Common Mistakes on The AP Macro Exam

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Common Mistakes on The AP Macro Exam

  1. 1. The difference between a change in demand and a change in quantity demanded
  2. 2. GRAPHING DEMAND Price of Corn P $5CORN P QD What if 4$5 10 4 20 Demand 3 3 35 Increases? 2 55 2 1 80 1 D o 10 20 30 40 50 60 70 80 Q Quantity of Corn
  3. 3. GRAPHING DEMAND Price of Corn P Increase $5CORN P QD in Quantity 4$5 30 10 Demanded 4 40 20 3 3 60 35 2 55 2 Increase 80 1 80+ in D’ 1 Demand D o 10 20 30 40 50 60 70 80 Q Quantity of Corn
  4. 4. The difference between a change in supply and a change in quantity demanded
  5. 5. GRAPHING SUPPLYPrice of Corn P $5 S CORN P QS 4 What if $5 60 3 Supply 4 50 3 35 2 Increases? 2 20 1 5 1 o 10 20 30 40 50 60 70 80 Q Quantity of Corn
  6. 6. GRAPHING SUPPLYPrice of Corn P Increase S’ $5 S CORN in P QS 4 Supply $5 6080 3 4 5070 3 3560 2 Increase 2 2045 1 5 30 1 in Quantity Supplied o 10 20 30 40 50 60 70 80 Q Quantity of Corn
  7. 7. Mislabeling or NOT labeling graphs correctly
  8. 8. EQUILIBRIUM AND CHANGES IN EQUILIBRIUM LRAS P ASPrice Level Equilibrium P Real Output AD Y Q Real Domestic Output, GDP
  9. 9. GROWTH IN THE AD-AS MODEL C ASLR1 ASLR2 ACapital Goods Price Level B D Q1 Q2 Consumer Goods Real GDP
  10. 10. THE MONEY MARKET Sm1 Sm Use this graph when the 10 FED changes the moneyNominal Interest Rate supply to change interest 7.5 rates. 5 ie 2.5 Dm 0 0 50 100 150 200 250 300 Amount of money demanded (billions of dollars)
  11. 11. Net effects of MonetaryPolicy and/or Fiscal Policy on Interest Rate
  12. 12. Expansionary Fiscal Policy = Interest Rate INCREASE• Exp. Fiscal Policy (Gov’t deficit)  Increase Demand for Money  Increase Interest Rate.• Higher Price Level Increase Demand for Money Increase Interest Rate.
  13. 13. Expansionary Monetary Policy  Interest Rate DECREASE
  14. 14. MONETARY POLICY AND EQUILIBRIUM GDP Sm1 S m2 Nominal interest rate Investment 10 10 Demand 8 8 6 6 Dm 0 0 Quantity of money Amount of investment, I AS Money Supply Increases If the moneyPrice level Interest Rate Decreases supply increases Investment Increases to stimulate the P2 P1 economy... AD & GDP Increases AD1 AD2 with slight inflation Real domestic output, GDP
  15. 15. MONETARY POLICY AND EQUILIBRIUM GDP Sm1 S S m2 m3Real rate of interest, i Investment 10 10 Demand 8 8 6 6 Dm 0 0 Quantity of money demanded and supplied Amount of investment, i AS More Money Supply P3 If the moneyPrice level Lower Interest Rates supply increases More Investment P2 again… P1 Still higher AD & GDP AD1 AD2 AD3 with significant inflation Real domestic output, GDP
  16. 16. MULTIPLIER(S) CONFUSION
  17. 17. THE MULTIPLIER EFFECT 1 1Multiplier = MPS or 1 - MPCChange in initial change GDP = Multiplier x in spendingMPC and the Multiplier MPC Multiplier .9 10 .8 5 .75 4 .67 3 .5 2
  18. 18. MONEY MULTIPLIER• 1 / Required Reserve Ratio• Maximum Multiple $$$ Money Expansion
  19. 19. MULTIPLE DEPOSIT EXPANSION PROCESS Amount bank Acquired reserves Required Excess can lend - NewBank and deposits reserves reserves money created A $100.00 $20.00 $80.00 $80.00 B 80.00 16.00 64.00 64.00 C 64.00 12.80 51.20 51.20 D 51.20 10.24 40.96 40.96 E 40.96 8.19 32.77 32.77 F 32.77 6.55 26.22 26.22 G 26.22 5.24 20.98 20.98 H 20.98 4.20 16.78 16.78 I 16.78 3.36 13.42 13.42 J 13.42 2.68 10.74 10.74 K 10.74 2.15 8.59 8.59 L 8.59 1.72 6.87 6.87 M 6.87 1.37 5.50 5.50 N 5.50 1.10 4.40 4.40 Other banks 21.97 4.40 17.57 17.57Total amount of money created by the banking system $400.00
  20. 20. Balanced Budget Multiplier= 1(Net Result on GDP)
  21. 21. FEDERAL RESERVE PURCHASE OF BONDS FROM PUBLIC New reserves $200 Purchase of a $800 Required $1000 bond Excess Reserves reserves from public... $1000 $4000 Initial Bank System Lending Deposit Total Increase in Money Supply ($5000)
