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The Ultimate Review for the A.P. Economics Exam Watch these You Tube video summaries: https://www.youtube.com/watch?v=JBHbwtzHfDg https://www.youtube.com/watch?v=BvqJiIGT8CE https://www.youtube.com/watch?v=k_fBAYEepco https://www.youtube.com/watch?v=ACSMsSAK_GY&list=PLD7C33AB80B405B9A https://www.youtube.com/watch?v=3mvBJvQQMKs Work these sample problems with Mr. Clifford: https://www.youtube.com/watch?v=UfG2ODhUl7I https://www.youtube.com/watch?v=WLfOZz-_JMY https://www.youtube.com/watch?v=Ks5MBWBdmQo https://www.youtube.com/watch?v=vAbEu5AbxaA https://www.youtube.com/watch?v=ErTS-aSNxVI https://www.youtube.com/watch?v=WMXje9II45c https://www.youtube.com/watch?v=N3pXQ1EQd9g By Ruth Narvaiz Macroeconomic Unit 1 Basic Economic Concepts Define the following terms: 1. Scarcity 2. Opportunity Cost Production Possibilities Curve Use the chart below to create a PPC to the right A B C D E F Cars 0 1 2 3 4 5 Jeans 100 90 75 55 30 0 Label the following points on the graph: • X – inefficient • y – efficient • z – not possible under current conditions What is the opportunity cost of moving from: • A to B _______________ • B to C _______________ • F to E _______________ Does the PPC curve in this example have a constant or increasing opportunity cost? • E to C _______________ Draw a PPC with a constant opportunity cost. Explain why this happens. Draw a PPC with an increasing opportunity cost. Explain why this happens. What two things will shift the production possibilities? 1. 2. Comparative/Absolute Advantage The table below shows the amount of coats and cars that each country can make with the same number of inputs. 1. Which country has the absolute advantage in coats? 2. Which country has the absolute advantage in cars. Coats Cars 3. Which country has the comparative advantage in coats? U.S.A. 40 10 4. Which country has the comparative advantage in cars? China 50 100 5. Assume each country specializes in the product it has a comparative advantage in. For both countries to benefit from trade, how many coats can be traded for each car. Wheat 200 50 50 100 Cars Country A Country B • What is the opportunity cost for Country A to produce: o Wheat o Cars • What is the opportunity cost for Country B to produce: o Wheat o Cars • Which country has an absolute advantage in wheat? • Which country has an absolute advantage in cars? • Which country has a comparative advantage in wheat? • Which country has a comparative advantage in cars? • Assuming they specialize in the product for which they have a comparative advantage, what terms of trade would benefit both countries? Supply and Demand According to the law of demand, as price According to the law of supply, as price quantity demanded will _____. quantity supplied will _____. Determine whether the following actions will cause a change in demand or a change in quantity demanded? • Price of the good decreases • Demand curve shifts • Movement along the demand curve • Change in consumer taste • Price of a complimentary good decreases Determine whether the following actions will cause a change in supply or a change in quantity supplied? • Movement along the supply curve • Change in the price of an input • Supply curve shifts • Price of the good increases • Change in the number of sellers in the market List 5 determinants of demand. (demand shifters) List 5 determinants of supply. (supply shifters) 1. 1. 2. 2. 3. 3. 4. 4. 5. 5. Draw a supply and demand graph that shows an increase in supply. Draw a supply and demand graph that shows a decrease In supply. Draw a supply and demand graph that shows an increase in demand. Draw a supply and demand graph that shows a decrease In demand This change causes This change causes This change causes This change causes Price_____ Price_____ Price____ Price _____ Quantity_____ Quantity_____ Quantity _____ Quantity_____ Draw a correctly labeled supply and demand graph that includes a price floor. What effect does a price floor have on price? What effect does a price floor have on the amount of a good that will be bought and sold? What will happen to price if the floor is removed? What will happen to quantity sold if the floor is removed? What effect does a price ceiling have on price? Draw a correctly labeled supply and demand graph that includes a price ceiling. What effect does a price ceiling have on the amount of a good that will be bought and sold? What will happen to price if the ceiling is removed? What will happen to quantity sold if the ceiling is removed? Are each of the following actions more likely to effect the supply of or the demand for a product first? • Consumer income increases • Change in the price of an input • Change in consumer taste • A technology change makes production more efficient Draw a supply and demand curve for roller skates. On the graph you drew, show the change that would happen if roller