AP Macroeconomics
Tuesday, May 12, 2015
Thursday, April 30, 2015
Free Response Quiz 2
Free Response Quiz 2
1. What
2 factors of the economy does the Phillips curve correlate?
2. What
would be the real interest rate if the nominal interest is 12% and the expected
Inflation is 7% and the unemployment rate is 6%?
3. What
would be the real interest rate if unemployment is 8% the nominal interest is 6%
and the expected Inflation is 4%?
4. What
is the difference between Nominal Interest and Real Interest?
5. If
the inflation rate were 2% what are the actions that the Federal Reserve can take
to target 3% inflation.
a. Why
would they want to do that?
6. If
the inflation rate is 5% what actions can Congress take to target 4% inflation?
a. Why
would they want to do that?
7. If
the inflation rate were 1% what Fiscal Policy actions can be taken to target 3%
inflation?
a. Why
would they want to do that?
8. If
the inflation rate were 9% what Monetary Policy actions can be taken to target 5%
inflation?
a. Why
would they want to do that?
9. How would Expansionary Fiscal Policy affect
Aggregate Demand?
10. How
would Contractionary Monetary Policy affect Short Run Aggregate Supply?
11. How
would Expansionary Monetary Policy affect real GDP?
12. What
are the effects of a Depreciating currency to a country’s GDP?
13. What
are the Effects of an Appreciating Currency to a country’s Exports?
14. If
the US demands products from France where the Euro is traded, what will happen
to value of the US Dollar?
15. If
the US demands products from Germany where the Euro is traded, what will happen
to value of the Euro?
16. What
will happen to the value of the Canadian Dollar if Mexican National s start
vacationing in Calgary, Toronto, and Vancouver?
a. How
does this increase in tourism in Canada affect Canadian exports?
b. How
does this increase in tourism in Canada affect US Currency?
c. How
does this increase in tourism affect Mexico’s GDP?
Monday, April 27, 2015
Topics AP Macroeconomics
What AP says should be covered in Unit 1:
Scarcity
Opportunity Cost
Production Possibilities Curve
Demand,
Supply,
Market Equilibrium
Supply and Demand:
“used to analyze the workings of the free market system”
Absolute Advantage, Comparative Advantage, Mutually
Advantageous Trade
Business Cycles
Economic Growth
Graphs students need
to draw or identify for multiple choice questions:
Production Frontiers (especially for use in Comparative
Advantage questions)
Supply and Demand
Supply and Demand with Ceilings and Floors
Currencies (as examples of Supply and Demand) (US dollars,
other currencies: real or made up)
Cycles
What AP says should be covered in Unit II:
Circular Flow, Households, Businesses, Government,
International
Gross Domestic Product, Expenditure Approach Components
Unemployment, Types, Measures, Causes, Unemployment Rate,
Natural Rate
Inflation Measures, Changes in Dollar Values over Time,
Costs of Inflation
Nominal GDP, Real GDP
Consumer Price Index
GDP Deflator
Graphs students need
to draw or identify for multiple choice questions:
The basic Circular Flow model
Investment Demand
What AP says should be covered in Unit III:
Aggregate Supply and Aggregate Demand
Equilibrium National Output, Full Employment Output
General Price Level
Effects of Public Policy
AD and AS Curves
AD Factors (C + Ig + G + Xn)
AS Factors
Short Run AS
Long Run AS
Spending Multiplier (applied to Aggregate Models)
Crowding Out (save for Unit V)
Sticky Price, Sticky Wages
Flexible Price and Flexible Wage
Graphs students need
to draw or identify for multiple choice questions:
Aggregate Model
What AP says should be covered in Unit IV:
Money Supply and Factors
Money Demand and Factors
Definition of Money
Measures of Money Supply
Time Value of Money
Stocks and Bonds (Definitions)
Fractional Reserve Banking
The Federal Reserve System
Multiple Deposit Expansion
T-Account Money Creation
Money Multiplier (via Loans)
Monetary Policy
Equilibrium Interest Rates
Interest Rates and Aggregate Demand
Aggregate Demand and Real Output and Price Level
Financial Markets
Loanable Funds Market (Private Savings Market)
Real Interest Rate
Money Market (as different from Loanable Funds)
Tools of Central Bank Policy
Quantity Theory of Money
Graphs students need
to draw or identify for multiple choice questions:
Money Market
Loanable Funds (Private Savings Market)
What AP says should be covered in Unit V:
Public Policy and Output, Price Level, Employment in the SR
and LR
Fiscal Policy
Monetary Policy
Short Run Shocks
Long Run Equilibrium
Budget Deficits and Crowding Out
The Burden of the National Debt
Phillips Curves:
Short Run and Long Run
Inflation and Unemployment Trade Off
Inflation Expectations
Graphs students need
to draw or identify for multiple choice questions:
Crowding Out (Shown in? -- Investment Demand Graph, Money
Market Graph, Loanable Funds Graph, Aggregate Model)
Phillips Curves
The Phillips and Aggregate Model Link (Coming to future
tests?)
