2010 Macro FRQ #1

2010 Macro FRQ #1

Watch me answer it on youtube 

https://www.youtube.com/watch?v=aX2zAKId5RQ&feature=youtu.be

(A) Draw a CLG of AD/AS and show each of the following.

(i) The Long Run Supply Curve.

(ii) The current equilibrium output/price levels, labeled a sYE & PLE.

(B) Assume the government increases spending on national defence without raising taxes.

(i) On your graph in part (a), show the effect on AD.

Government spending on national defence is government spending that increases the G in the GDP formula. So, C + I + G + XN = GDP,,, If, G increases (defence spending) then AD increases, increasing GDP.

(ii) How will this action affect the unemployment rate in the short-run? Explain.

If the government is spending then the G is increasing, people are supplying goods to the government, so GDP is increasing and output is increasing which means businesses are hiring to keep up with the increased demand from government spending and increased output. 

(C) Assume that the economy adjusts to a new long-run equilibrium after the increase in government spending.

(i) How will the new short-run aggregate supply curve compare to the initial SRAS curve in part (a)? Explain.

The college board is simply asking you what happens in the long-run, after inflation happens in the economy. Notice that when an economy is in equilibrium and then the government spends, that we are in an inflationary gap. If the government does nothing in the long run the SRAS curve will shift leftward as prices and wages adjust. In essence during an inflationary gap, there isn't enough labor to handle the increased demand for goods and services, so wages rise to entice more people into the workforce and prices also rise.

(D) In order to finance the increase in government spending national defence in part (B), the government borrows from the public. Using a CLG of the loanable funds market, show the effect of the government's borrowing on the real interest rate.

If the government is borrowing from the public then the demand for loanable funds is increasing driving up the interest rate.

(E) Given the change in the Real Interest Rate in part (d), what is the impact of the following.

(i) Investment.

Crowding out will occur as the real interest rate rises it deters people from taking out loans to invest. As the government drives up the interest rates by borrowing there is less and less private investment.

(ii) Economic growth rate. Explain.

If there is less private investment there will be less long-term growth as there will be less capital formation, less capital goods produced so in the long-run society will suffer.

2010 Macro FRQ #2

2010 Macro FRQ #2

watch me answer it here

https://youtu.be/36FeNAAp3_I

(A) Using a CLG of the money market, show how the nominal interest rate will be affected.

There is the idea that people need a certain amount of cash monthly, daily to pay for incidentals. Lunch, snacks, school play, whatever. If credit card fees fall, then it is cheaper to use credit cards and they don't need to keep as much money on hand as now it is more affordable to just use a credit card.

The problem even tells you that the demand for money falls. So the demand for money will fall.

(B) Given the interest rate change in part (A), what will happen to bond prices in the short-run?

This is more of a finance question than an AP economic one. You must understand that a Bond is a financial asset that is bought (usually for a $1,000) and then the company that sells you the bond promises to pay you a yearly rate of interest (like 5%) to borrow your $1,000. At the end of the time the $1,000 is paid back to you in full.

If interest rates fall to lets say 2%, and you have a bond that is paying 5%, your 5% bond is worth more than the Bonds that now only pay 2%.

If interest rates fall, the bonds with higher paying amounts (Yields) will have higher prices as your bond, having a higher yield will be worth more than the lower yield bond.

(C) Given the interest rate change in part (A), what will happen the price level in the Short-run? Explain?

If interest rates fall, then more consumption and investment will occur, as it is now cheaper to borrow money. Therefore the AD curve will shift rightward and the price level will increase. (I wouldn't have thought of exports)

(D) Identify an open market operation that the FED could use to keep the nominal interest rate constant at the level that existed before the drop in credit card fees. Explain.

If the demand for money is falling which reduces the interest rate then the FED can reduce the money supply which will increase the interest rate. So the FED should sell bonds.

