2010 AP Macro Exam Multiple Choice (PPC, Comparative Advantage, Circular Flow)

2010 AP Macro Exam Multiple Choice 
(PPC, Comparative Advantage, Circular Flow)

Answer (C) Countries X & Y can engage in mutually advantageous trade by exchanging 1 watch for 1 radio.

Answer (D) 10

Opportunity cost,, what is given up - to move from 10 to 20 (A) is a gain of 10.

to move from 90 to 80 (B) is a loss of ten.

Lose 10 units of (B) and gain 10 units of (A)

Answer (A) Households are on the demand side of the product market and the supply side of the resource market.

Fiscal Policy Cheat Sheet

Fiscal Policy Cheat Sheet

This is a tentative cheat sheet,, I will be working my way over the next week through the FRQ's and Multiple choice questions to check my thinking.

Questions, comments, corrections -    wcwaugh@gmail.com

Government Spending & Taxes and Real Interest Rates

Government Spending and Real Interest Rates

If the Government is spending then the Real Interest rate is increasing.

FRQ's that ask about government spending always want to know the real interest rate. The loanable funds graph tell you whether the real interest rate is rising or falling.

Hint, if the government is spending the RIR is increasing.

Remember that Keynesian view spending is a short-term fix for a recession.
When the RIR increases, investment is reduced and growth is sacrificed and there will be less capital investment.

As for the decrease in taxes being expansionary. Take the view that with a balanced budget when the government reduces taxes it must make up the difference with Government spending.
The reasoning is a bit circular because the idea of a reduction in government is not entertained along with the reduction in taxes.

More about crowding out, soon.

Fiscal Policy (Taxes) Real Interest Rates

Fiscal Policy (Taxes) Real Interest Rates

OK, correction ,, Tax cuts and RIR

Look at it from a balanced budget starting point.

Tax cuts require the government to deficit spend as we don't assume there could be a reduction in government. (faulty and circular thinking in my libertarian view)

So, Taxes decrease and therefore government spending must increase to make up the lack of taxes being collected. The Real Interest Rate increases...

Nominal Interest Rates, Price Level changes, and the Real Interest Rate

Nominal Interest Rates, Price Level changes, and the Real Interest Rate

Monetary Policy (money market, loanable funds, investment, AD/AS) & real interest rates

Monetary Policy (money market, loanable funds, investment, AD/AS) & real interest rates

So lately I've been trying to increase my understanding of how fiscal and monetary policies work in tandem. I've been a bit dismayed as many students can't understand the Real interest Rate questions on the AP exam and I haven't found any resources that string it all together.

So I've spent a few days working through the past FRQ's and Multiple choice sections of exams in hopes of clarifying exactly what the college board is testing.

1st Monetary Policy

On the left is an explanation of the causal chain of events. On the right is a graphical illustration of the left side. Sometimes seeing what happens in graphs makes the left side a bit more clear. Hope this helps,,, any mistakes, corrections, comments,, wcwaugh@aol.com

Fiscal Policy (Loanable Funds) FRQ Cheat Sheet

Fiscal Policy (Loanable Funds) FRQ Cheat Sheet

Some students have a conceptual problem with understanding this section (to many things to think about at this point in the course I think.

Anything that makes money flow into the commercial banks is an increase in the supply of loanable funds and therefore the real interest rate will fall, (more of a supply of something the price falls, ) more money supplied and the price (interest rate) will fall.


Notice that each question is in two places.
2014 is in the Supply decreasing (interest rates rise) and in demand increasing (interest rates rise)
2013 is in the supply increasing (interest rates fall) and the Demand decreasing section (interest rates fall).

Both answers would be correct unless on the AP exam they ask you specifically what happens to supply. 2014 would then be a supply increasing explanation with a correct graph.