2023 AP Macroeconomics Set 1 #1 FRQ

1. The economy of Vanderlandia is in short-run equilibrium with a real GDP of $500m. The full-employment level of RGDP is $550m.

A) Draw a correctly label graph (CLG) of the aggregate demand, SRAS and LRAS curves showing, 

        (i) The current equilibrium real output (RGDP - Y1) and Price level (PL1).

        (ii) The full employment output, labeled Yf.

(The economy is in a recession gap as the current equilibrium (Y1 - $500m) 

has less output than the full employment equilibrium at (Yf - $550m)

B) Assume no policy action is taken to restore to full employment.

        (i) Explain how the economy will adjust in the long-run.

        (ii) Following the long-run adjustment process, will the price level in Vanderlandia be greater than,                    less than, or equal to PL1, shown in part (a).

This is a Classical View question. How do we know? 

It says that there are No Policy Actions - which implies there is no fiscal or monetary policies 

The economy must fix itself in the long-run 

"and we answer it the same way every time."

If we are in a recessionary gap this implies that many people are out of work and will take lower wages to go back to work and input prices are falling due to a recession.

 Lower wages and lower input costs for business will shift their SRAS curve to the right.

This lowers the price level (PL) and increases output back to the full employment level at a lower PL

Let's explain it tightly.

(i) In a recessionary gap people will accept lower wages and input prices are falling. Lower wages and lower input prices will shift the SRAS curve rightward until full employment is achieved at a lower price level in the long-run.

(ii) The PL will be less than PL1 in the long run. (No explanation needed)

C) Assume instead that policy makers in Vanderlandia are considering changing government spending to restore full employment in the short run and the marginal propensity to save is 0.2.

(i) Calculate the minimum change and state the direction of change in government spending required to completely close the output gap in the short-run. (Show your work)

(ii) On your graph in part (a), show the short-run effect of the change in government spending 

in part (c)(i), labeling the new equilibrium price level PL2.

(i) If the MPS is 0.2 we find the spending multiplier with the formula 1/MPS and 1/MPS = 5

When government spending increases it will increase the RGDP/Outputs by a multiple of 5

If we remember we needed 50million to close the output gap back to full employment, so if the government spends 10million the money will multiply through the economy and give us the needed 50million increase in RGDP/output

10m x 5 = 50m

GS increase x Multiplier = increase in RGDP

(ii) If in a recessionary gap and the government starts spending it pushes the AD curve to the right toward full employment. Output increases to full employment (Yf) 

the PL increases a higher level at PL2.

D) Draw a correctly labeled graph of the loanable funds market, and show the effect of the change in government spending in part (c)(i) on the equilibrium real interest rate.

Understand that this is the Crowding-Out Effect

When government spends it has to borrow from the loanable funds market

it takes money out of the banks & this reduces the supply of loanable funds

RIR's increase 

E) Based on the change in the real interest rate (RIR), what will happen to each of the following.

(i) The price of previously issued bonds

Understand that interest rates and previously issued bond's prices are inversely related

RIR increases and bond prices decrease

(ii) The rate of economic growth in the long-run. Explain.

We answer these questions the same every time.

As RIR's increase there will be less investment & less capital formation 

and therefore less LR Growth

 

Quick - LImited Reserves. Monetary Policy

Quick - Limited Reserves - Monetary Policy

This is a quick explanation of the Limited Reserves

framework for answering the AP College Board

MCQ's

Quick - Ample Reserves - MOnetary POlicy

 Quick - Ample Reserves - MOnetary POlicy

This is a quick explanation of the new ample reserves

framework for answering the AP College Board

MCQ's

IB 2022 Economics Higher Level Paper 3

 IB Economics Higher Level Paper 3

1. The diagram below shows the demand and cost curves of an imperfectly competitive firm that operates as a profit maximizer.

