2021 (Set 2) AP Macro FRQ#2

 2021 (Set 2) AP Macro FRQ#2

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a) Draw a single CLG with both SR & LR Phillips curve. Showing the initial SR equilibrium point as X.

Recession = a movement down the SRPC

AD shifting left is a movement down the SRPC

b) Suppose the government impements fiscal policy in order to achieve full employment output and the MPC is .75.

i) Calculate the minimum government spending needed to get back to full employment. Understand the recessionary output gap is 600 billion. So we need 600 billion of RGDP to get to full employment.

The government does not have to spend the full 600b to get us back to full employment because of the magical (multiplier)

 The MPC = .75

The MPS = .25

MPC (.75) + MPS (.25) always = 1

The multiplier is 1/MPS = 1/.25 = 4 , The multiplier is 4

Government spending x multiplier = change in RGDP

Gov't spending ? x  4 = 600b

or we can rewrite it as 600b/4 = 150b

Government needs to spend 150b x 4 = the 600b to get us back to full employment

ii) Suppose instead the gov't wants to change taxes. Calculate the minimum change in taxes needed to push aggregate demand by the amount of the output gap (600b).

((The Tax Multiplier is always (1 less) than the Government Spending Multiplier))

Put it in your brain and don't forget it.

Since the Government Spending multiplier in (i) was 4 the Tax multiplier is 3

so 600b/3 = 200b

The government must lower taxes by 200b to push Aggregate Demand back to the 600b full employment point as less taxes is expansionary.

The Tax multiplier formula is -MPC/MPS or 600b/3 = -200b

Taxes need to be reduced by 200b that is why the minus is there

c) Assume instead the government takes no policy actions to close the output gap. Explain how the economy will adjust in the long-run.

Recognize that this is now a Classical View question.

If we are in a recession and there is no Fiscal or Monetary policy

in the long run wages, prices, inflationary expectations will decrease

wages and input prices decreasing shifts the SRAS curve to the right

We return back to full employment at a lower PL (price level)

2021 (Set 1) AP Macro FRQ#2

 2021 (Set 1) AP Macro FRQ#2

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2. Assume the country is operating below full employment.

Below full employment = Recession

a) Identify a fiscal policy that could restore the economy back to full employment.

Fiscal Policy is either (Government spending or Taxes)

Recession = (More Government Spending or Reduce Taxes)

b) Draw a CLG of the loanable funds market and show the effects of the fiscal policy chosen on the equilibrium real interest rate.

Government spending  = an increase in the RIR (Real Interest Rate)

If the government wants to spend more money they must either tax citizens more or borrow the funds. Borrowing of the funds means selling bonds to citizens.

The citizens must take the money out of the banks to pay for the bonds.

(Demand shift) = People walking into banks needing to take out money to buy bonds 

increases (rightward shift) of the demand for loanable funds

(Supply Shift) = As people take the money out of the bank it 

reduces (shifts leftward) the supply of loanable funds in the banks.

Both shifts are technically correct (Use the one that seems correct to you)

Easiest for me to recognize that anytime the govenment is spending they are borrowing from the Banks reducing the supply of lonable funds which increases the RIR.

c) Based solely (only) on the real interest rate change what will happen to the following?

i) Net Exports. Explain.

If the RIR increases then the demand for the currency will increase causing the currency to appreciate which will decrease the amount of exports for the country.

As the RIR increases citizens of other countries will want to put their money in our banks to get the higher interest rate (they want higher profits)

To put their money in our banks they must exchange it in the FOREX, causing the demand for our currency to increase which drives up the value of our currency.

Since our currency is increasing in value our goods are becoming more expensive.

More expensive goods means less people will want to buy our goods therefore

our exports will decline.

ii) Stock of physical capital (capital goods) . Explain.

As the RIR increases (Loans are now more expensive)

Domestic Investment (taking out of loans) will decrease which implies that less capital goods will be produced in our country. Less physical stock (capital formation/goods) means that the country's long-run growth will be damaged.

RIR increase = Less physical stock (capital goods/formation)

2021 (Set 1) AP MAcro FRQ#1

 2021 (Set 1) AP Macro FRQ#1

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1. Assume the economy of Sweden is in long-run equilibrium and has a surplus in its current account.

a) Is the Swedish capital account and financial account in deficit, surplus or in balance? Explain.

If the Capital account is in a surplus that implies the financial account must be in a deficit as

CA + FA = 0

b) Draw a CLG of the AD/AS curve for Sweden showing the PL and Y.

Recognize that you must have read #1, Sweden is in long-run equilibrium.

c) The UK decreases its imports from Sweden. On the graph show the new eqilibrium PL & Y.

A decrease in UK imports is a decrease in Swedens exports.

If exports decrease, then AD decreases along with the Price Level (PL), RGDP and Output

d) As a result of the decrease in imports into the UK will Sweden's policy makers be more worried about cyclical unemployment or inflation in the short-run? Explain.

Cyclical unemployment occurs due to a downturn in the economy = recession.

