Possible Questions 2011Final Exam
AP Macroeconomics – Mr. Logan’s Class
Unit 1
Describe four ways in which governments interfere with free trade among nations.
Draw, correctly label, and explain the market for Krispy Kreme Donuts. You should have a supply schedule, a demand schedule, and at least one graph showing supply and demand curves.
Suppose that the comparative-cost ratios of two products—baby formula and tuna fish—are as follows in the hypothetical nations of Canswicki and Tunata.
- Canswicki:1 can baby formula = 2 cans tuna fish
- Tunata: 1 can baby formula = 4 cans tuna fish
In what product should each nation specialize? Explain why terms of trade of 1 can baby formula = 2-1/2 cans tuna fish would be acceptable to both nations.
Unit 2
Suppose that in 1984 the total output in a single-good economy was 7,000 buckets of chicken. Also suppose that in 1984 each bucket of chicken was priced at $10. Finally, assume that in 1996 the price per bucket of chicken was $16 and that 22,000 buckets were purchased. Determine the GDP price index for 1984, using 1996 as the base year. By what percentage did the price level, as measured by this index, rise between 1984 and 1996? Use the two methods listed in Table 7-6 to determine real GDP for 1984 and 1996.
Which of the following are actually included in this year’s GDP? Explain your answer in each case.
a.Interest on an AT&T bond.
b.Social security payments received by a retired factory worker.
c.The services of a family member in painting the family home.
d.The income of a dentist.
e.The money received by Smith when she sells her economics textbook to a book buyer.
f.The monthly allowance a college student receives from home.
g.Rent received on a twobedroom apartment.
h.The money received by Josh when he resells his current-year-model Honda automobile to Kim.
i.Interest received on corporate bonds.
j.A 2hour decrease in the length of the workweek.
k.The purchase of an AT&T corporate bond.
l.A $2 billion increase in business inventories.
m.The purchase of 100 shares of GM common stock.
n.The purchase of an insurance policy.
If the price index was 110 last year and is 121 this year, what is this year’s rate of inflation? What is the “rule of 70”? How long would it take for the price level to double if inflation persisted at (a) 2, (b) 5, and (c) 10 percent per year?
Unit 3
Assuming the level of investment is $16 billion and independent of the level of total output, complete the following table and determine the equilibrium levels of output and employment in this private closed economy. What are the sizes of the MPC and MPS?
of employment
(millions) / Real domestic
output (GDP = DI)
(billions) / Consumption
(billions) / Saving
(billions)
40
45
50
55
60
65
70
75
80 / $240
260
280
300
320
340
360
380
400 / $244
260
276
292
308
324
340
356
372 / $ _____
$ _____
$ _____
$ _____
$ _____
$ _____
$ _____
$ _____
$ _____
Assume there are no investment projects in the economy that yield an expected rate of return of 25 percent or more. But suppose there are $10 billion of investment projects yielding an expected rate of return of between 20 and 25 percent; another $10 billion yielding between 15 and 20 percent; another $10 billion between 10 and 15 percent; and so forth. Cumulate these data and present them graphically, putting the expected rate of net return on the vertical axis and the amount of investment on the horizontal axis. What will be the equilibrium level of aggregate investment if the real interest rate is (a) 15 percent, (b) 10 percent, and (c) 5 percent? Explain why this curve is the investmentdemand curve.
The data in columns 1 and 2 of the table below are for a private closed economy.
Real
domestic
output
(GDP = DI)
billions / (2)
Aggregate
expenditures
private closed
economy,
billions / (3)
Exports,
billions / (4)
Imports,
billions / (5)
Net
exports,
private
economy / (6)
Aggregate
expenditures,
open,
billions
$200
$250
$300
$350
$400
$450
$500
$550 / $240
$280
$320
$360
$400
$440
$480
$520 / $20
$20
$20
$20
$20
$20
$20
$20 / $30
$30
$30
$30
$30
$30
$30
$30 / $ _____
$ _____
$ _____
$ _____
$ _____
$ _____
$ _____
$ _____ / $ _____
$ _____
$ _____
$ _____
$ _____
$ _____
$ _____
$ _____
a.Use columns 1 and 2 to determine the equilibrium GDP for this hypothetical economy.
b.Now open up this economy to international trade by including the export and import figures of columns 3 and 4. Fill in columns 5 and 6 to determine the equilibrium GDP for the open economy. Explain why this equilibrium GDP differs from that of the closed economy.
c.Given the original $20 billion level of exports, what would be the equilibrium GDP if imports were $10 billion greater at each level of GDP?
d.What is the multiplier in this example?
