2010 B Macro FRQ #2

2010  B Macro FRQ #2

Watch me answer it here

https://youtu.be/rgncLbqXjLk

Sells bonds = Contractionary = MS decreases

(A) Assume that banks in Sewell have no excess reserves. What is the effect of the central bank's action on the amount of customer loans that banks in Sewell can make?

Banks have no excess reserves, meaning they have no money to lend out. Then the FED sells bonds and bank customers take out even more cash to buy FED bonds. The bank is now having to borrow money from other banks to cover the checks written by its customers to buy those FED bonds. There is even less money in the system and no excess reserves to loan out. Loans decrease.

(B) Using a CLG of the money market, show they affects of the central banks actions on the nominal interest rate in Sewell.

(C) What is the effect of the Central bank's action on each of the following.

(i) PL

(ii) Real interest rate (RIR) Explain.

If the Central Bank uses a contractionary policy by  selling bonds then the nominal interest rate will increase as the money supply shrinks. As the money supply decreases and the nominal interest rate increases then there will be less consumption and investment which will decrease AD. As AD (aggregate demand) decreases the Price Level will fall. 

A quick way to know about the RIR is to know that nominal and real interest rates for the AP exam move in the same direction. So if the Nominal IR is increasing then the Real IR must also be increasing.

The central bank is contracting the money supply. The real interest rate is affected by the supply of money in the loanable funds market (commercial banks). If the FED is contracting the money supply then the supply of loanable funds is being extracted from the commercial banks. This lowers the supply of loanable funds and therefore the RIR will increase.

(D) Given your answer in part (C)(ii), how is the international value of the Sewell's currency, the Ono, affected. Explain.

Understand that when the AP College Board starts speaking about currency and RIR's together then we have to take the affects on the FOREX market.

So, if the RIR increases, foreigners will see the higher interest rates in the country of Ono, and want to invest in the country to get the higher interest rates. Profits attract investors. So if the RIR in Ono, increases and foreigners demand more currency from Ono in the FOREX. Then we will see the value of Ono's currency increasing. As demand for the Ono increases in the FOREX the value of the Ono will increase.

2010 B Macro FRQ #3

2010  B Macro FRQ #3

Notice (in the short-run) & (Explain each)

(A) An increase in the price of crude oil, an important natural resource.

Understand that crude oil is oil and therefore is a resource cost of business. Stagflation for the AP exam is usually caused by rising oil prices that shift the SRAS curve leftward. Raising costs (PL) and lowering RGDP.

(B) A technological change that increases the productivity of labor.

Productivity of labor implies that citizens of a country can produce more goods with the same resources due to technological change. This (in the short-run) is the graph that shows Growth.

(C) An increase in spending by consumers.

An increase in spending by consumers will increase the PL and increase the RGDP.

(D) The depreciation of the country's currency in the FOREX.

If a country's currency depreciates, the value of the currency falls, this will stimulate exports. Exports will increase as the currency value falls.

Why?

As the currency's value decreases foreigners can buy more of our goods. In essence our goods become relatively less expensive compared to foreign goods.

If Exports increase then AD increases, PL and RGDP increases.

2009 Macroeconomics FRQ #1

2009 Macroeconomics FRQ #1

(A) Using a CLG with both short-run and long-run Phillips curves and the relevant numbers from above, show the current long-run equilibrium as point A.

Understand that the expected inflation rate in long-run equilibrium is the NRU (Natural Rate of Unemployment) --- A is the NRU.

(B) Calculate the real interest rate in the long run equilibrium.

Understand that: Real = Nominal (with no inflation)

                            Real = Nominal - Inflation

                            Nominal = Real + Inflation

Real (6%) = Nominal Rate (8%)  - Inflation (Expected Rate 2%)

(C) Assume now that the Fed targets an inflation (price level) rate of 3%. What open market operation should the FED undertake.

If the FED sells bonds (Contractionary policy) it will reduce the Money Supply raising the nominal interest rates. Think about it: if the inflation rate (PL) is 6% and the FED wants a lower price level (inflation rate) then it needs to decrease the (C) and (I), consumption and investment. It needs to lower the PL by decreasing the AD (aggregate demand). AD decreases and the PL / Inflation rate falls  from 6% to 3%.

Crazy tricky college board:

Looking at you college board.

 (D) Using a CLG of the money market, show how the actions of the FED in part (C), will affect the nominal interest rate.

You must have recognised that selling bonds was contractionary.

(E) How will the interest rate change you identified in part (D), affects aggregate demand in the short-run.

If the FED sells bonds (Contractionary policy) it will reduce the Money Supply raising the nominal interest rates. Think about it: if the inflation rate (PL) is 6% and the FED wants a lower price level (inflation rate) then it needs to decrease the (C) and (I), consumption and investment. It needs to lower the PL by decreasing the AD (aggregate demand). AD decreases and the PL / Inflation rate falls  from 6% to 3%.

(F) Assume that the FED's actions are successful. What will happen to the following  as the economy approaches a new long-run equilibrium.

(i) Short-run phillips curve 

(ii) The NRU (natural rate of unemployment)

The NRU (natural rate of unemployment) remains unchanged at 5%

2009 Microeconomics FRQ #3

2009 Microeconomics FRQ #3

Watch me answer it here

https://youtu.be/b5o-oYRxY2E

1st make a chart

(A) If Red chooses a location south of the city, which location is better for Blue? Explain.

  

If red goes South, then Blue should go North as $4000 > $1000

(B) Is choosing a location to the South of the city a dominant strategy for Red Shop? Explain. 

Red shop has no dominant strategy and neither does Blue. Both are better off doing the opposite of the other's choice.

(C) If the two firms cooperate in choosing locations, where will each firm locate?

If they cooperate they will collude and choose the locations that give off the biggest payoff.

 (D) Assume that the South suburb has enacted an incentive package to attract new businesses. Any firm firm that locates south of the city will receive a subsidy of $2000 per day. Redraw the payoff matrix to include the subsidy.

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Drop me an e-mail telling me where you are (school, country) and where you found my blog.

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 wcwaugh@aol.com (don't laugh at the AOL account, it's older than you are)

2009 B Microeconomics FRQ #3

2009 B Microeconomics FRQ #3

Watch me answer it here

https://youtu.be/o0Byq2fLBQU

1st, make a chart.

(A) If Easy chooses to maintain its current fare, which strategy is better for City Wheels? Explain.

Look at your chart - If Easy maintains then City should maintain. Explain = Why? $180>$120

If Easy maintains then City has two choices, to maintain or lower the fare.
City will choose the choice with the higher payoff.
To maintain for a payoff of $180.

(B) Is there a dominant strategy for Easy Ride. Explain.

Know what a dominant strategy is.

From the Oligopoly Cheat Sheet here.

Easy does not have a dominant strategy. WHY? Easy rides best move (highest payoff) depends on City.

(C) Assume the companies must make their decisions without cooperating. What will be the daily profit for each Company.

Without cooperating/knowing the moves of the other firm we can expect both company's to try and choose the highest payoff.

 

(D) If the two firms were to cooperate, which strategy (maintain/lower) would each firm choose?

This problem is a bit unique in that no matter if they cooperate or don't they will choose the left upward quadrant with Easy and City maintaining the fare.

(E) Local government subsidises the fare of only a company that will lower its fare. Draw a new payoff that reflects the question. (Only the quadrants with LOWER FARE are changed.)

Oligopoly Cheat Sheet (Updated 12/8/16)

Oligopoly Cheat Sheet (Updated 12/8/16)