2008 B Macro FRQ #1

2008 B Macro FRQ #1

(A) How will the increase in government expenditures (spending) affect each of the following in the short-run?

(i) Aggregate Demand

Government spending will shift the AD curve rightward. 

Government spending causes (C) consumption to increase which increases AD.

The AD/AS cheat sheet is here.

(ii) Short-run Aggregate Supply

Government spending does not affect the SRAS - short run aggregate supply curve.

These shift the SRAS curve 

(B) Using a CLG of the AD/AS, show the effects of the expenditure on the real output (RGDP) and the price level (PL).

PL, increases

RGDP, increases

&

Incomes (Y) increase

(C) Assume that the government funded this increase in expenditures by borrowing from the public. Using a CLG of the loanable funds market, show the effects of the borrowing on the RIR, real interest rate.

Government spending increases, the RIR, increases

Fiscal Policy Cheat Sheet is here.

(D) Given the change in the real interest rate (C), what will be the effect of the change in the FOREX?

(i) Supply of Z currency. Explain. (WHY?)

If, the government increases spending then the RIR will increase. This increased interest rate will attract foreigners to invest into Z's interest bearing assets (people want to put their money into Bonds) because they can earn a higher interest rate compared to their own countries. Capital flows (money) will flow into the country of Z to take advantage of the higher interest rates. 

To be able to invest in country Z investors must exchange their currency in the FOREX market. They are demanding Z's currency. The demand for Z's currency will increase. This will decrease the supply of Z's currency in the FOREX. 

(ii) The value of Z currency.

Demand increases for Z's currency and supply decreases, so the value will rise.

(E) Given your answer in part (d)(ii), what will be the effect of the change in the value of Z's currency on Z's exports? Explain.

(D)(ii) says that the currency's value will increase. This means that to buy a Z, one must spend more in the FOREX. 

Explain, - I want to buy a jacket from the country of Z and it costs 100z. The company who makes the jacket do not take $ they only take z's. So, I must trade my $ for z's in the FOREX. Before the government spending (RIR increased) I could buy the jacket for $100. 

The exchange rate was 1 for 1.  - 100$ for 100z

Now the value of Z's currency has increased, it now takes 2$ to equal 1z. So, I must take $200 to buy 100z. I can still buy the jacket but since the RIR increased and the value of the z increased I must pay more for each z that I want to buy.

This means that the price of the goods in the country of Z have increased for foreigners wanting to buy their goods.

If the price of Z's goods have increased relative to other countries then they will not be able to export as much. Their exports will decline.

2008 Micro FRQ #2

2008 Micro FRQ #2

(A) Define marginal utility - satisfaction from consuming an additional unit.

From the PPC & Utility Cheat Sheet Here. 

(B) The table below shows the quantities, prices, and marginal utilities of two goods, fudge and coffee, which Mandy purchases.

Mandy spends all of her money and buys only two goods. In order to maximise her utility, should Mandy purchase more fudge and less coffee, purchase more coffee and less fudge, or maintain her current consumption? Explain.

It is important that you recognise that the formula helps to set these two goods equal. If the utility of both goods were 12 but the cost of one was $2 and the other $4, then it wouldn't be a fair comparison as one good costs twice as much as the other. We use the formula (below) to take into account the differing marginal utilities and the price difference between goods. 

Understand (memorize) the Formula for these Utility problems.

(C)  Assume that consumers buy 20 units of Good R each month regardless of price.

So, step back a second and remember what you have learned from the Elasticity section of this course. What type of goods are bought no matter the price. Two examples.

Drugs and Insulin - Perfectly Inelastic

(i) What is the numerical value of the price elasticity of demand for good R?

Elasticity Cheat Sheet Here.

Remember that elasticity is not slope, but price changes do not effect the Qd.

No % change in Qd.

(ii) If the government imposes a $2 per-unit tax on Good R, how much of the tax will the seller pay?

Buyers will pay the total amount of the tax.

PPC & Utility Cheat Sheet (Updated)

PPC & Utility Cheat Sheet (Updated)

2008 Micro FRQ #1

2008 Micro FRQ #1

Watch me answer it on youtube 

https://youtu.be/F-YvJktcaA8

(A) Draw a clearly labeled side-by-side graph for the apple market and Callahan's Orchard, and show,

(i) Market output & price

(ii) Callahan's output & price

(B) Now assume that the Government provides farm support to apple growers by granting an annual lump-sum subsidy all apple growers. Indicate the effect the subsidy would have on each of the following. ((In the Short-Run))

(i) Callahan's (firms) output and quantity

Lump sums do not affect the marginal costs (no change in quantity or price) 

Perfect Competition Cheat Sheet, Here.

