Download MACRO Study Guide Before AP 2016

AP MACROECONOMICS-2016
Name: ________________________
MACRO Review Study Guide
This Study guide is not required.
Complete this only it will help you best prepare for the AP EXAM
You
can turn in for normal credit if you would like….:) (30 points)
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 types will not go away at peak of business cycle—remember seasonal is adjusted out!))
Circle which are NOT included in GDP
a.
3)
Final goods,
intermediate goods,
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
4) GDP deflator & the CPI Index both measure inflation:
(2 change here!)
circle which it applies to each index
a.
Is the broader measure of inflation
GDP deflator
CPI Index
b.
Uses a consumer market basket of goods
GDP deflator
CPI Index
c.
Includes international goods
GDP deflator
CPI Index
BOTH
d.
Base Year Index is always 100
GDP deflator
CPI Index
BOTH
5) Please calculate the following based on the following information:
a. 2000
b. 2003
Sold 1,000 coffee
Sold 1,500 coffee
Calculate:
Nominal GDP
(current price & qty sold)
at $3
at $6
Base Year = $3/$3 X 100 = 100 Index
Index = current year cost / base year cost X 100
Real GDP
Price Index
(in 2000 dollars)
2000
_________
_______
100
2003
_________
________
______
6) List the 2-types of inflation:
7) Inflation hurts people who:
a. not in debt
___________-pull (printing money type)
(2000 is the base year)
______________-push (supply type)
Circle all that apply:
live on fixed income
borrowing money at fixed interest rate,
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borrow money at adjustable rate
Consumption, Savings Function & AD/AS Model
Section 2
8) Disposable Income = Gross income - taxes & government _______________ payments.
9) MPC + MPS = ______ (all money is either consumed or saved!)
10) If Marginal Propensity to Consume (MPC) = .80
Calculate the following:
1/MPS = Gov’t spending multiplier
a.
The Government spending or investment multiplier is _____________
b.
The Tax multiplier is ________________
c.
The Balanced Budget Multiplier is ALWAYS __________ (RAISE TAXES & RAISE GOV’T SPENDING)
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 consumer confidence or “wealth” will shift consumption upward (left) and savings downward. (right)
However a change in taxes or government transfers is the only time both curves shift in same direction. For example, cutting
taxes will lead to BOTH more consumption and more savings!
11) Explain how a increase in government transfer payments 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
_________________________________________________________________________________________________
Long Run Equilibrium
12)
AD = ________________________________
13) 3-Reasons why AD is downward sloping: _________________________________________________________
(hint: why does GDP rise as the price level (inflation) falls)
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14) 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!
________________________________________________________________________________________________________
________________________________________________________________________________________________________
_______________________________________________________________________________________________________
15) Explain at what level of Real GDP the LRAS is vertical and how this relates to the PPF Graph.
a.
(1-2 sentences or clear/efficient bullet points—think PPF curve)
________________________________________________________________________________________________________
________________________________________________________________________________________________________
16) Name 2 factors which ONLY shift SRAS ______________________________
(not LRAS or PPF)
17) Name 5 factors which will shift both SRAS & LRAS _____________________________________________
(for LRAS to shift right => PPF must shift right)
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
18) Assume the required reserve ratio is 10% and a bank holds no excess reserves (multiplier = 1/rr)
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 18c
ii. (hint: Remember the Fed’s money is NOT the same as your money----it is not part of the current money
supply. think Magic Money or new money! Joe’s money was already part of money supply)
________________________________________________________________________________________________________
________________________________________________________________________________________________________
_______________________________________________________________________________________________________
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GRAPH A:
Money Market
Nominal
Interest
Rate
GRAPH B:
Real
Interest
Rate
MS
S1
--------------
MD
-------------
R1
i1 ------------ E1
Q1
Loanable Funds
E1
Q1
Qty $
D1
Qty
Loanable Funds
Review: The Money Market graph is used in open market operations when conducting monetary policy. This is a nominal
interest rate ( federal funds rate). The Fed “targets” an interest rate and then adjusts money supply to reach it. Money supply
shifts left or right as the Fed buys or sells bonds. Money Demand Graph is the desire to “hold” money. It 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 (national savings) & label it real interest rate. The
demand curve is investors who want to borrow money for capital investment. The supply curve is “savers”. People who buy
bonds. (it also includes Government) You use this graph for crowding out. As supply shifts to the left => real interest rates rise
=> less capital investment (I falls) => AD falls => RGDP falls
19) Graph A:
a.
