn't effect the M1 money supply. I guess if Luis took the money and burned it,, then the M1 level of the money supply would have been changed.

Short of burning the money,, the M1 doesn't change from bank  (checkable deposits) to customer (cash).

Answer - One point is earned for stating that the $5,000 withdrawal has no effect on the M1 measure of the money supply because it only changes the composition of M1 between cash and demand deposits. 

(iii) As a result of the withdrawal, what is the new value of the excess reserves on the balance sheet of the Mi Tierra Bank, based on the reserve requirements from part (a).

This is tricky,, you must decrease the Demand deposits by the $5,000 and decrease excess reserves by $5,000 and then add back to excess reserves the amount $500 that doesn't need to be held in reserved requirements due to the $5,000 withdrawal.

Answer - One point is earned for stating that the new value of the excess reserves is $500. 

2013 Microeconomics Exam FRQ #1

2013 Microeconomics Exam FRQ #1

Watch me answer it here

https://youtu.be/9rkDZFx_vCs

(a) Assume that the profit maximising monopolist is unregulated. Using the labelling in the graph, identify each of the following.

(i) the monopolist's quantity of output.

It is a profit maximising monopolist so profit maximising is where MR = MC.

Answer - the monopolist's quantity of output is at Q1.

(ii) The monopolists price.

Answer - The monopolists price is at P3.

(iii) The Profit earned by the monopolist.

Answer - Area of Profit, P1,P3,a,c

(iv) The deadweight loss.

Answer - Deadweight loss area (acf)

(b) Now assume that the monopolist can perfectly price discriminate. Using the labelling of the graph, identify each of the following.

(i) the quantity produced

(ii) the total revenue received by the monopolist.

Answer - P4,f,Q3,0   all in red is the total revenue.

(c) Instead, assume the monopolist charges a single price and is regulated to produce the socially efficient quantity. Using the labelling of the graph identify each of the following.

(i) The socially efficient quantity.

(ii) The consumer surplus at the socially efficient quantity.

The socially efficient quantity is allocative efficiency where P = MC or D = MC

Answer - the socially efficient quantity is at Q3 & the consumer surplus is P1,P4,f.

(d) Is the monopolist facing the regulation in part (c) earning positive economic profit, zero economic profit, or incurring a loss. Explain.

The regulated monopolist is making zero economic profit as he is covering his ATC's. 

Answer - the monopolist is making zero economic profit as the price equals the ATC.

(e) Is point f in the elastic, inelastic, or unit elastic section of the demand curve? Explain.

Answer - f is in the inelastic section of the curve as the MR (marginal revenue) is negative.

You must train daily.