(ii) Callahan's Profit

Profit will increase.

(iii) The number of firms in the industry.

 The number of firms will only increase in the long-run, never in the short run.

(C) Indicate how each of the following will change in the ((long-run)) due to the subsidy.

(i) Number of firms in the industry.

In the short-run due to the lump-sum subsidy Callahan has a profit, firms in the industry are attracted to the profits and enter the industry. 

(ii) Price

As firms enter the industry they will push the price down.

(iii) Industry Output

Industry Output will increase as there are more firms producing more goods

Earlier post with some more coverage, here.

Perfect Competition Cheat Sheet (Updated)

Perfect Competition Cheat Sheet (Updated)

Need a copy - email (wcwaugh@aol.com)

2008 Macro FRQ #3

2008 Macro FRQ #3

Watch me answer it here

https://youtu.be/N8tiU6iyMYo

(A) Calculate the opportunity cost of a bicycle in Artland.

Artland can produce 600 Hats or 300 Bikes.

The opportunity cost is what is given up, foregone, or sacrificed. Art land only makes two things so to produce more of one thing (hats) he must give up another thing (bikes).

600/300 = 2

   2 / 1

Hats/bikes = 2 hats to 1 bike

If Artland produces 1 bike he gives up 2 hats

If they had asked for the opportunity cost of a hat. Reverse it.

300/600 = .5

Bikes/Hats = .5 bike to 1 hat

If Artland produces 1 hat it gives up .5 bikes

(B) If the two countries specialise and trade, which country will import bicycles? Explain.

We have to compare both sides in the making of hats and bikes. 

Ray only gives up .25 of a bike to make 1 hat - most efficient - comparative advantage in hat making.

So Ray will make hats and import bikes.

Art only gives up 2 hats to make 1 bike - most efficient - comparative advantage in bikes.

Art will make bikes and import hats.

(C) If the term of trade are 5 hats for 1 bike, would trade be advantageous for each of the following?

(i) Artland

(ii) Rayland

Look at the chart again,

Ray can trade 4 hats for 1 bike - 5 hats for 1 bike is a worse deal - Not Good

Art can trade 2 hats for 1 bike - 5 hats for 1 bike is a better deal - Good

(D) If production in Artland triples, which country has the comparative advantage in hats?

So production triples, not just in hats but in bicycles also. Art land would now have the absolute advantage but the comparative advantage wouldn't have changed.

Art = 600/300 equalised = 1 to .5

Art = 1800/900 equalised = 1 to .5

 

2008 Macro FRQ #2

2008 Macro FRQ #2

FOREX and Balance of Payments Cheat Sheet, Here.

(A) Two major sub accounts in the balance of payments are the current and the capital (Financial) account. IN which of these sub accounts will each of the following transactions be recorded?

(i) US resident buys chocolate from Belgium.

Current Account = Goods & Services

(ii) US manufacturer buys computer equipment from Japan.

Current Account = Goods & Services

(B) How would an increase in real income in the US affect the current account balance? Explain.

If Real incomes increase then we can expect citizens to import more goods and services. More goods and services will increase the current account but the Current Account Balance will go more into a deficit.

AD shifts right and RGDP increase, but incomes increase also Y1 to Y2. Why? If output increases then someone must have been hired to produce the extra output. That someone now has income (income increases nationally) and will marginally buy more imported goods.

Remember - That an increase in incomes (Y) is aligned with an increase in RGDP as shown on the AD/AS curve.

(C) Using a CLG of the FOREX market for the US dollar, show how an increase in the US firm's direct investment in India will affect the value of the US dollar relative to the Indian rupee.

1. Use a FOREX graph of the $

2. US firms invest in India

3. What happens to value of the $

OK, for US firms to invest in India they must go to the FOREX market and buy  Indian Rupee ₹

This implies that the demand for Rupee ₹ is increasing. 

The value of the ₹ is increasing relative to the $.

The Supply of US $ is increasing as US firms dump their $ into the FOREX to buy Rupees ₹. As the supply of $ increases the value decreases.

The Supply of US $ in the FOREX increases the Demand for US$ will decrease. As the supply of US$ increases the demand for US$ will decrease.

If they had asked for the Graph drawn showing the Valuation of the ₹.

All of the Rupee symbols are not necessary, but it made me happy.