AP MACROECONOMICS-2018 Name: FINAL EXAM STUDY GUIDE Instructions: DUE: Day of FINAL EXAM => Friday 12/21 st (1 st & 2 nd Periods) Thursday 12/20 th (4 th period) Section 1: PRODUCTION POSSIBLITIES FRONTIER Qty Food 10 5 ----------. B ----------- Graph A 5 10 Qty Shelter Graph B 1) The graphs above are 2 different production possibilities frontiers. Recall that the PPF curve displays trade-offs between 2 goods. It assumes a society uses all its scarce resources to produce only two goods. The long term goal is to get the PPF curve to shift right. If the PPF shifts right, then the LRAS & SRAS will shift with it. a. Graph A is a opportunity cost PPF. Graph B would be an opportunity cost PPF. b. The slope of the PPF curve is the of producing one more unit of a specific good c. Graph A: Any point below B would be considered an use of scarce resources. d. Graph A: Any point above B would be considered un in the short run with current e. If investment (I) rose in a country (think capital goods!) what effect would it have on the PPF curve in long run. f. List 5 factors that determine the full potential output (real GDP) of an economy (think PPF & LRAS) g. If unemployment rate rose in a country why would the PPF curve NOT SHIFT? Note: Understand why a bowed shaped PPF curve is significantly more realistic than a straight line. i. Hint: Think workers: are they all the same in the real world? h. Free Trade terms: Absolute advantage which means a country is more at producing a good and Comparative advantage which means a country can produce that good at a lower cost. i. Free Trade theory states countries should specialize in goods in which they have a advantage which will allow each country to produce to the of their initial PPF curve. If in Mexico 1 Car = 5 Tractors Brazil 1 Car = 4 Tractors, o then Brazil has a (comparative, absolute) advantage in producing Cars because they give up less tractors. 1
Section 2: SUPPLY & DEMAND 1) Determinants of Demand shift the demand curve (results in increase or decrease in demand) a. TIPSEN stands for: 2) Determinants of Supply shift the supply curve (results in increase or decrease in supply) b. TINE & TP stands for: 3) Important note: A change in Quantity Demanded or Quantity Supplied does not shift either curve! (know this!) Instead of shifting either curve, you simply move along the existing demand or supply curve. So if supply shifts to the right in the Soda market below you have an supply & an demanded. 4) In the left graph list 2 events that could cause this supply shift: (think TINE-TP) 5) If a price floor was placed at $1,000 in the computer market (above) there would be a a. After the price floor quantity sold would 6) If, instead, a price ceiling was placed at $700 in the computer market (above) there would be a. After the price ceiling quantity sold would 7) If both the demand and supply increase in the market for T-shirts, explain what would occur a. The new equilibrium Price (vs P1): (higher, lower or indeterminate) b. The new equilibrium Quantity (vs Q1) (higher, lower or indeterminate) Explain why one new equilibrium point is indeterminate: 2
Section 3: MEASURING ECONOMIC GROWTH 8) There are 4 types of unemployment. Circle appropriate answer or answers for each question below. a. Created during a recession: cyclical, frictional, structural, seasonal b. Gov t policy is concerned with which 2: cyclical, frictional, structural, seasonal c. Full Employment accounts for which 2: cyclical, frictional, structural, seasonal 9) Circle which are NOT included in GDP a. Final goods, intermediate goods, used goods, new goods, foreign made goods, financial transactions 10) GDP = C + I + G + NX Circle the component or components of GDP which changes a. Purchase of a new home: GDP = C + I + G + NX (hint: Not C) b. Purchase of a new factory: GDP = C + I + G + NX c. Purchase of a new domestic made car GDP = C + I + G + NX d. Purchase of a new foreign made car GDP = C + I + G + NX (2 change here!) 11) List what 3 factors are considered leakage from GDP: 12) List what 3 factors are considered injections from GDP: 13) GDP deflator versus CPI Index: circle which it applies to a. Uses a market basket of goods GDP deflator CPI Index b. Includes international goods GDP deflator CPI Index c. Includes all domestic goods GDP deflator CPI Index 14) List the 2-types of inflation: 15) Inflation hurts people who: Circle all that apply: a. not in debt live on fixed income borrowing money at fixed interest rate, borrow money at adjustable rate 16) Please calculate the following based on the following information: (Use 2000 dollars as the base year) a. 2000 Sold 1,000 coffee at $2 50 b. 2003 Sold 1,500 coffee at $5 Calculate: Nominal GDP Real GDP Price Index (2000 base year) 2000 100 2003 (Remember real GDP focuses only on quantity of goods/services => if you sell more goods => real GDP goes up) 3