skating were to become the new fitness craze. As a result of this change, what would happen to the: Draw a supply and demand curve for green beans. On the graph you drew, show the change that would happen if new hybrid seeds were discovered that allowed farmers to produce twice as many green beans. As a result of this change, what would happen to the: • Price of roller skates • Price of green beans • Quantity of roller skates sold • Quantity of green beans sold Macroeconomic Unit 2 Measure of Economic Performance Define the following terms: 1. Nominal GDP 2. Real GDP 3. Friction Unemployment 4. Structural Unemployment 5. Cyclical Unemployment Business Cycle Draw a representation of the business cycle including the labels peak, recession, contraction, trough, expansion. During which phase of the business cycle would you: 1. have inflation Real GDP 2. have cyclical unemployment 3. have frictional unemployment time Gross Domestic Product The Formula for Gross Domestic Product is Determine if the following are classified as part of GDP and if so, which component they belong to. GDP = _____ + _____ + _____ + ____ 1. 100 shares of Apple stock 2. A new home 3. A vintage prom dress purchased on ebay 4. Your new back to school wardrobe 5. Toys imported from China 6. The Army’s new tanks 7. A veteran’s disability check Use the information below to calculate GDP Millions of Dollars Exports $100 Dividends 375 Consumption of fixed Capital 150 Personal Consumption 900 Government Purchases 1150 Imports 500 Corporate profits 750 Gross private investment 350 item________________________________amount _______________________ $_____________ _______________________ $_____________ _______________________ $_____________ _______________________ $_____________ _______________________ $_____________ Write two formulas for calculating real GDP Price of Hammers $2 $4 $6 Year 2008 2009 2010 Quantity of Hammers 100 120 110 Price of Screw Drivers $10 $15 $10 Quantity of Screw Drivers 10 20 25 Price of Wrenches $10 $12 $15 Quantity of Wrenches 20 20 20 Using the information above fill in the table below. Year Nominal GDP 2008 2009 2010 Using 2009 as the base year, fill in the following table. Year Real GDP 2008 2009 2010 Write the formula for Price Index. Assume the market basket of goods used to CPI for Narvaizville includes 2 cars, 1 truck and 10 motorcycles. Fill in the chart with the price of the market basket of goods. Calculate the price index. Use 2010 as the base year then recalculate using 2015 and 2016 as the base year. product 2010 price 2011 price 2012 price car $1,500 3,500 4,000 truck 5,000 5,000 5,000 motorcycle 200 800 1,200 Fill in the price index in the chart below. Use 2014 as the base year then recalculate using 2015 and 2016 as the base year Year 2010 2011 2012 Price of the Market Basket of Goods Base Year 2010 Base Year 2011 Base Year 2012 100 100 100 Inflation Define: 1. Demand Pull Inflation 2. Cost Push Inflation 3. Disinflation 4. deflation Write the formula used to determine the rate of inflation Assume that the actual rate of inflation turns out to be HIGHER than the rate of inflation that was expected. Who is helped and hurt by this unexpected inflation? Helped Hurt year Consumer Price Index 2000 100 1. 2000 and 2005 2005 112 2. 2005 and 2010 2010 110 3. 2000 and 2010 Given the table to the left, how much did prices change between: Unemployment Explain the following economic concepts: 1. The natural rate of unemployment 2. Discouraged workers Write the formula for the unemployment rate Narvaizville’s population includes the following people: Employed full time 500 Employed part time 400 Retirees who have retuned to work 400 Unemployed looking for work 100 Students working part time 100 1. What is the size of Narvaizville’s labor force? 2. What is Narvaizville’s unemployment rate? Macroeconomic Unit 3 National Income and Price Determination Explain the following reasons for the aggregate demand curve being downward sloping: 1. Real Balances (wealth) effect 2. Interest Rate effect 3. Foreign Purchases effect Write the formula for Aggregate Demand Draw the AD/AS model showing the economy at full employment equilibrium. Include all the appropriate labels. List the determinants of Aggregate Demand AKA Demand Shifters Draw the AD/AS model showing the economy with a recessionary gap Draw the AD/AS model showing the economy with an inflationary gap. List the determinants of Aggregate Supply AKA Supply Shifters Draw the AD/AS model in equilibrium and then show a negative demand shock. Draw the AD/AS model in equilibrium and then show a positive demand shock. How will this shock effect: 1. Price 2. GDP 3. Unemployment How will this shock effect: 1. Price 2. GDP 3. Unemployment Draw the AD/AS model in equilibrium and then show a negative supply shock. How will this shock effect: 1. Price 2. GDP 3. Unemployment Draw the AD/AS model in equilibrium and then show a positive supply shock. How will this shock effect: 1. Price 2. GDP 3. Unemployment Explain Stagflation MPC,MPS and The Multiplier Write the formulas for: Disposable Income MPC MPS Multiplier Assume that households typically save 20% of any additional income they receive. 