Download MACRO Study Guide Before AP 2009

AP MACROECONOMICS
Name: ________________________
MACRO Review Study Guide
Instructions:
_______/30pts
You have the OPTION to turn this in for 30pts (assuming a good job!)
It is a great way to prepare for the 35 question quiz/test Monday May 9th
MEASURING ECONOMIC GROWTH
Section 1:
1) There are 4 types of unemployment. Circle appropriate answer or answers for each question below.
2)
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 is the rate with only which 2:
cyclical, frictional,
structural,
seasonal
(which 2 don’t go away at peak of business cycle—remember seasonal is adjusted out!))
Circle which are NOT included in GDP
a.
Final goods, intermediate goods,
3) GDP = C + I + G + NX
used goods,
new goods,
foreign made goods,
financial transactions
Circle the component or components of GDP which changes
a.
Purchase of a new home:
GDP = C + I + G + NX
b.
Purchase of 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!)
4) GDP deflator versus CPI Index: circle which it applies to
a.
Is the broader measure of inflation
GDP deflator
CPI Index
b.
Uses a market basket of goods
GDP deflator
CPI Index
c.
Includes international goods
GDP deflator
CPI Index
d.
Includes all domestic goods
GDP deflator
CPI Index
5) List the 2-types of inflation: _________________
6) Inflation hurts people who:
a.
not in debt
___________________
Circle all that apply:
live on fixed income
borrowing money at fixed interest rate,
borrow money at adjustable rate
7) Please calculate the following based on the following information:
a. 2000
b. 2003
Calculate:
Sold 1,000 coffee
Sold 1,500 coffee
at $3
at $6
Nominal GDP
Real GDP
2000
_________
_______
2003
_________
Price Index
100 (2000 is the base year)
________
______
(in 2000 dollars)
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Consumption, Savings Function & AD/AS Model
Section 2
8) Disposable Income = _____________________
9) MPC + MPS = ______
10) 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 __________
The consumption function measures how consumers respond to changed in DISPOSABLE INCOME. As we earn more DI we
move up along our consumption and/or savings curve. Typically if Consumption shifts up (left), savings must shift down (right).
For example, an increase in wealth will shift consumption left and savings left. However a change in taxes is different.
11) Explain how a change in taxes or government transfers will shift the consumption function and the savings function.
a. Hint: will it shift left or right on each function?
b. Be careful: see graph above: DI is on x-axis & consumption on y-axis
_________________________________________________________________________________________________
_________________________________________________________________________________________________
Price
Level
SRAS
Price
Level
LRAS
AD1
AD1
Real
GDP
Real
GDP
12) 3-Reasons why AD is downward sloping: _________________________________________________________
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13) The SRAS is upward sloping due to sticky wages and stick prices.
a. Explain why sticky wages lead to an upward sloping SRAS (2-3 sentences or clear/efficient bullet points)
b. Relevance: current financial crisis—unemployment is high in part because wages are sticky => wages should fall
today => which should lead to more people being hired and a return to full employment. But wages are sticky!
________________________________________________________________________________________________________
________________________________________________________________________________________________________
_______________________________________________________________________________________________________
14) Explain why & at what point the LRAS is vertical: (2-3 sentences or clear/efficient bullet points)
________________________________________________________________________________________________________
________________________________________________________________________________________________________
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15) Name 2 factors which ONLY shift SRAS ______________________________
(not LRAS)
16) Name 5 factors which will shift both SRAS & LRAS _____________________________________________
FISCAL & MONETARY POLICY
Section 3
:
BANK 1
BANK 2
Assets
Assets
Liabilities
Deposits
Deposits
Loans
Loans
Total Assets
Assets
Liabilities
Liabilities
Required Reserves
Required Reserves
BANK 3
Total Liabilities
Required Reserves
Deposits
Loans
Total Assets
Total Liabilities
Total Assets
Total Liabilities
17) Assume the required reserve ratio is 10% and a bank holds no excess reserves
a. Joe deposits $20,000 into Bank 1
b. Fill in the balance sheet for each bank which shows the effect of Joe’s deposit
c. Calculate the total new money creation caused by Joe’s deposit:
d.
If instead the Federal Reserve had purchased $20,000 worth of bonds, what would the new money creation be?
i. Explain the difference versus the answer for 17c
ii. (hint: Remember the Fed’s money is NOT the same as your money….)