Section 4 Consumption, Savings Function & AD/AS Model 17) Assume: Marginal Propensity to Consume (MPC) =.80 Calculate the following: a. The Government spending or investment multiplier is b. The Tax multiplier is c. The Balanced Budget Multiplier is (this is always the same number!) 18) Generally the consumption function and savings function shift in opposite directions. Example: a rise in expectations/confidence shifts consumption upward and savings downward d. Warning: only change in taxes & transfers cause both to increase or decrease Using the function formula: Disposable income = $10,000 & MPC =.80 & automomous conspution = $1,000 Then: S = C = 19) 3-Reasons why AD is downward sloping: 20) The SRAS is upward sloping due to sticky wages and stick prices. a. Explain why companies produce less in a recession. 21) Explain why the LRAS is vertical and what could get it to shift right. (shift left?) 22) Name 2 factors which ONLY shift SRAS (please know this! I have emphasized this point throughout the course. very important!) It is how the AD/AS model self regulates when no fiscal or monetary policy is taken. Recessionary & inflationary gaps cannot last in the long run => SRAS will shift to get you back to full employment) 23) Name 5 factors which will shift both SRAS & LRAS right 4
Section 5 FISCAL & MONETARY POLICY T-Account 24) Draw a T-Account above for a bank that has $2 million in demand deposits and $500,000 in bank reserves when the required reserve ratio is 10%. a. How much can this bank lend with their current balance sheet? (hint: split reserves into excess & required) b. Calculate the total new money creation caused this bank lending all excess reserves c. If instead the Federal Reserve purchases $50,000 worth of bonds from a bank, what would the new money creation if there are no excess reserves in the system and the reserve requirement is 10% GRAPH A: Money Market GRAPH B: Loanable Funds Real Interest S 1 R 1 E 1 ------------- D 1 Qty Loanable Funds 25) Graph A: Assume the Federal Reserve conducts open market operations using expansionary monetary policy a. The Fed would which would the money supply b. Modify the above graph to show the effect on equilibrium interest rate & qty of money. Q 1 26) Graph B: Assume the Federal Government increases taxes on interest income. a. Modify the market for Loanable funds in Graph B b. Show the effect on equilibrium interest rate & qty of money. 27) List 3 reasons people hold money (the MD curve represents people s desire to hold money in cash or demand deposits) 28) If the price level suddenly rose, in theory, MD would shift to the but the Federal Reserve could offset this change by. 29) Explain what Economists mean in regard to Money Neutrality. a. Hint: MV = PV (know as the equation of exchange) 5
INFLATIONARY GAP RECESSIONARY GAP Price Level LRAS 1 Price LRAS 1 SRAS 1 Level SRAS 1 Real GDP 30) Draw a correctly labeled inflationary gap equilibrium in the 1 st graph. & a recessionary gap equilibrium in the 2 nd graph. a. Label all equilibrium points Real GDP 31) How would the Federal Reserve use Monetary Policy to correct an inflationary gap: a. Reserve Ratio b. Discount c. Open Market Operations (buy or sell) d. On the inflationary graph above, draw the effect of this monetary policy & label the new Equilibrium 32) How would the Federal Government use Fiscal policy to correct a recessionary gap: a. Income Taxes b. Government Spending c. On the recessionary graph above, draw the effect of this fiscal policy & label the new Equilibrium Inflation (percent per year) 6 B (b) The Phillips Curve Inflation The Phillips Curve Long-run Phillips curve 3.... and increases the inflation rate... B A 2 A 0 4 (output is 8,000) Phillips curve 7 Unemployment (output is (percent) 7,500) 0 Natural rate of unemployment Unemployment 33) The Short Run Phillips Curve (SRPC) illustrates the tradeoff between Unemployment & inflation. When the SRAS shifts to the right the SRPC would shift to the. 34) When you move upward from point A to point B on the SRPC above, you are also moving upward along the SRAS. For example, this occurs whenever AD shifts to the, 35) The long run Phillips curve is drawn on the X-axis at what point? Does it shift with LRAS? b. Hint: the answer is know, please understand why 36) Notice that inflation has an inverse relationship between unemployment in the run but no relationship with employment in the run. The Federal Reserve is using this short run relationship to justify keeping interest rates at zero for so long. 6
Section 6 Exchange s & Balance of Payments 37) Assume that the price level (inflation) is suddenly higher in Europe than in the USA. (there are no other changes) a. Properly label each graph below (mkt for dollars & market for euros) b. Modify each graph based on the changing inflation rate Market for Dollars Market for Euros S 1 S 1.. D 1 D 1 Q 1 House of Money Q 1 38) According to the modified graphs above: a. The U.S. dollar versus the Euro. b. The Euro versus the dollar. c. Explain the effect on aggregate demand (AD) in the USA due to this change 39) List the 3 accounts that form the Balance of Payments and describe what is in them Account What is in the account: a) b) c) If the current account is in deficit the financial account must be in Some factors make fiscal & monetary policy more effective: multiplier, automatic stabilizers, etc. Some factors make fiscal & monetary policy less effective: Next Export Effect, crowding out, state/local taxes, etc 40) Explain why state/local taxes make fiscal policy less effective (think of during a recession) The economy is above full potential output. If NO ACTION is taken by the Government or the Federal Reserve, how does the economy find a long run equilibrium? Please, please, please understand this Explain: /40 Points Excellent Work Good Work Try Harder 7