AP Economics:
AD / AS FRQs
March 18, 2015
AD / AS FRQs
1.
Assume that Australia and New Zealand are trading partners. Australia’s
economy is currently in recession.
(a) Now assume that Australia begins to recover from its recession. Using a
correctly labeled graph of aggregate demand and aggregate supply for
New Zealand, show the impact of Australia’s rising income on each of the
following in the short run:
(i) Aggregate demand in New Zealand. Explain. AD shifts to the right
because exports to Australia increase
(ii) Output in New Zealand
Correct labels
New Zealand’s AD curve shifts right
Output increases
(b) Using a correctly labeled graph of the money market for New Zealand,
show the effect of the output change in part (a)(ii) on the following:
(i) Demand for money. Explain. More demand for transactions
(ii) The nominal interest rate.
Correct labels; MD shifts to right; nominal interest rate increases
(c) Assume that the price level in New Zealand rises. Given your answer to
part (b)(ii), explain what will happen to real interest rates.
Indeterminate. Increase in MD increases rates, but not necessarily
overcoming increase in prices.
(d) Although recovering, Australia remains in recession and its government
takes no action. Indicate whether each of the following curves will shift
to the left, shift to the right, or remain unchanged in the long run in
Australia.
(i) Aggregate supply shifts to the right to take advantage of lower
wages
(ii) Aggregate demand unchanged
2. Assume that a country's economy is operating at less than full employment.
(a) Draw a correctly labeled graph of aggregate demand and aggregate
supply, and show each of the following:
(i) Long-run aggregate supply curve
(ii) Current output and price level
Correctly labeled; vertical LRAS at YF and to the right of SR equilibrium; show Y1 and P1
(b) Assume that policy makers take no policy action and that prices and
wages are flexible. Explain what will happen to each of the following:
(i) Short-run aggregate supply Shifts to right as lower wages reduce
production costs
(ii) Employment increases as Real GDP increases
(c) Now assume that instead of taking no policy action, the government
implements a special tax incentive to encourage individuals to increase
saving for retirement. Draw a correctly labeled graph of the loanable
funds market. Show how the real interest rate is affected.
Correctly labeled; S shifts to the right; interest rates decline
(d) Given your answer in part (c), explain how aggregate supply is affected in
the long run. LRAS shifts to the right. Higher S and lower interest rates
lead to higher I. The increase in Capital Stock leads to increase in LRAS