AP MACROECONOMICS-2014
Name: ________________________
FINAL EXAM STUDY GUIDE
Instructions:
Section 1:
DUE: Day of FINAL EXAM
4th Tuesday 12/16th
1st Thursday 12/18th
2nd Friday 12/19th
PRODUCTION POSSIBLITIES FRONTIER
Qty
Food
10
.
---------- B
-----------
5
5
10
Qty
Shelter
Graph A
Graph B
1) The graphs above are 2 different production possibilities frontiers. Recall that the PPF curve displays trade-offs
between 2 goods. It assumes a society uses all its scarce resources to produce only two goods. The long term goal
is to get the PPF curve to shift right. If the PPF shifts right, then the LRAS will shift right with it….
a.
Graph A is classified as a _____________ cost PPF curve and Graph B would be a _____________cost PPF curve.
b.
Graph A: Any point below B would be considered an ____________________ use of scarce resources.
c.
Graph A: Any point above B would be considered _______________________ in the short run
d.
If investment (I) rose in a country (think capital goods!) what effect would it have on the PPF curve
__________________________________________________________________________
e.
List 5 factors that determine the full potential output (real GDP) of an economy
______________
f.
________________
_______________
______________
____________
If unemployment rate rose in a country why would the PPF curve NOT SHIFT?
_____________________________________________________________________________________
Note: Understand why a “bowed” shaped PPF curve is significantly more realistic than a straight line.
i.
Hint: Think workers: are they all the same?
g.
Free Trade based on ________________ advantage allows countries to produce to the ________ of their PPF
h.
Free Trade allows countries to produce only goods where they have the _________________ opportunity cost.
i.
The slope of the PPF curve is the ______________________ of producing one more unit of a good
1
SUPPLY & DEMAND
Section 2:
2) Determinants of Demand shift the demand curve
a. TIPSEN stands for: __________________________________________________________
3) Determinants of Supply shift the supply curve
a. TINE & TP stands for: ______________________________________________________
4) A change in Quantity Demanded or Quantity Supplied does not shift either curve! (know this!) It occurs when only price
changes. Instead of shifting either curve, you simply move along the _____________ demand or supply curve.
Price
Price
P1
S1
-------------- E1
-------------
-------------- E1
-------------
P1
S1
D1
Q1
D1
Q1
Qty
T-Shirts
Qty
T-Shirts
Graph A:
Graph B:
Assume T-shirts are a normal good
5) Graph A: Assume there is a sudden FALL of 50% in the value of the stock market
a. Shift the appropriate curve & find the new market equilibrium. Label P2, Q2 & E2
6) Graph B: Assume there is a sudden RISE in the wages of T-Shirt workers
a. Shift the appropriate curve & find the new market equilibrium. Label P2, Q2 & E2
Price
-------------- E1
-------------
P1
S1
Q1
D1
Qty
T-Shirts
7) Graph B: Assume there is a sudden rise in the taste for T-Shirts
Assume there is a sudden rise in the technology of producing T-shirts
a. Shift the appropriate curves & find the new market equilibrium and label it P2, Q2 & E2
b. What can you say about the new equilibrium Price:
(higher, lower or indeterminate)
c. What can you say about the new equilibrium Quantity (higher, lower or indeterminate)
Explain why one new equilibrium point is indeterminate whenever both curves shift:
_______________________________________________________________________________________________________________________
8) A price ceiling will cause a ___________ of supply when it is set _________ market equilibrium
2
MEASURING ECONOMIC GROWTH
Section 2:
9) There are 4 types of unemployment. Circle appropriate answer or answers for each question below.
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 accounts for which 2:
cyclical,
frictional,
structural,
seasonal
10) Circle which are NOT included in GDP
a.
Final goods, intermediate goods,
11) 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 a 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!)
12) List what 3 factors are considered leakage from GDP:
____________________________________________________________________________________________________________________
13) List what 3 factors are considered injections from GDP:
____________________________________________________________________________________________________________________
14) GDP deflator versus CPI Index: circle which it applies to
a.
Uses a market basket of goods
GDP deflator
CPI Index
b.
Includes international goods
GDP deflator
CPI Index
c.
Includes all domestic goods
GDP deflator
CPI Index
15) List the 2-types of inflation: _______________
16) 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
17) Please calculate the following based on the following information: (Use 2000 dollars as the base year)
a. 2000
b. 2003
Calculate:
Sold 1,000 coffee
Sold 1,500 coffee
at $250
at $5
Nominal GDP
Real GDP
2000
_________
_______
2003
_________
________
Price Index
100
______
(remember real GDP focuses only on quantity of goods/services => if you sell more goods => real GDP goes up)
3
Consumption, Savings Function & AD/AS Model
Section 3
18) Assume: 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 __________
(this is always the same number!)
19) Except for taxes & transfers, the consumption function and the savings function shift in opposite directions. For example, an
an increase in expectations will shift consumption function LEFT and savings to the RIGHT. On the other hand, a ↓ taxes will
shift the consumption function left and the savings function left.
a. Warning: consumption & savings function are the only curves where a rightward shift is a decrease (it’s backwards!!)