2010 B Micro FRQ #3

2010 B Micro FRQ #3

Watch me answer it here on youtube

https://youtu.be/4MmPMLCwKSQ

(A) The table below gives the quantity of good X demanded and supplied at various prices.

(i) Is the demand for good X relatively elastic, relatively inelastic, unit elastic, perfectly elastic or inelastic when the price decreases fro $30 to $20? Explain.

Elastic Cheat sheet is here.

First way to get this answer - - -

Second way to get this answer - - -     

 Total Revenue = P x Q

Total Revenue Test

Total Revenue at $30 price = Qd (1) x $30 = $30TR

Total Revenue at $20 price = Qd (3) x $20 = $60TR

Price decreased and Total Revenue increased = Relatively Elastic Demand

From the Elasticity Cheat Sheet

(ii) Is the supply of Good X relatively elastic, relatively inelastic, unit elastic, perfectly elastic or inelastic when the price decreases fro $30 to $20? Explain.

From the Cheat Sheet:

(iii) If a per-unit tax is imposed on good X, how will the tax be distributed between the buyers and sellers?

If the quantity supplied  does not change  when the price changes we assume that the good is perfectly inelastic. A perfectly inelastic supply implies that the supplier can't change the quantity of the good he produces. If a tax is imposed an a seller with a perfectly inelastic supply curve the seller will pay the total amount of the tax. 

(The one with the most inelasticity pays the burden of the tax) Know this...

(B) Assume that the income elasticity of demand for good Y is a -2. Using a CLG of the market for Good Y, show the effect of a significant increase in income on the equilibrium price of Good Y in the short-run.

You must understand that the YED, income elasticity of demand, when negative means that Good Y is an inferior good. 

From the Elasticity Cheat Sheet here.

From the Demand and Supply Cheat Sheet here

The "Y" in the cheat sheet above stands for Income. 

If Income (Y) increases then the quantity demanded of the good will decrease.

This is a bit confusing and perhaps I should rework the cheat sheet as actual Demand shifts to the left.

Demand decreases due to the rising incomes and Good Y being an Inferior good.

Remember from the Demand and Supply Cheat Sheet.

Inferior Good - (Y) Income increases then Demand (D) decreases

When Income increases the demand for Good Y decreases

2010 AP Micro FRQ#2

2010 AP Micro FRQ #2

Watch me answer it here

https://youtu.be/qnJ_Ut_Ev00 

(A) Using a CLG of the factor market for machines and the John Lamb Company, showing each of the following.

(i) The equilibrium rental price of machines in the factor market, labeled PR.

(ii) John Lamb's equilibrium rental quantity of machines, labeled as QL.

Understand that no matter if machines or labor we label the graphs the same. The college board is just checking to see if you know how to draw the Resource (factor) market graph.

Resource (Labor) Cheat Sheet here.

You also needed to know that a perfectly competitive (factor) market which will give us that perfectly elastic MRP curve for John Lamb's company.

(B) Assume the popularity for widgets declines decreasing the demand for widgets. What will happen to each of the following?

(i) Marginal product curve for machine hours.

Know what marginal product is:

from the Output and Costs, Cheat Sheet, here.

This is tricky -  understand that MP doesn't change for machines. The first machine makes 10 widgets an hour, the second machine makes 10 widgets and hour and so on...

(ii) Marginal Revenue Product curve for machine hours. Explain.

The MRP will decrease. As the demand for machines decreases, the price for the machines will fall. Since the formula for MRP = MP x P (of the good) and price of the good (widgets) decreases because the demand falls. The MRP shifts left.

From the Resource Costs Cheat sheet:

 

(C) John Lamb is employing the cost-minimisation combination of inputs (labor/machines). The marginal product of labor is 28 widgets per worker hour and the wage-rate is $14 an hour. The 

marginal product of the machine is 60 widgets per hour. What is the rental price per hour?

I did a blog post specifically on Least Cost Rule here.

Understand that the price of labor is the wage (MRC)

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