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![Real Interest Rate
[Nominal I.R. – inflation rate = Real I.R.]
16%
10
- 6 = %
%
Nominal Inflation Real
Interest Premium Interest
Rate
Rate](https://image.slidesharecdn.com/commonmistakesontheapmacroexam1-120516090303-phpapp01/75/Common-Mistakes-on-The-AP-Macro-Exam-34-2048.jpg)
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Common Mistakes on The AP Macro Exam
- 2. The difference betweena change in demand and a change in quantity demanded
- 3. GRAPHING DEMAND Priceof Corn P $5 CORN 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
- 4. GRAPHING DEMAND Priceof Corn P Increase $5 CORN 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
- 5. The difference betweena change in supply and a change in quantity demanded
- 6. GRAPHING SUPPLY Price ofCorn 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
- 7. GRAPHING SUPPLY Price ofCorn 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
- 8. Mislabeling or NOTlabeling graphs correctly
- 9. EQUILIBRIUM AND CHANGES IN EQUILIBRIUM LRAS P AS Price Level Equilibrium P Real Output AD Y Q Real Domestic Output, GDP
- 10. GROWTH IN THEAD-AS MODEL C ASLR1 ASLR2 A Capital Goods Price Level B D Q1 Q2 Consumer Goods Real GDP
- 11. THE MONEY MARKET Sm1 Sm Use this graph when the 10 FED changes the money Nominal 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)
- 12. Net effects ofMonetary Policy and/or Fiscal Policy on Interest Rate
- 13. 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.
- 14. Expansionary Monetary Policy Interest Rate DECREASE
- 15. MONETARY POLICY ANDEQUILIBRIUM 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 money Price 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
- 16. MONETARY POLICY ANDEQUILIBRIUM GDP Sm1 S S m2 m3 Real 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 money Price 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
- 17.
- 18. THE MULTIPLIER EFFECT 1 1 Multiplier = MPS or 1 - MPC Change in initial change GDP = Multiplier x in spending MPC and the Multiplier MPC Multiplier .9 10 .8 5 .75 4 .67 3 .5 2
- 19. MONEY MULTIPLIER • 1 / Required Reserve Ratio • Maximum Multiple $$$ Money Expansion
- 20. MULTIPLE DEPOSIT EXPANSIONPROCESS Amount bank Acquired reserves Required Excess can lend - New Bank 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 17.57 Total amount of money created by the banking system $400.00
- 21. Balanced Budget Multiplier=1 (Net Result on GDP)
- 22. 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)
- 23. Someone deposits $1000in new Reserves at a bank. New reserves $200 $800 Required Excess Reserves reserves $1000 $4000 Initial Bank System Lending Deposit Total Increase in Money Supply ($4000)
- 24. Fed Buys A$1,000 Bond From Joe’s Bank New reserves $1,000 20% RR Excess Reserves $5,000 PMC thru Bank Lending TMS is $5000
- 25. OUTCOME OF MONEYEXPANSION $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
- 26. $100 Injections: New reserves $20 $80 Required Excess reserves reserves Additional Spending into Income – Expenditures stream: Investment, G, or Xn $400 $100 Initial Bank system lending Deposit Money Created
- 27. UNEMPLOYMENT Types of Unemployment Frictional Unemployment Structural Unemployment Cyclical Unemployment Natural rate of Unemployment = Structural + Frictional (Around 4-5%)
- 28. LOANABLE FUNDS MARKET S This graph shows how the supply and demand for loanable real interest rate funds affects real interest rates r D Q Quantity of Loanable Funds
- 29. Loanable Funds MarketGraph (Long-Term Interest Rates) What changes Supply: What changes Demand: 1. Increase in Household 1. Increase in Household savings borrowing 2. Increase in Gov’t 2. Increase in business savings Investment 3. Increase in Foreign 3. Increase in Business borrowing savings 4. Increase in Government 4. Increase in Business borrowing (When the savings gov’t has a budget 5. Increase in Foreigners’ deficit!) = (the crowding - savings out effect)
- 30. Price Index Price Index Price of market basket in specific year in a given = --------------------------------------------- X 100 Year Price of same market basket in base year Nominal GDP Real GDP = ------------------------------- X 100 Price Index
- 31. Remembering the difference between Real and Nominal
- 32. Nominal: with Inflation Real: Adjusted for Inflation
- 33. Nominal vs. Real 6% 11% = + Inflation Premium 5% Nominal Real Interest Interest Rate Rate
- 34. Real Interest Rate [NominalI.R. – inflation rate = Real I.R.] 16% 10 - 6 = % % Nominal Inflation Real Interest Premium Interest Rate Rate
- 35. Demand-Pull Inflation vs. Cost-Push Inflation
- 36. DEMAND-PULL INFLATION ASLR AS2 AS1 Price Level P3 c P2 b P1 a AD2 AD1 o Q1 Real domestic output
- 37. COST-PUSH INFLATION Occurs when short-run AS shifts left ASLR AS2 AS1 Price Level P2 b P1 a AD1 o Q2 Q1 Real domestic output
- 38. COST-PUSH INFLATION Government responsewith increased AD ASLR AS2 AS1 Even Price Level P3 c higher P2 b price P1 a levels AD2 AD1 o Q2 Q1 Real domestic output
- 39. COST-PUSH INFLATION ASLR AS2 AS1 Price Level P2 b P1 a AD1 o Q2 Q1 Real domestic output
- 40. COST-PUSH INFLATION If governmentallows a recession to occur ASLR AS2 AS1 Nominal Price Level wages fall (which increases AS & P2 b AS returns P1 a to its original location AD1 o Q2 Q1 Real domestic output
- 41. People must believeFed is serious about stopping inflation. Higher expectations decreases Aggregate Supply.
- 42. THE PHILLIPS CURVECONCEPT Annual 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)
- 43. THE PHILLIPS CURVECONCEPT Annual 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)
- 44. GENERAL EXAM ADVICE FreeResponse: • 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
- 45. 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