AP MACROECONOMICS-2016Name: ______

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)

Section 1: MEASURING ECONOMIC GROWTH

1)There are 4 types of unemployment. Circle appropriate answer or answers for each question below.

  1. Created during a recession: cyclical, frictional, structural, seasonal
  1. Gov’t policy is concerned with which 2: cyclical, frictional, structural, seasonal
  1. 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!))

2)Circle which are NOT included in GDP

  1. Final goods, intermediate goods, used goods, new goods, foreign made goods, financial transactions

3)GDP = C + I + G + NX Circle the component or components of GDP which changes

  1. Purchase of a new home: GDP = C + I + G + NX
  1. Purchase of new factory: GDP = C + I + G + NX
  1. Purchase of a new domestic made car GDP = C + I + G + NX
  1. Purchase of a new foreign made car GDP = C + I + G + NX (2 change here!)

4)GDP deflator & the CPI Indexboth measure inflation: circle which it applies to each index

  1. Is the broader measure of inflationGDP deflator CPI Index
  1. Uses a consumer market basket of goods GDP deflator CPI Index
  1. Includes international goods GDP deflator CPI Index BOTH
  1. Base Year Index is always 100 GDP deflator CPI Index BOTH

5)Please calculate the following based on the following information:

  1. 2000 Sold 1,000 coffee at $3 Base Year = $3/$3 X 100 = 100 Index
  2. 2003 Sold 1,500 coffee at $6 Index = current year cost / base year cost X 100

Calculate: Nominal GDP Real GDP Price Index

(current price & qty sold) (in 2000 dollars)

2000 ______100 (2000 is the base year)

2003 ______

6)List the 2-types of inflation: ______-pull (printing money type) ______-push (supply type)

7)Inflation hurts people who: Circle all that apply:

  1. not in debt live on fixed income borrowing money at fixed interest rate, borrow money at adjustable rate

Section 2 Consumption, Savings Function & AD/AS Model

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

  1. The Government spending or investment multiplier is ______
  1. The Tax multiplier is ______
  1. 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 confidenceor “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 ingovernment transfer payments will shift the consumption functionand the savings function.

  1. Hint: will it shift left or right on each function?
  2. Be careful: see graph above: DI is on x-axis & consumption on y-axis

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Long Run Equilibrium

12)AD = ______

13)3-Reasons why AD is downward sloping: ______

(hint: why does GDP rise as the price level (inflation) falls)

14)The SRAS is upward sloping due to sticky wages and stick prices.

  1. Explain why sticky wages lead to an upward sloping SRAS (2-3 sentences or clear/efficientbullet points)
  2. 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!

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15)Explain at what level of Real GDPthe LRAS is vertical and how this relates to the PPF Graph.

  1. (1-2 sentences or clear/efficientbullet points—think PPF curve)

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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)

Section 3 FISCAL & MONETARY POLICY

: BANK 1 BANK 2 BANK 3

18)Assume the required reserve ratio is 10% and a bank holds no excess reserves (multiplier = 1/rr)

  1. Joe deposits $20,000 into Bank 1
  2. Fill in the balance sheet for each bank which shows the effect of Joe’s deposit
  3. Calculate the total new money creation caused by Joe’s deposit:
  1. If instead the Federal Reserve had purchased $20,000 worth of bonds, what would the new money creation be?
  2. Explain the difference versus the answer for 18c
  3. (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 GRAPH B: Loanable Funds

Review: The Money Market graphis used inopen 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 marketis the market for public & private savings(national savings) label itreal 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: Assume the Federal Reserve conducts open market operations using contractionary monetary policy

  1. The Fed would ______securities (bonds)
  2. Modify the above graph to show the effect on equilibrium interest rate & qty of money.

20)Graph B: Assume the Federal Governmentsuddenly has a much larger deficit.

  1. Modify the market for Loanable funds in Graph B Show the effect on equilibrium interest rate & qty

INFLATIONARY GAP RECESSIONARY GAP

21) Draw a correctly labeled inflationary gap equilibrium in the 1st graph.

  1. 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:

  1. Reserve Ratio ______
  2. Discount Rate______
  3. Open Market Operations______
  4. 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:

  1. Income Taxes______
  2. Government Spending______
  3. On the above graph, draw the effect of this policy & label the new Equilibrium price & quantity

25)Explain what Economists mean in regard to Money Neutrality.

  1. Hint: MV = PQ (equation of exchange)

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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.

  1. During a recession a Keynesian economist would recommend ______policy. One risk of this policy is ______
  1. During a recession a Classical economist would recommend ______policy. One risk of this policy is ______
  1. A monetarist economists believes money is ______and expansionary monetary policy is relatively ______in the long run.

27)Theshort 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!

Section 4 Balance of Payments & Exchange Rates

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: buying a car interest on a stock buying a factory

29)What is in the Financial Account: buying a foreign bond 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.

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)

  1. Properly label each graph below (mkt for dollars & market for euros)
  2. Modify each graph based on the changing inflation rate

Market for Dollars Market for Euros

33)According to the modified graphs above:

  1. The U.S. dollar ______versus the Euro.
  2. The Euro ______versus the dollar.
  3. 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.:

  1. Hint: it has to do withrelative prices of goods: (If the price of domestic rice is higher than imported rice => we become a net importer)

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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)

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