AP Macroeconomics Fall 2014 Take-Home Quiz
Answer the following on separate paper. Follow directions. Be sure to explain thoroughly when directed to explain.
Use graphs were directed to do so, or where graphs would help offer explanation. You may use information in your textbook to help you solve the problems; in other words, you may go back and read the relevant parts of the appropriate chapters as you prepare to construct answers.
Complete problems 5, 7, and 11 on pages 470-71 in Chapter 15. (The graphs on page 471 are for problem 11 on page
470).
Additional Problems
4.
Assume the central bank increases the quantity of money by 25%, even though the economy is initially in both short-run and long-run macroeconomic equilibrium. Describe the effects, in the short run and the long run (giving numbers where possible), on the following: a.
aggregate output b.
the aggregate price level c.
the real value of the money supply (its purchasing for goods and services) d.
the interest rate
5.
Suppose the U.S. economy is experiencing a recession. a.
Draw a correctly labeled aggregate demand-aggregate supply graph showing the aggregate demand, shortrun aggregate supply, long-run aggregate supply, equilibrium output, and aggregate price level. b.
Assume energy prices increase in the United States. Show the effects of this increase on the equilibrium in your graph from part a. c.
According to your graph, how does the increase in energy prices affect unemployment and inflation in the economy? d.
Assume the United States and Canada are the only two countries in an open economy and that energy prices have remained unchanged in Canada. Draw a correctly labeled graph of the foreign exchange market for U.S. dollars, and use it to show the effects of increased U.S. energy prices on the demand for
U.S. dollars. Explain.
6.
Assume the United States is operating below potential output. a.
Draw a correctly labeled aggregate demand and supply graph showing equilibrium in the economy. b.
Suppose the government decreases taxes. On your graph, show how the decrease in taxes will affect AD ,
SRAS , LRAS , equilibrium aggregate price level, and output. c.
Assume the decrease in taxes led to an increased budget deficit and that the deficit spending was funded through government borrowing. Use a correctly labeled graph of the market for loanable funds to show the effect of increased borrowing on the interest rate. d.
Given the effect on the interest rate from part c, draw a correctly labeled graph of the foreign exchange market showing the effect of the change in interest rate on the supply of U.S. dollars. Explain how the interest rate affects the supply of U.S. dollars. e.
According to your graph from part d, what happened to the value of the U.S. dollar? How will this effect
U.S. exports and aggregate demand?
Consider these “Challenge Questions”; use Chapter 19, pages 556-68 to help develop your answers. Also, remember that purchases and investment spending is in local currency. For example, if British people buy
American goods, they pay for them in dollars (i.e., Brits “demand” dollars); if Americans buy British goods, they pay for them with pounds (i.e., Americans “demand” pounds).