Download Macroeconomic Unit 1 Basic Economic Concepts

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Review for the
A.P. Economics
Exam
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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