Suppose that aggregate demand and supply for a hypothetical economy are as shown:
real domestic
output demanded,
billions / Price level
(price index) / Amount of
real domestic
output supplied,
billions
$100
200
300
400
500 / 300
250
200
150
100 / $450
400
300
200
100
a.Use these sets of data to graph the aggregate demand and aggregate supply curves. What is the equilibrium price level and the equilibrium level of real output in this hypothetical economy? Is the equilibrium real output also necessarily the fullcapacity real output? Explain.
b.Why will a price level of 150 not be an equilibrium price level in this economy? Why not 250?
c.Suppose that buyers desire to purchase $200 billion of extra real domestic output at each price level. Sketch in the new aggregate demand curve as AD1. What factors might cause this change in aggregate demand? What is the new equilibrium price level and level of real output?
State the alternative views on why unemployment in Europe has recently been so high. What are the policy implications of each view?
Unit 4
What are the three basic functions of money? Describe how rapid inflation can undermine money’s ability to perform each of the three functions.
What are the components of the M1 money supply? What is the largest component? Which of the components is legal tender? Why is the face value of a coin greater than its intrinsic value? What nearmonies are included in M2 money supply? What distinguishes the M2 and M3 money supplies?
Over the years, the Federal Reserve Banks have printed many billions of dollars more in currency than American households, businesses, and financial institutions now hold. Where is this “missing” money? Why is it there?
Explain why a single commercial bank can safely lend only an amount equal to its excess reserves but the commercial banking system can lend by a multiple of its excess reserves. What is the monetary multiplier, and how does it relate to the reserve ratio?
Suppose the simplified consolidated balance sheet shown below is for the entire commercial banking system. All figures are in billions. The reserve ratio is 25 percent.
(2)
Reserves
Securities
Loans / $ 52 ___
48 ___
100 ___ / Checkable deposits / $200 ___
a.What amount of excess reserves does the commercial banking system have? What is the maximum amount the banking system might lend? Show in column 1 how the consolidated balance sheet would look after this amount has been lent. What is the monetary multiplier?
- Answer question 13a assuming that the reserve ratio is 20 percent. Explain the resulting difference in the lending ability of the commercial banking system.
Unit 5
Briefly state and evaluate the problem of time lags in enacting and applying fiscal policy. Explain the notion of a political business cycle. How might expectations of a near-term policy reversal weaken fiscal policy based on changes in tax rates? What is the crowdingout effect and why is it relevant to fiscal policy? In what respect is the net export effect similar to the crowdingout effect?
Suppose that you are a member of the Board of Governors of the Federal Reserve System. The economy is experiencing a sharp and prolonged inflationary trend. What changes in (a) the reserve ratio, (b) the discount rate, and (c) openmarket operations would you recommend? Explain in each case how the change you advocate would affect commercial bank reserves, the money supply, interest rates, and aggregate demand.
What is the Laffer Curve and how does it relate to supply-side economics? Why is determining the location where the economy is on the curve so important in assessing tax policy?
Unit 6
What are the four supply factors of economic growth? What is the demand factor? What is the efficiency factor? Illustrate these factors in terms of the production possibilities curve.
Between 1990 and 2002 the U.S. price level rose by about 38 percent while its real output increased by about 41 percent. Use the aggregate demand-aggregate supply model to illustrate these outcomes graphically.
To what extent have increases in U.S. real GDP resulted from more labor inputs? From higher labor productivity? Rearrange the following contributors to the growth of real GDP in order of their quantitative importance: economies of scale, quantity of capital, improved resource allocation, education and training, technological advance.
Unit 7
What are the main concerns of the WTO protesters? What problems, if any, arise when too many extraneous issues are tied to efforts to liberalize trade?
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