(a) Using the labeling on the graph identify and explain the 

        (i) quantity level of output (1 point)

        (ii) price charged by the firm (1 point)

(i) Q2 is where marginal revenue = marginal cost

(ii) P5 is the Profit Maximizing Price

(B) Explain, at the profit maximizing level of output, if the firm achives

        (i) Productive Efficiency

        (ii) Allocative Efficiency

(i) Productive Efficiency is when P = Minimum of the ATC (Costs are lowest)

(ii) Allocative Efficiency is when P = MC or (MB = MC)

Allocative efficiency shows the quantity and price that a perfectly competitive firm would produce if laid over the top of this monopoly. It shows the socially optimal quantity

 (ie) the quantity of the good that society desires.

(C) Now suppose the firm seeks to maximize revenues.

        (i) The quantity level of output

        (ii) The price charged by the firm

Maximizing Revenue is found where MR = Zero

(i) The Revenue Maximizing quantity is Q3

(ii) The Revenue Maximizing price = P3

(D) (i) Define Normal profits

        (ii) Identify the price and quantity the firm would charge to earn a normal profit?

(i) A Normal Profit (Zero Economic Profit) is when the firm is covering all of its explicit and implicit costs.

Explicit Costs = Fixed Costs & Variable Costs (anything you spend $ money on)

Implicit Costs = Opportunity Costs = what you could have been doing, given up

(ii) P3 & Q3 

(Understand that P3 & Q3 just happen to be where Revenue is Maximized, it isn't always)

 

A firm is breaking even when its

1. Producing where P = ATC sometimes labeled as D = ATC

2. Called Breaking Even or Fair-Return as (TR = TC)

3. When a firm is breaking even it is covering all of its explicit and implicit costs, and if forced to produce at break-even, it will not need a subsidy to continue to produce in the long-run.

2. Asepsis Corp. operates in an imperfectly competitive industry producing hand sanitizer called Sani-Gel. The company currently produces the profit-maximizing quantity of Sani-Gel but is operating at a loss. [4]

(a) Draw a correctly labeled graph for Asepsis Corp. and show

1. (i)  The profit - maximizing output, labeled as QM

2. (ii)  The profit - maximizing price, Labeled as PM

3. (iii)  The area of loss shaded completely 

Imperfectly Competitive = Monopoly

Losses, so P < ATC

(b) Assume that Asepsis is operating in the short-run. Amend the diagram from part a) AND write an explanation in the box below to demonstrate how the firm can remain open in the short-run while still operating at a loss. 

(b) The firm will continue to operate as long as the Price > than the AVC

As long as the price is greater than the AVC the firm will continue to operate in the short-run

3. (a) Complete the following table for McLovin’s: 

(b) Identify and explain the point at which McLovin’s begins to experience the law of diminishing returns 

(b) Diminishing marginal returns occur when the MP start to decrease

        DMR first occurs with the hiring of the 5th worker

4. The table below shows the total costs of production for STC Inc.

Output (Lbs)	Total Costs ($)
0	15,000
50	25,000
100	33,000
150	39,000

(a) State the value of STCInc.’s fixed costs.

(a) If the output is zero and there is a (TC) total cost - then that has to be Fixed Costs

When output is zero it implies that the Variable Costs is zero but Fixed Costs are 15k.

(b) Calculate the value of STC Inc.’s average variable cost if it produces 100 Lbs of output.

With an output of 100 lbs the TC is 33K - 15k (FC) = VC = 18k

(c) With reference to the data in the table, explain why STC Inc. achieves increasing returns to scale as it increases output from 50 Lbs to 150 Lbs. 

