2010 Macro FRQ #3

2010 Macro FRQ #3

Mauricio Macri President of Argentina

(A) How will the transaction above affect Argentina's aggregate demand?

Argentina's imports will increase, therefore aggregate demand will decrease.

(B) Assume the US current account balance with Argentina is initially zero. How will the transaction above affect the US current account balance? Explain.

Balance of Payments Cheat Sheet here.

The US account balance will be a surplus as the US will have exported goods to Argentina. We will have a surplus in out current account and a deficit in the financial or capital account.

(C) Using a CLG of the FOREX market for the US dollar. show how a decrease in the US financial investment in Argentina affects each of the following.

(i) The supply of US dollars.

(ii) The value of the US dollar relative to the Peso.

Understand, that if the Argentinians are buying US goods they must go to the FOREX to buy US dollars as US suppliers do not accept Argentinian Pesos. So as Argentinians dump their money into the FOREX to buy US dollars the supply of US dollars in the FOREX decreases.

Obviously, when there is less of something the value of it increases. The value of the US dollar increases relative to the Peso.

(D) Suppose the inflation rate in the US is 3% and 5% in Argentina. What will happen to the value of the Peso relative to the US dollar as a result of the inflation rate difference? Explain.

Careful here as the college board is asking about the inflation rate (Price Level) not the interest rate as they do for so many of these problems.

If the US price level (inflation rate) is less than Argentinas then the prices of US goods are increasing at a slower rate than Argentinas goods. So relatively, US goods are going to be cheaper than the Argentinian goods. 

If US goods are cheaper than the Argentinian goods, relatively. Then Argentinians are going to purchase (import) more US goods. Again, they have to buy US dollars to purchase US goods. As they do this the supply of Argentinian Pesos increase in the FOREX market. A larger supply means that the Argentinian peso will loose value against the US dollar.

2010 B Macro FRQ #1

2010  B Macro FRQ #1

Watch me answer it here

https://youtu.be/LbJtYHi8lFs

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.