Download AP Macroeconomics

AP Macroeconomics
Course Review 6
1. Aggregate supply shocks resulting from an oil embargo imposed by OPEC
nations and worldwide crop failures helped to bring about higher inflation and
higher unemployment rates. The economy, with rising prices and decreased
output, is referred to as “stagflation.” Using an AD and SRAS model, draw a new
SRAS curve that will represent the change caused by stagflation.
LRAS
Price
Level
SRAS
GDPr
2. Using the AS/AD graphs below and economic analysis illustrate and explain the
short-run and long-run economic affects of unanticipated inflation rates.
Short-run AS/AD
LRAS
Long-run AS/AD
SRAS
LRAS
SRAS
PL1
PL1
AD1
AD
FE
FE+2%
FE

SR:______________________________________________________________

LR:______________________________________________________________
LRAS
AS1
AS2
P3
P2 Z
Y
X
AD2
P1
W
AD1
Q1
Qp
Q2
3. Using the above model, if there is demand-pull inflation then in the short-run the
new equilibrium is at point _____, with price level at _____ and real output at
___.
 Using the above model, in the long-run nominal wages will rise so the AS curve
will shift from _____________________. The equilibrium will be at point _____
with the price level at ________ and real output at ________.
 Using the previous model, now assume that the economy is initially in
equilibrium at point W, where AD1 and AS1 intersect. If there is cost-push
inflation, then in the short-run the new equilibrium is at point ______ with the
price level at ______ and real output at _______.
 If the government tries to counter the cost-push inflation with expansionary
monetary and fiscal policy, then AD will shift from _______________. With the
price level becoming ________ and real output ________.
 If government does not counter the cost-push inflation, the price level will
eventually move to _________ and real output to _________ as the recession
reduces nominal wages and shifts the aggregate supply curve from
____________.
4. The following table gives data on the public debt and the GDP for selected
periods from 1961-2000. Data for the public debt and the GDP are in billions of
dollars. Calculate the ratio of the public debt to GDP expressed as a percentage of
GDP.
Year
1986
1991
1995
1997
2000
Debt
$2120.1
$3599.0
$4921.0
$5369.7
$5629.0
GDP
$4268.6
$5671.8
$7265.4
$8083.4
$9962.7
Debt/GDP
____________
____________
____________
____________
____________
Year
1
2
3
4
5
Price Index
100
110
120
130
140
5. Refer to the above table. What would be the inflation rate from Years 1-2, Years
2-3, and Years 3-4, respectively?
__________________________________________________________________
6. Assume that a person saves $50,000 and earns 5 percent annual interest. If the
marginal tax rate is 36 percent, then the after-tax interest earning will be
__________________________________
7. Assume that a person saves $50,000 and earns 9 percent annual interest. If the
marginal tax rate is 40 percent, then the after-tax interest rate will be
__________________________________
8. Using the graph below, what factor(s) might have caused a shift from SRPC 1 to
SRPC2?
__________________
__________________
Inflation
Rate
__________________
SRPC2
SRPC1
Unemployment Rate
LRPC
8
6
4
SRPC
2
2
4
6
8
9. Using the above graph, draw a SRPC and a LRPC if the expected inflation rate is
4 percent and the natural unemployment rate is 6 percent. Then explain the shortrun changes due to the following situations:
a. Slower growth in AD causes a recession.
_________________________________________________________________
b. The inflation rate increases.
_________________________________________________________________
c. The natural unemployment rate increase.
__________________________________________________________________
12
LRPC
Y3
9
6
Y2
X3
Y1
X2
3
X1
Z2
PC3
Z1
PC2
PC1
0
3
6
9
12
10. Using the above model, suppose you begin at point X1 and an assumption is made
that nominal wages are set on the original expectation that a 3% rate of inflation
will continue in the economy. If an increase in AD reduces the unemployment
rate from 6% to 3%, then the actual rate of inflation will move to _____________.
The higher product prices will lift profits of firms and they will hire more
workers; thus in the short run the economy will temporarily move to point
_____________.
11. If workers demand and receive higher wages to compensate for the loss of
purchasing power from higher than expected inflation, then business profits will
fall from previous levels and firms will reduce employment; therefore, the
unemployment rate will move from point _________ to ___________. The shortrun Phillips Curve has shifted from __________ to _____________.