View
218
Download
2
Category
Tags:
Preview:
Citation preview
Background
Info taken from an Arthur Raymond (Chief AP Macro Reader) Presentation
Original Presentation here: http://apcentral.collegeboard.com/apc/p
ublic/courses/206126.html This version can be found at: www.teachercannon.com
Content AreasForeign Exchange MarketFiscal Policy Effect on AD
Good NewsMore Than ~50% of Students Answered
Correctly
Success 1
Macro 2 (b) (ii) b) Suppose in a different part of the world,
the real interest rate in Canada increases relative to that in Mexico.
(i) Using a correctly labeled graph of the foreign exchange market for the Canadian dollar, show the effect of the change in real interest rate in Canada on the international value of the Canadian dollar (expressed as Mexican pesos per Canadian dollar).
(ii) How will the change in the international value of the Canadian dollar that you identified in part (b)(i) affect Canadian exports to Mexico? Explain.
Success 1 - Continued
Canadian exports to Mexico will decrease because appreciation of the Canadian dollar increases the prices of Canadian goods relative to Mexican goods.
Success 2
Macro 1 (b) (b) Draw a correctly labeled graph of
aggregate demand and aggregate supply in the recession and show each of the following.
(i) The long-run equilibrium output, labeled Yf (Success 2)
(ii) The current equilibrium output and price levels, labeled Ye and PLe, respectively. (Labels, AS, AD, and Ye, PLe) (Success 3)
Success 4
Macro 1 (c) To balance the federal budget, suppose that
the government decides to raise income taxes while maintaining the current level of government spending. On the graph drawn in part (b), show the effect of the increase in taxes. Label the new equilibrium output and price levels Y2 and PL2, respectively.
On AS-AD diagram of part (b),AD shifts to the left, decreasing Y to Y2 and PL to PL2.
Success 5
Macro 1 (d) (i) (d) Assume that the Federal Reserve
uses monetary policy to stimulate the economy.
(i) What open-market policy should the Federal Reserve implement?
Buy Bonds
Content AreasThe Mechanics of Money Creation
Categories of Unemployment
Classical Adjustment to Recession
Bad News Less than ~25% of Students Correctly Answered
2011 Test FR #3
3 of the top 5 errors come from this question Problem areas:
3 (b) (ii) 3 (c) 3 (e)
Other issues: Students using irrelevant data from the
question
Mr. Cannon…
…How do I know when to multiply by the TOTAL amount of the deposit and how do I know when to multiply by the new loan?
Depends on the source…
If the money is already IN the money supply, then it can only expand by the amount of the initial loan
HOWEVER
If the money is NEW to the money supply (a la a FED bond purchase), then the money supply increases by the initial injection
Errors 5 and 4
Macro 3 (a) Based on Sewell Bank’s balance sheet, calculate the required reserve ratio.
Req. Res. Ratio=0.20 (Required Reserves compared to Demand Deposits)
(b) Suppose that the Federal Reserve purchases $5,000 worth of bonds from Sewell Bank. What will be the change in the dollar value of each of the following immediately after the purchase? (i) Excess reserves. $5,000 (ii) Demand deposit No change in demand deposits. (The purchase
increases Sewell Bank’s reserves and decreases its bond holdings.)
(c) Calculate the maximum amount that the money supply can change as a result of the $5,000 purchase of bonds by the Federal Reserve. (Error 4)
Max. Change in Money Supply = 5,000 x 5 = $25,000
Error 2
Macro 3 (e) (e) Suppose that instead of the purchase of bonds
by the Federal Reserve, an individual deposits $5,000 in cash into her checking (demand deposit) account. What is the immediate effect of the cash deposit on the M1 measure of the money supply?
No effect. There is no change in the M1 measure of the money supply. (Demand deposits increase by the same amount that cash holdings fall.)
Errors 1 and 3
3rd most common error was on 1 (e) (ii) Student’s misinterpreting natural
unemployment
MOST common error last year was 1 (e) (i) Deals with the long run shift of the SHORT
RUN aggregate supply curve
Error 3
Macro 1 (e) (ii) (e) Now assume instead that the government and
the Federal Reserve take no policy action in response to the recession.
(ii) In the long run, what will happen to the natural rate of unemployment?
The natural rate of unemployment will not The natural rate of unemployment will not change. change. Natural = Frictional + StructuralNatural = Frictional + Structural Based on productive resources at that timeBased on productive resources at that time
Classical Theory Assumptions Says Law = If a country can generate X
GDP, they can generate enough income to buy X GDP Therefore, the economy should have no
inherent trouble reaching full employment
Nay”sayers” point out that not all income is spent
Classical Theory Assumptions Prices, wages, and interest rates are all
flexible in either direction Don’t believe me?
Classical Theory Assumptions In 2010 TOTAL wages paid to workers
was just over $6 trillion.
Adjusted for inflation, that was the SAME amount paid to workers in 2005 when the population was 4.2% smaller
WAGES ARE FLEXIBLE!!!!!WAGES ARE FLEXIBLE!!!!!
Classical Explanation
If a recession, then 1. Unemployment (and unemployed
resources) increases
2. Workers begin to accept wage cuts
3. Decrease in resource prices increase SRAS!!!!!
Classical Explanation
If a inflationary gap, then 1. Prices increase
2. REAL WAGES decrease
3. Workers demand higher nominal wages (other input prices increase as well)
4. SRAS shifts left
Error 1
Macro, Question 1 (e) (i) (e) Now assume instead that the government and the
Federal Reserve take no policy action in response to the recession.
(i) In the long run, will the short-run aggregate supply increase, decrease, or remain unchanged? Explain.
In response to the recession and no policy action, the short-run aggregate supply curve will increase (shift to the right) because the recession will eventually lead to lower wages and or other factor costs.
Recommended