1. What is the MPC? 2. What is the MPS? 3. What is the multiplier If households receive a $200 tax cut: 1. How much of the $200 will they spend? 2. How much will GDP increase? NOW – you are going to show this result graphically here If Government spending increases by $200: 1. How much will GDP increase? Draw the AD/AS model in equilibrium. Next, show the change that will result from the $200 tax cut that households receive. Be sure to consider the multiplier effect when you make this change to the graph. Macroeconomic Unit 4 Stabilization Policies Define the following terms: 1. Fiscal Policy 2. Discretionary Fiscal Policy 3. Expansionary Fiscal Policy 4. Contractionary Fiscal Policy 5. Automatic stabilizers 6. The political business cycle Economic Problem Should policymakers expand or contract the economy What specific policy should be pursued The economy is in recession The economy is experiencing inflation There is high unemployment Suppose Narvaizville’s full employment potential output is $500 but the actual GDP is only $400. Draw the AD/AS model that shows Narvaizville’s current economic situation. Suppose the MPS for Narvaizville is .2. What is the Multiplier? If the government of Narvaizville increases government spending by $20 what will be the resulting increase in GDP? Show the result of this increase in government spending on the graph to the left. Who is John Maynard Keynes and why is he important? What is the formula for the Budget Balance? What is likely to happen to the budget as a result of pursuing expansionary fiscal policy during a recession? What is likely to happen to the budget as a result of pursuing contractionary fiscal policy during a period of inflation? If people begin to expect inflation what is likely to happen to the actual inflation rate? The Phillips Curve Draw an AD/AS graph in equilibrium. Be sure to include all the appropriate labels. Label the equilibrium point A Draw the short and long run Phillips Curve. Be sure to include all the appropriate labels. Label the equilibrium point A On the AD/AS graph above show the result of a positive demand shock. Label the new short run equilibrium point B. NEXT – label the corresponding point B on the Phillips Curve NOW - ON THE SAME GRAPH ABOVE On the AD/AS graph above show the result of a negative demand shock. Label the new short run equilibrium point C. NEXT – label the corresponding point C on the Phillips Curve Draw an AD/AS graph in equilibrium. Be sure to include all the appropriate labels. Label the equilibrium point A Draw the short and long run Phillips Curve. Be sure to include all the appropriate labels. Label the equilibrium point A On the AD/AS graph above show the result of a positive supply shock. Label the new short run equilibrium point B. NEXT – make a change to the Phillips Curve that would happen as a result of this shock. Label point B on the Phillips curve that corresponds with point B on the AD/AS graph NOW - ON THE SAME GRAPH ABOVE On the AD/AS graph above show the result of a negative supply shock. Label the new short run equilibrium point C. NEXT – make a change to the Phillips Curve that would happen as a result of this shock. Label point on the Phillips curve that corresponds with point B on the AD/AS graph Macroeconomic Unit 5 Financial Sector Explain the three roles of money 1. Write the time value of money formula 2. Assume that the interest rate is 10%. If $100 is deposited in a bank account today, how much money will there be in that account one year from now? 3. Bank T-accounts Define: 1. Fractional banking 2. Excess reserves 3. Required reserves 4. Demand deposits What is the money multiplier equation? Use the bank balance sheet to answer the questions to the right. Assets Required Reserves $3,000 Excess Reserves $3,000 Loans $24,000 2. What is the money multiplier Liabilities Demand Deposits 1. What is the reserve requirement? $30,000 3. What is the maximum possible increase in the money supply if the bank loans out all excess reserves? 4. Assume that the bank loans all the excess reserves it has on hand. Create a T-account below that shows the result of all excess reserves being loaned out. Assume that any money created is redeposited into the bank. The Fed List the three tools used by the Fed to control the money supply: 1. 2. 3. The three things that will cause the money demand curve to shift are: 1. TheMoney MoneyMarket MarketGraph Graph The Draw the demand and supply of money graph. Include all the appropriate labels including the equilibrium interest rate. 2. 