Recognize that MC = (Change in TC / Change in quantity)

Marginal Costs are falling which implies that Marginal Product must be increasing

Therefore the firm has Increasing Returns to Scale

ALL "Released"Price Floor & Price Ceiling Multiple Choice Questions

 ALL "Released"Price Floor & Price Ceiling 

Multiple Choice Questions

ALL Released Multiple Choice Questions Indirect Tax

 Released Multiple Choice Questions

Indirect Tax

https://www.youtube.com/watch?v=HlKLu8K94QQ

FED - T Accounts Multiple Choice Review (Released AP exam questions)

Federal Reserve - Central Bank - Monetary Policy

Past AP Exam (Released) Questions 

Multiple Choice Review 

(A) Keep part of their demand deposits as reserves

(E) The Discount Rate - The rate of Interest that the FED charges banks 

when they borrow from the FED

(FED2Bank Loans)

(D) Business purchase more factories & equip

RRR decreases-MS increases-Nominal Interest rate decreases-Investment increase

Investment = More loans taken out to create capital goods - factories, equipment, tools etc

(E) Banks less able to extend credit

If people's DM increases then they want more money in their poskets and less money in the banks - If the banks have less money they have less ability to extend loans

also if there is less money in the banks the NIR will increase and less people will

take out loans for investment purposes.

(Below full employment level of output) = Recession

(D) open market purchases of bonds

(D) MS increases and market (nominal) Interest Rate decreases)

(B) bank charge one another for short-term loans

FED Funds Rate = (Bank2Bank Loans)

(E) Fed buys gov't bonds

As the Fed Buys Bonds the MS increases and the Nominal Interest rate decreases

Lower nominal rates = lower rates that banks can charge one another

therefore lower Federal Funds rates

If you only have the categories of 

Required Reserves & Excess Reserves 

Then Req. Res. & Exc. Res. must = Checkable Deposits

$45 must be in Required Reserves & $45 is 15% of $300

(B) Increase by $200 - Increase by $30

$200 is deposited in Checkable deposits

the RR is 15%

15% of the $200 goes into the Req. Res. = $30

the rest ($170) flows into Exc Res.

(B) $80

$100 is deposited into the Banks Checkable deposits/ demand deposits

The RRR is 20%

Therefore 20% of checkable deposits goes to the Req. res. = $20

the rest $80 flows into excess reserves.

What is in Excess Reserves can be loaned out

(B) $8,000

What is in Excess Reserves can be loaned out

(C) $3,000

Anytime the College Board gives you (Total Reserves or Reserves)

you must figure out the required and the excess

they are trying to trick you - the jerks!

(D) $9,000

(D) $500

RRR = 20%

Money Multiplier = 1/RRR = 5

Banks Loan out money from Excess Reserves increases the Money Supply

$100 in excess reserves x 5 = $500 increase in the Money Supply

(B) $900

$100 in Check Dep.

RRR = 10% therefore $10 in Req Res.

$90 flows into Excess Res.

Banks loan out all of their Exc Res.

Money Multiplier = 1/RRR = 1/.1 = 10

$90 x 10 = MS increases by $900

(B) less than $5 million

** Notice in the question (A $1 million increase in Reserves)

If the full $1million was in excess reserves

and it all was loaned out.

The Money Multiplier = 1/RRR = 1/.2 = 5

$1million x 5 = 5 million increase in money supply

but

The problem said: banks voluntarily keep some excess reserves.

If banks loan out less than the $1 million in exc. res. then the money supply can't increase by the full $5 million

(C) $2,000 billion

** Tricky tricky question

Recognize that when the FED buys bonds the MS increases by $400b immediately

Then when citizens deposit that $400b in the banks the money supply

increases again when banks loan out money

Exc Res. = $320 x 5 = $1,600 increase in the MS

Therefore $1,600 Bank increased MS

 + $400 FED increased MS

= $2,000 total increase in MS

(C) $900

(E) Decrease of $5 million

Selling Bonds is Contrationary - MS will decrease

RRR = 20% = Money Multiplier = 1/.2 = 5

$1 million sold bonds  = $1m x 5 = $5 million decrease in MS

(D) B can increase loans by $40

** Notice these T - Accts only have Actual Reserves

You need to break them up into 

Required Reserves

Excess Reserves