  22. 22. Someone deposits $1000 in new Reserves at a bank. New reserves $200 $800 Required Excess Reserves reserves $1000 $4000 Initial Bank System Lending DepositTotal Increase in Money Supply ($4000)
  23. 23. Fed Buys A $1,000 Bond From Joe’s Bank New reserves $1,00020% RR Excess Reserves $5,000 PMC thru Bank Lending TMS is $5000
  24. 24. OUTCOME OF MONEY EXPANSION $100 New reserves $20 $80 Required Leakages Excess reserves reserves exist...(Savings) Currency Drains $100 $400 Initial Excess Reserves Deposit Bank system lending Money Created
  25. 25. $100 Injections: New reserves $20 $80 Required Excess reserves reserves Additional Spending intoIncome – Expenditures stream: Investment, G, or Xn $400 $100 Initial Bank system lending Deposit Money Created
  26. 26. UNEMPLOYMENT Types of Unemployment Frictional Unemployment Structural Unemployment Cyclical UnemploymentNatural rate of Unemployment =Structural + Frictional (Around 4-5%)
  27. 27. LOANABLE FUNDS MARKET S This graph shows how the supply and demand for loanablereal interest rate funds affects real interest rates r D Q Quantity of Loanable Funds
  28. 28. Loanable Funds Market Graph (Long-Term Interest Rates)What changes Supply: What changes Demand:1. Increase in Household 1. Increase in Household savings borrowing2. Increase in Gov’t 2. Increase in business savings Investment 3. Increase in Foreign3. Increase in Business borrowing savings 4. Increase in Government4. Increase in Business borrowing (When the savings gov’t has a budget5. Increase in Foreigners’ deficit!) = (the crowding - savings out effect)
  29. 29. Price IndexPrice Index Price of market basket in specific yearin a given = --------------------------------------------- X 100Year Price of same market basket in base year Nominal GDPReal GDP = ------------------------------- X 100 Price Index
  30. 30. Remembering the difference between Real and Nominal
  31. 31. Nominal: with Inflation Real:Adjusted for Inflation
  32. 32. Nominal vs. Real 6%11% = + Inflation Premium 5%Nominal RealInterest Interest Rate Rate
  33. 33. Real Interest Rate[Nominal I.R. – inflation rate = Real I.R.] 16% 10 - 6 = % % Nominal Inflation Real Interest Premium Interest Rate Rate
  34. 34. Demand-Pull Inflation vs. Cost-Push Inflation
  35. 35. DEMAND-PULL INFLATION ASLR AS2 AS1Price Level P3 c P2 b P1 a AD2 AD1 o Q1 Real domestic output
  36. 36. COST-PUSH INFLATION Occurs when short-run AS shifts left ASLR AS2 AS1Price Level P2 b P1 a AD1 o Q2 Q1 Real domestic output
  37. 37. COST-PUSH INFLATIONGovernment response with increased AD ASLR AS2 AS1 EvenPrice Level P3 c higher P2 b price P1 a levels AD2 AD1 o Q2 Q1 Real domestic output
  38. 38. COST-PUSH INFLATION ASLR AS2 AS1Price Level P2 b P1 a AD1 o Q2 Q1 Real domestic output
  39. 39. COST-PUSH INFLATIONIf government allows a recession to occur ASLR AS2 AS1 NominalPrice Level wages fall (which increases AS & P2 b AS returns P1 a to its original location AD1 o Q2 Q1 Real domestic output
  40. 40. People must believe Fed is seriousabout stopping inflation. Higherexpectations decreases AggregateSupply.
  41. 41. THE PHILLIPS CURVE CONCEPTAnnual rate of inflation 7 6 As inflation declines... (percent) 5 Unemployment 4 increases 3 2 1 0 1 2 3 4 5 6 7 Unemployment rate (percent)
  42. 42. THE PHILLIPS CURVE CONCEPTAnnual rate of inflation 7 LRPC = Natural Rate of Unemployment 6 (percent) 5 4 3 2 1 0 1 2 3 4 5 6 7 Unemployment rate (percent)
  43. 43. GENERAL EXAM ADVICEFree Response:• Do not restate question• Use correct terminology• Even if a graph is not required, draw one anyway and explain.• Use same outline as question• Use Good Handwriting
  44. 44. GENERAL EXAM ADVICE• Draw graphs large enough for the reader to tell what’s going on.• Explain your reasoning: “the price increased”, why?• No Calculators

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