3. Explain why the money supply curve is vertical Increasing the money supply will cause the supply curve to shift ________________ the Fed causes this shift by: 1. _______________ bonds 2. _______________ reserve requirements 3. _______________ the discount rate As a result of this action interest rates would __________ Decreasing the money supply will cause the supply curve to shift ________________ the Fed causes this shift by: 1. ________________ bonds 2. ________________ reserve requirements 3. ________________ the discount rate As a result of this action interest rates would __________ Monetary policy practice: 1. Assume the reserve requirement is 10%. The money multiplier is ___________________. • If the Fed buys $10 million worth of bonds: • The money supply will _____________________ • By $________________________ • Interest rates will _________________ 2. Assume the reserve requirement is 20%. The money multiplier is ____________________. • If the Fed sells $5 million worth of bonds; • The money supply will _____________________ • By $__________________________ • Interest rates will _____________________ 3. Assume the reserve requirement is 50%. The money multiplier is ____________________. • If the Fed buys $2 million worth of bonds; • The money supply will _____________________ • By $__________________________ • Interest rates will _____________________ Loanable Funds Draw the loanable funds market graph. Include all the appropriate labels including equilibrium. Shifters of demand for loanable funds 1. 2. Shifters of supply of loanable funds 1. 2. What is crowding out? 1. If government funds a large deficit by borrowing 2. If there is an increase in capital inflows • the demand for loanable funds will _______. • the supply of loanable funds will _______. • Interest rates will ____________ • Interest rates will ____________ • Investment spending will ________________ • Investment spending will ________________ • Economic growth will _________________ • Economic growth will _________________ AD/AS and Monetary Policy Step 1 - Draw and label an AD/AS graph showing the economy in recession Step 2 - Draw and label the money market graph including equilibrium In order to close the recessionary gap the Fed should __________________ the money supply. It can do this by: 1. 2. 3. Step 3 – Shift the money market graph to show the result of the Fed closing the recessionary gap Draw the appropriate arrows or and follow the process to show the eventual shift in the AD • Money supply_______ • Interest rates ______ • Investment spending and consumer spending ____ • Aggregate demand _____ Step 4 – Shift the AD/AS graph to show the eventual outcome of this chain of events Economic Growth is the result of supply side increases in: 1. Capital goods Macroeconomic Unit 6: Economic Growth and International Trade Explain which point on the PPC graph to the left is most likely to promote economic growth and why. A 2. B How can government encourage economic growth? Consumer goods Define the following terms: 1. Exports 2. Imports 3. Net exports 4. Trade deficit 5. Trade surplus 6. Balance of payments 7. Current account 8. Financial account Balance of Payments Identify if the example below is part of the current account or the financial account. 1. The U.S. company Boeing sells 5 planes to Israel. 2. Walt Disney buys a beach resort in the Caribbean. 3. An American oil worker in Saudi Arabia sends money home to his family. 4. Ford motor company sells F150 trucks to Canadians. 5. Japanese tourists by souvenirs in NYC with dollars. Foreign Exchange Market When a currency appreciates: List the four things that cause the foreign exchange market graphs to shift. 1. 2. • Its value compared to other currencies ___________. • Its exchange rate _________________. • Exports ________________. • Imports________________. When a currency depreciates: • Its value compared to other currencies____________. 3. • Its exchange rate_____________. • Exports _________________. 4. • Imports_________________. Draw the foreign exchange market for the US Dollar relative to the Mexican Peso. Be sure to include all appropriate labels Draw the foreign exchange market for the Mexican Peso relative to the US Dollar Be sure to include all appropriate labels On the graph above show the result of an increase in American tourists to Mexico. Which currency appreciates? Which currency depreciates Compare the U.S. dollar to the Euro. Currency that appreciates Situation Currency that depreciates Currency that has an increase in demand American tourists increase visits to Paris The U.S. government decreases income taxes giving Americans more spending money Europe experiences inflation making their goods more expensive The U.S. government increases its budget deficit. The deficit is financed through borrowing which increases the interest rate Europe places high tariffs on all U.S. imports You finished! Now go ace the AP exam! Currency that has an increase in supply