What AP says should be covered in Unit VI:
Long Run Economic Growth
Productivity Measures
Standard of Living
Role of Investment
Physical Capital Accumulation
Research and Development
Graphs students need
to draw or identify for multiple choice questions:
(No new graphs)
What AP says should be covered in Unit VII:
Balance of Payments Accounts
Trade Balance
Current Account
Capital (Financial) Account
Foreign Exchange Markets
Equilibrium Exchange Rates
Currency Demand and Supply
Currency Appreciation and Depreciation
Net Exports
Trade Restrictions
Graphs students need
to draw or identify for multiple choice questions:
(No new graphs)
Thursday, April 9, 2015
Phillips Curve Notes
The
Phillips Curve and Its Modern Uses
William
Phillips: 1958
Paul
Samuelson and Robert Solow: 1960
Edmund
Phelps: 2006 Nobel Prize
The
Original Short Run Phillips Curve
Basic
Assumptions:
·
There is an inverse relationship between inflation and
unemployment. When one increases, the
other decreases.
·
If an economy has inflation, usually due to demand pull growth, then
more workers are being hired to produce the greater number of goods being
produced.
·
If an economy is in a recession, more resources are being left idle,
therefore fewer workers are needed and less pressure is put on the resource
base. This results in less inflation.
·
Movement along the Phillips Curve represents year to year changes in
the business cycle.
The
original data collected in the 1940’s and 1950’s showed this general connection
with the business cycle. This also held during the 1960’s in the US (see most
texts).
Why the Phillips Curve?
Original SR Phillips Curve
|
|
Inflation and Unemployment
=
|
There is an assumed inverse
relationship
|
Inflation =
|
Increases as the economy
expands
|
Recession =
|
Unemployment increases as
the economy slow down, contracts
|
Along the Curve =
|
Cyclical changes in the GDP
|
Stagflation
|
|
Late 1970’s to 1981
|
Increasing inflation and
unemployment during the same year
|
Data?
|
1974, 1980, 1981….
|
A New Phillips Approach
|
|
New Range?
|
The SRPC can move outward
and inward as well as illustrate the business cycle
|
Cost Push Inflation
|
More stress on resources,
wages, input costs
|
Supply Shocks
|
Rapid loss of resources or
rapid increase in resource costs
|
SRPC Curve moves
|
Outward during these Shocks
|
SRPC moves back
|
Inward as the society
increases productivity or regains resources
|
Long Run Phillips Curve
|
|
Inflation?
|
Society adjusts for
cost/wage increases with new prices.
“Real” balances
|
LRPC is?
|
The efficient Production
Possibilities Frontier
|
Natural Rate of
Unemployment
|
Becomes the equivalent of
the Full Employment Unemployment Rate
|
Phillips and AD/AS Curves
|
|
Change points on SRPC =
|
If AD changes, move points
on the SRPC
|
Move the SRPC =
|
If SRAS changes, move the
SRPC
|
The
Problem of Stagflation
Phillips
Curves under attack:
·
Starting in the mid-1970’s the economy started to suffer from
increasing amounts of inflation and
unemployment (see the Business Cycles Data chart).
·
The data points on the Phillips Curve no longer fit into any
immediately recognizable pattern.
·
Did the model seem to present the relationship between inflation and
unemployment too simplistically?
A New
“Phillips” Approach
Stagflation,
and its removal, explained:
·
If the fundamental efficiencies and demographics of an economy change,
then the relationship between inflation and unemployment is still valid, just
in a new range.
·
One key change is the type of inflation. If inflation now becomes “cost push”
inflation, the resource base has now changed.
The aggregate supply is reduced due to resources being used up or lost,
disasters, boycotts, etc. More costs and
job losses occur.
·
The result of cost push inflation will be higher prices due to fewer
and more expensive resources, plus more unemployment due to business production
cuts. This is also known as a supply shock.
·
The Short Run Phillips Curve still has a relationship between the two
factors, but the curve moves outward. Year to year business cycles still occur,
just at higher levels than before.