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GRAPH A:
Money Market
Nominal
Interest
Rate
GRAPH B: Loanable Funds
Real
Interest
Rate
MS
MD
--------------
-------------
R1
i1 ------------ E1
S1
E1
D1
Q1
Qty $
Qty
Q1
Loanable Funds
Hint: remember the Federal Reserve uses the Money Market graph in their open market operations in conducting monetary policy.
This is a nominal interest rate (really the federal funds rate). Money Demand is based on speculative demand, precautionary
demand & price level. So we hold more money when consumers get ‘scared”. You rarely shift MD on AP tests—but sometimes
they do require it!
The loanable funds market is the market for public & private savings & is a real interest rate. It better reflects long term interest
rates and is the graph you use for any change in real rates such as crowding out.
18) Graph A: Assume the Federal Reserve conducts open market operations using contractionary monetary policy
a. The Fed would ________ securities (bonds)
b. Modify the above graph to show the effect on equilibrium interest rate & qty of money.
19) Graph B: Assume the Federal Government increases taxes on interest income.
a. Modify the market for Loanable funds in Graph B (remember D = people who need $, Savings = people who save $)
b. Show the effect on equilibrium interest rate & qty of money.
INFLATIONARY GAP
Price
Level
LRAS1
RECESSIONARY GAP
Price
Level
SRAS1
LRAS1
SRAS1
Real
GDP
Real
GDP
20) Draw a correctly labeled inflationary gap equilibrium in the 1st graph.
a. Label Equilibrium Price & Output (you need to add an AD curve)
21) Draw a correctly labeled recessionary gap equilibrium in the 1st graph.
22) How would the Federal Reserve use Monetary Policy to correct an inflationary gap using the following tools:
a. Reserve Ratio
___________
b. Discount Rate
___________
c. Open Market Operations ______________
d. On the inflationary graph above, draw the effect of this policy & label the new Equilibrium price & Quantity
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23) How would the Federal Government use Fiscal policy to correct a recessionary gap:
a. Income Taxes
________
b. Government Spending
_________
c. On the above graph, draw the effect of this policy & label the new Equilibrium price & quantity
24) Explain what Economists mean in regard to Money Neutrality.
a. Hint: MV = PQ
________________________________________________________________________________________________________
________________________________________________________________________________________________________
25) Explain the Theory of Liquidity Preference (Keynes’s theory)
________________________________________________________________________________________________________
________________________________________________________________________________________________________
The Phillips Curve
(b) The Phillips Curve
Inflation
Rate
Inflation
Rate
(percent
per year)
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Long-run Phillips
curve
3. . . . and
increases the
inflation rate . . .
B
B
A
A
2
Phillips curve
0
4
(output is
8,000)
Unemployment
7
(output is Rate (percent)
7,500)
0
Natural rate of
unemployment
Unemployment
Rate
26) Explain what the short run Phillips Curve implies about Unemployment & inflation
a. Why does this relationship hold true in the short run only?
________________________________________________________________________________________________________
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Balance of Payments & Exchange Rates
Section 4
27) What is included in the Current Account:
buying a car
interest on a stock
buying a factory
(we will cover t Balance of payments after your quiz on Monday…..so you can skip this for now…)
28) The current account is equal to what component of GDP: ___________________
29) What is included in the Capital Account:
buying a car
interest on a stock
buying a factory
30) If the Current Account > Capital Account, the country is running a BOP ______________
Hint for next problem: All currency transactions go through the “house of money” which is actually the MARKET FOR FOREIGN
EXCHANGE. For Example, If real interest rates rise in Japan then foreigners will want to save money in Japan. Therefore Americans
will go to the house of money and supply dollars & demand Yen so they can buy Japanese bonds.
House of
Money
31) Assume that 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
S1
Q1
.
D1
House of
Money
--------------
--------------
--------------
--------------
.
S1
D1
Q1
32) 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
33) Explain what determines whether the USA is a net exporter or net importer of a good.:
a. Hint: it has to do with relative prices of goods: (price of domestic rice versus imported rice)
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________________________________________________________________________________________________________
34) Explain how crowding out and the Net Export Effect can sometimes drastically hurt (offset) the goal of expansionary Fiscal
Policy. (expansionary shifts AD to the right => why do these to shift AD to the left)
________________________________________________________________________________________________________
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