b.
Assume the Federal Reserve conducts open market operations using contractionary monetary policy
The Fed would ________ securities (bonds)
Modify the above graph to show the effect on equilibrium interest rate & qty of money.
20) Graph B:
a.
Assume the Federal Government suddenly has a much larger deficit.
Modify the market for Loanable funds in Graph B Show the effect on equilibrium interest rate & qty
INFLATIONARY GAP
Price
Level
LRAS1
RECESSIONARY GAP
Price
Level
SRAS1
LRAS1
SRAS1
Real
GDP
Real
GDP
21) Draw a correctly labeled inflationary gap equilibrium in the 1st graph.
a.
Label Equilibrium Price & Output (you need to add an AD curve)
22) Draw a correctly labeled recessionary gap equilibrium in the 1st graph.
23) How would the Federal Reserve use Contractionary Monetary Policy to correct an inflationary gap:
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
24) 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
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25) Explain what Economists mean in regard to Money Neutrality.
a.
Hint: MV = PQ (equation of exchange)
________________________________________________________________________________________________________
________________________________________________________________________________________________________
26) The main schools of economic thought are Classical Economists, Keynesian Economists, Monetarists & Supply Side
Economists. Some schools of thought believe in Government intervention while some rely more on self-regulation.
a.
During a recession a Keynesian economist would recommend ___________________ policy.
policy is _______________________
One risk of this
b.
During a recession a Classical economist would recommend ___________________ policy. One risk of this policy
is _______________________
c.
A monetarist economists believes money is ______________ and expansionary monetary policy is relatively
_______________ in the long run.
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)
0
Unemployment
7
(output is Rate (percent)
7,500)
Natural rate of
unemployment
Unemployment
Rate
27) The short run long run Phillips demonstrates the tradeoff between inflation and unemployment. In the short run you can
have lower unemployment only if you accept higher _________________
What is the trade off between unemployment and inflation in the long run? ________________________________
NOTE: The SRPC will shift in the opposite direction of the SRAS curve. The LRPC rarely shifts => the natural rate of
unemployment would have to change for it to shift!
Balance of Payments & Exchange Rates
Section 4
Review: The current account is basically NX + investment income. It is often referred to as our trade balance.
The financial account is buying financial assets of another country. (like their stocks, real estate, etc…) The current account
& the financial account generally must sum to zero. If one is negative (deficit) the other is in surplus.
28) What is included in the Current Account:
29) What is in the Financial Account:
buying a car
buying a foreign bond
interest on a stock
buying a factory
interest on a foreign stock
buying a foreign factory
30) If the Current Account + Financial Account > 0, the country is running a BOP ______________
31) The USA currently has a current account ____________ with China and a financial account ___________ with China.
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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.
Hint: Think of who “needs” foreign currency to achieve their goal. If you want to buy something from another country or save
money in that country => you need to supply your currency and demand the foreign currency.
32) 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
.
--------------
D1
Q1
--------------
--------------
--------------
.
S1
D1
Q1
33) 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
34) 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: (If the price of domestic rice is higher than imported rice =>
we become a net importer)
________________________________________________________________________________________________________
________________________________________________________________________________________________________
35) 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)
________________________________________________________________________________________________________
________________________________________________________________________________________________________
_______/30pts
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