How would a 25% increase in the stock market effect the consumption & savings function?
_______________________________________________________________________________________________________________________
_______________________________________________________________________________________________________________________
Price
Level
SRAS
Price
Level
LRAS
AD1
AD1
Real
GDP
Real
GDP
20) 3-Reasons why AD is downward sloping: _________________________________________________________
21) The SRAS is upward sloping due to sticky wages and stick prices.
a. Explain if wages were not sticky but perfectly flexible how the recession of 2008 would correct itself much faster!
_______________________________________________________________________________________________________________________
_______________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________________
22) Explain why the LRAS is vertical and what could get it to shift right. (shift left?)
_______________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________________
23) Name 2 factors which ONLY shift SRAS _____________
______________ (know this! 2nd time I told you to
understand this point. It is how the AD/AS model self regulates when no fiscal or monetary policy is taken. Recessionary &
inflationary gaps cannot last in the long run => SRAS will shift to get you back to full employment)
24) Name 5 factors which will shift both SRAS & LRAS right _____________________________________________
4
FISCAL & MONETARY POLICY
Section 4
:
T-Account
25) Draw a T-Account above for a bank that has $2 million in demand deposits and $500,000 in bank reserves when the required
reserve ratio is 10% .
a. How much can this bank lend with their current balance sheet?
b. Calculate the total new money creation caused this bank lending all excess reserves
c.
If instead the Federal Reserve purchases $50,000 worth of bonds from a bank, what would the new money creation
if there are no excess reserves in the system and the reserve requirement is 10%
GRAPH A:
Nominal
Interest
Rate
GRAPH B: Loanable Funds
MS2
Real
Interest
Rate
R1
---------
S1
--------------
MD
-------------
i2
Money Market
Q1
Qty of $
E1
D1
Qty
Loanable Funds
26) Graph A: Assume the Federal Reserve conducts open market operations using expansionary monetary policy
a. The Fed would _____________________ which would ___________ the money supply
b. Modify the above graph to show the effect on equilibrium interest rate & qty of money.
27) Graph B: Assume the Federal Government increases taxes on interest income.
a. Modify the market for Loanable funds in Graph B
b. Show the effect on equilibrium interest rate & qty of money.
28) List 3 reasons people “hold money” (the MD curve represents people’s desire to “hold” money in cash or demand
deposits)
__________________________
_________________________________________
__________________________
29) If the price level suddenly rose, in theory, MD would shift to the _______________ but the Federal Reserve could offset this
change by ___________________________.
30) Explain what Economists mean in regard to Money Neutrality.
a. Hint: MV = PV (know as the equation of exchange)
_______________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________________
5
INFLATIONARY GAP
LRAS1
Price
Level
RECESSIONARY GAP
LRAS1
Price
Level
SRAS1
SRAS1
Real
GDP
Real
GDP
31) Draw a correctly labeled inflationary gap equilibrium in the 1st graph.
a.
Label Equilibrium Price & Output
32) Draw a correctly labeled recessionary gap equilibrium in the 2nd graph.
33) How would the Federal Reserve use 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 monetary policy & label the new Equilibrium
34) How would the Federal Government use Fiscal policy to correct a recessionary gap:
a.
Income Taxes
b.
Government Spending
c.
On the recessionary graph above, draw the effect of this fiscal policy & label the new Equilibrium
The Phillips Curve
(b) The Phillips Curve
Inflation
Rate
Inflation
Rate
(percent
per year)
6
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
35) The Short Run Phillips Curve (SRPC) illustrates the tradeoff between Unemployment & inflation. When the SRAS shifts
to the right the SRPC would shift to the _____________.
36) When you move upward from point A to point B on the SRPC above, you are also moving upward along the SRAS. For
example, this occurs whenever AD shifts to the _____________,
37) The long run Phillips curve is drawn on the X-axis at what point? ______________
6
Does it shift with LRAS? _________
Exchange Rates
Section 5
38) Assume that the price level (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
House of
Money
Q1
--------------
--------------
--------------
.
S1
D1
Q1
39) According to the modified graphs above:
c.
The U.S. dollar _______________ versus the Euro.
d.
The Euro _________________ versus the dollar.
e.
Explain the effect on aggregate demand (AD) in the USA due to this change
40) List the 3 accounts that form the Balance of Payments and describe what is in them
Account
What is in account:
a)
________________________
____________________________
b) _________________________
_____________________________
c)
_____________________________
________________________
Some factors make fiscal & monetary policy more effective: multiplier, automatic stabilizers, etc….
Some factors make fiscal & monetary policy less effective:
Next Export Effect, crowding out, state/local taxes, etc…
41) Explain why Crowding Out & state/local taxes make fiscal policy less effective
________________________________________________________________________________________________
________________________________________________________________________________________________
7
The economy above is above full potential output.
1) Assuming no monetary or fiscal policy actions are taken, find a long run equilibrium & modify the graph to
illustrate this point.
2) Briefly explain how you found your long run equilibrium
_______________________________________________________________________________________________________
_______________________________________________________________________________________________________
________/40 Points
Excellent Work ____
Good Work ____
8
Try Harder _____