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AP Macro Review

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AP Macro Review. Fun with formulas!. Unemployment. According to the chart above, What is the unemployment rate? What is the size of the labor force ? What is the labor force participation rate?. Real and nominal interest rates. - PowerPoint PPT Presentation

Text of AP Macro Review

AP Macro Review

AP Macro ReviewFun with formulas!1UnemploymentEMPLOYED8000UNEMPLOYED1000NOT IN THE LABOR FORCE (16 -64) 500According to the chart above, What is the unemployment rate?What is the size of the labor force ?What is the labor force participation rate?2Real and nominal interest ratesJerry decides to loan his friend some money. He would like to see a 5% return on the loan. If the current rate of inflation is 15%, what should he charge as an interest rate?3GDP1. Suppose GDP is $15 million, where consumer spending is $4 million, investments are $2 million, government spending is $5 million, and exports are $4 million. How much is spent on imports?4Rule of 70If the US has a 2% annual growth rate, how long will take for real GDP to double?5Real v. nominal GDPCurrent GDP is $8000The GDP deflator is 110What is real GDP?

Real GDP in the previous year was $7000What was the rate of growth in this economy?6InflationCPI in 1990 was 115CPI in 1991 was 120

What was the inflation rate between the two years?

If I got a 2% raise between in this time period, what happened to my real income?

7FRQ PRACTICE2011, question B8The multiplierMPC = change in consumption/change in disposable incomeMPS= change in savings/change in disposable incomeMPC + MPS =1Spending multiplier = 1/MPSTax multiplier = - MPC/MPSBalanced budget multiplier =1 (used to offset the multiplier effect on increased spending by increasing taxation by the same amount as the spending increase9The multiplierIf the government increases spending by $5 billion and the MPC is .7, what would happen to real GDP?A. increase by $15 billionB. Increase by $16.5 billionC. Decrease by $16.5 billionD. Decrease by $15 billionE. Remain the same10The multiplierIf the MPC is .6 and spending increases by $10 billion, what will happen to GDP?

11The multiplierIf the MPC is .6, how much would the government need to spend if it desired an $25 billion increase in national income?

12The multiplierMPC = .75

What is the spending multiplier?What is the tax multiplier?What will be the effect on GDP if spending and taxes both increase by $10 billion?13The money multiplierThe required reserve ratio (RRR) is 10%.What is the multiplier?If a bank receives a cash deposit of $10,000, what is the amount of excess reserves that results from this deposit?What is the change in loans that results from this deposit?

14FRQ PracticeIn Country Z, the required reserve ratio is 10 percent. Assume that the central bank sells $50 million in government securities on the open market.(a) Calculate each of the following.(i) The total change in reserves in the banking system(ii) The maximum possible change in the money supply(b) Using a correctly labeled graph of the money market, show the impact of the central banks bond saleon the nominal interest rate.(c) What is the impact of the central banks bond sale on the equilibrium price level in the short run?(d) As a result of the price level change in part (c), are people with fixed incomes better off, worse off, or unaffected? Explain.15Assume that the real interest rates in both Canada and India have been 5 percent. Now the real interest rate in India increases to 8 percent.(a) Using a correctly labeled graph of the foreign exchange market for the Canadian dollar, show the effect ofthe higher real interest rate in India on each of the following.(i) Supply of the Canadian dollar. Explain.(ii) The value of the Canadian dollar, assuming flexible exchange rates(b) Using a correctly labeled graph of the loanable funds market in Canada, show how the increase in the realinterest rate in India affects the real interest rate in Canada.T-accountAssets : reserves, loansLiabilites : demand deposits/checking accounts

Example on whiteboardAS/AD curvesThere are three of these that you need to be able to operate.They work much like regular supply and demand but they look at the entire economy.P is now PL, and Q is now GDP/Output/Income/YEXAMPLES ON BOARDPhillips CurveRelationship between the EVIL TWINS of economics, inflation and unemploymentIn the SHORT RUN, there does seem to be an inverse relationshipIn the LONG RUN, there is none---the LRPC is vertical from the point of the natural rate of unemployment.IT IS THE MIRROR IMAGE OF AGGREGATE SUPPLYEXAMPLES ON THE BOARD

Practice1. Assume that the economy of Meekland is in a long-run equilibrium with a balanced government budget.(a) Using a correctly labeled graph of aggregate supply and aggregate demand, show each of the following.(i) Long-run aggregate supply(ii) The output level, labeled YE, and the price level, labeled PLE(b) Assume consumer confidence falls. Show on your graph in part (a) the short-run impact of the change in consumer confidence and label the new equilibrium price level and output Y1 and PL1, respectively.(c) Using a correctly labeled graph of the short-run and long-run Phillips curves, show the effect of the fall in consumer confidence on inflation. Label the initial long-run equilibrium point A and the new short-runequilibrium point B.(d) If the government and the central bank do not pursue any discretionary policy change, how does the fall in consumer confidence affect government transfer payments in Meekland? Explain.(e) Draw a correctly labeled graph of the loanable funds market in Meekland and show the effect of the change in government transfer payments you identified in part (d) on the real interest rate.(f) In the absence of any changes in fiscal and monetary policies, in the long run will the short-run aggregate supply curve shift to the left,Money MarketRelationship between interest rates and the quantity of moneyDemand for money is downward-sloping, because we demand less at higher rates, and more at lower ratesMoney supply is vertical, because it is manipulated by the FedExample on boardLoanable funds graphSupply and demand graph---loanable fundsP=interest rateQ= QLFExample on boardLaffer curveRelationship between tax rate and tax revenueAt a certain point, if tax rates are too high, tax revenue will actually decrease because incentive has been removedExample on board