If we are at long-run equilibrium and exports in Sweden decrease we move into a 

recessionary gap = cyclical unemployment

e) If the Swedish central bank's (Monetary policy) goal is to return the econmy to long-run equilibrium what open market operation must it use?

FED = Open market operations means either buying bonds or selling bonds.

To move us from a recession to long-run equilibrium the central bank must use expansionary policy by buying bonds.

Buying bonds causes the Money Supply (MS) to increases which causes the 

Nominal Interest Rate (NIR) to fall, causing Investment to increase, 

AD to increase, RGDP & Output to increase pushing the economy

back to Long-run Equilibrium

f) Draw a CLG of the Sedish krona showing the effects in the FOREX of the UK's decrease in imports from Sweden on the Krona's value in the FOREX.

As UK citizens buy less goods from Sweden the demand for Swedish krona decreases.

g) If the Swedish central banks goal is to reverse the exchange rate change shown in part f, by changing the interest rate, what open market operation would it use?

Open market operations buy the central bank is either buying or selling bonds.

The Swedish Central Bank would sell bonds

Selling bonds, decreases the Money Supply (MS), increasing the Nominal Interest Rate (NIR)

When the NIR is increasing the Real Interest Rate (RIR) is increasing 

Larger RIR's attract inflows of currency from the UK into Sweden

meaning that the demand for the Swedish krona will increase

as UK citizens wants to make more profits by depositing money in Swedish 

banks to receive the higher Real Interest Rates

to put money in Swedish banks the UK citizens must buy krona

in the FOREX

this increases the demand for the krona

causing the value of the krona to increase.

h) Explain G

2021 (Set 2) AP Micro FRQ#3 (Utility/ MC=MB)

 2021 (Set 2) AP Micro FRQ#3 (Utility/ MC=MB)

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a) Calculate the total net benefit of placing three advertisments.

Net = Benefits - Costs

Total Benefit of 3 advertisements = $3,000

Total Cost of 3 advertisements = $800

Total NET Benefit = Total Benefit - Total Cost = Total Net Benefit

$3,000 - $800 = $2,200

b) Calculate the marginal net benefit of the third advertisement.

Marginal = Change in Total / Change in Quantity

c) What is the optimal number of advertisements? Explain using marginal analysis.

The Optimal number of advertisements is where the MC = MB

If we can't get there then we want to get as close as possible to the MC = MB 

without having the MC > MB.

The 4th advertisement has a MC of 500 and a MB of 600 = a 100 difference which is as close to where the MC=MB without having the MC > MB.

the 5th advertisement the MC > MB and we would never want to buy advertisements where the MC is greater than the MB as we would be losing money on that advertisement.

d) Suppose over the next year the MB for each advertisement increases by $300. Identify the optimal number of advertisements.

The MB for the 4th unit is now 900and the MC for the 4th unit is still 500 a 400 difference.

The 5th units MC is now greater than its MB and we never want our MC to be greater than the MB or we will be loosing money on that Unit.

So we stay at the 4th unit.

e) There are many firms and they advertise.

We only have one market structure that advertises for the AP.

Monopolistic Competition

Natural Monopoly Cheat Sheet

Here

 2019 AP Macro (Set 1) FRQ#3

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(a.) Draw a CLG of the short run and long run Phillips curve. Label the current short-run equilibrium as Point X and plot the values on the graph.

(b) Is the actual inflation rate greater, less than or equal to the Expected Inflation Rate of 3%.

Less than.

The economy is currencty in a recession and has a lower PL and greater unemployment rate than the Expected inflation rate and NRU.

(c) Assume loans were made taking into account the expected rate of inflation at 3%, will lenders (creditors, bankers) be better off, worse off after they realize the actual inflation rate identified in part B? Explain.

Better off as the actual inflation rate is less than the expected rate.

Bankers must take into account the inflation rate. Why?

Suppose you make a loan to someone with an interest rate of 3%. This is the nominal rate you have charged them and actual inflation turns out to be 3%. 

Stupid, Stupid, Stupid

{{Nominal - INflation = Real}}

If you charge then 3% and the Inflation rate is 3% then you have made 0 real dollars

Remember inflation implies that the price of everything increased by 3%, 

you made 3% on your loan but the price of everything increased by 3%.

If you had charges 5% and the inflation rate was 3% then you would have made 2% on your money.

If you charged 3% and the inflation rate was 1%, then you earned 2% on your loan and this is what we have in the problem above. The actual rate is less than the expected rate of 3% and therefore the banker wins.

(d) Based on the relationshipbetween the actual and the expected, what will happen to the natural rate of unemployment in the long-run?

What we know is that in the long-run we always return to the LR rate of unemployment at 4%.

The only time the college board has tested the NRU actually changing was 1 year when they had unemployment benefits increasing. This caused more people to choose to stay unemployed and therefore the NRU increased as the LRPC shifted right.

In the situation above (in the long-run) wages would fall, input prices would fall and the SRPC would shift leftward taking us back to fullemployment at a lower price level.

but the NRU would remain unaffected.

(Think Classical view)