·
When the economy is able to adjust with improved technologies, or the
resource supply is re-established, the inflation pressures level off and
businesses are able to lower costs and produce more. The SRPC moves back inward (to the left).
·
This approach appears to answer the late 1970’s changes. As energy resources were cut and significant
demographic changes like women moving into the workforce changed, the economy
suffered from stagflation. This was
“cured” by the restoration of cheaper energy and new technologies in the 1980’s
and 1990’s.
·
The logic of the Phillips Curve was intact, just in new ranges.
The Long
Run Phillips Curve
Inflation
has less importance in the Long Run.
·
Two new factors emerge in Long Run analysis. The first is that the economy can adjust for
inflation in the long run through wage and real-wage changes. The second is based on Rational Expectations
School theories that expected inflation rates are controllable and predictable
by the market, therefore no longer a random factor.
·
The Long Run Phillips Curve is therefore vertical at some natural rate
of unemployment. This is now presumed to be around 4 to 5 % for the US and 6%
for Canada. This vertical LRPC is also
known as the NAIRU line, or “non accelerating inflation rate of
unemployment”.
·
The analysis of the LRPC is now based on arguments of how a country
can change the natural rate of unemployment.
Usually this is connected to long run productivity of the workforce and the willingness of a country to
help those who are unemployed. The
theory is that financial assistance given to those who lose jobs will lengthen
their “willingness” to wait, or settle, for new jobs. This will increase the natural rate of
unemployment (move it to greater levels of unemployment).
The
Phillips Curve and the AD/AS Model
Phillips
Curves and AD/AS Graphs: Mirror Images
·
When you move points along the SRPC you are showing changes in the
year to year business cycle. This is
exactly what you are illustrating when you move the AD line on the AD/AS model.
·
When you move the entire SRPC outward to show supply shocks or cost
push inflation problems, it is exactly the same at moving the SRAS curve
inward. The AD/AS model will also show the simultaneous creation of greater
inflation and more unemployment. This will also be true of movements in the
opposite directions, like the SRPC moving back inward is the same as the SRAS
curve moving outward to better levels of inflation and production.
Current
Thinking About the Phillips Curve
Recent
and growing critiques of the Phillips Curve use:
·
I quote a brief article from Dr. D. Hamermesh of the University of
Texas at Austin, “By the mid-1980’s the Phillips Curve was no longer taught as
offering a trade-off between inflation and unemployment and was hardly
mentioned in economics courses anymore.”
“…Nobel Prize winners Milton Friedman and Edmund Phelps suggested that
there was no good theoretical basis for the relationship…” These words are typical of university
critiques of the curve.
- Data from the
1990’s forward also seems to show that economies like the US can sustain
long periods of growth, with falling inflation and low, steady levels of
unemployment.
Crowding out Quiz
What is “Crowding Out”?
Quiz
Bonds in Monetary Policy:
1.
If the economy is suffering from a recession,
the __1___ will ____2______ bonds. This
will move money from the government to the public.
2.
On
the Money Market Graph, show the change by moving the _____3_______ line.
3.
This
will create a ________4_____________ interest rate, therefore helping ____5____.
4.
This
will improve __6__ on the Aggregate Model Graph.
Bonds in Fiscal Policy:
5.
If the economy is suffering from a recession,
_____7_____ will ____8_____ taxes or ____9_______ government spending, or do
both.
6.
This
policy will increase __10____ and ___11____ as parts of AD.
7.
However,
it is assumed that this policy will affect the federal budget. If the government income ___12_______ due to
tax ___13____, and expenditures ____14_______, then a budget ____15_______ will
occur.
8.
Government
will now have to __16_____ bonds.
Money Market Graph:
9.
If Monetary Policy actions move the __17____
line, then Fiscal Policy actions will move the __18_____ line.
10.
When
Congress causes this line to move, it will move _____19________.
11.
As
a result, the interest rate will ____20_______.
Loanable Funds Graph (Private Savings
Graph):
12.
Deficit spending will cause the ____21_______
line to move outward.
13.
Deficit spending will cause the _____22______
line to move inward.
14.
Either
way, the interest rate will _____23_________.
Investment Demand Graph:
15.
Higher interest rates will cause the quantity
of investment demand funds to ___24______.
16.
This
will _____25_____ Ig, as a component of AD.
17.
If
a Private Savings (Supply) line is shown on this graph, then deficit spending
will move this line ____26________.
Aggregate Model Graph:
18.
The initial fiscal policy increases in _27____
and _28____ will cause AD to move ___29_____.
19.
However,
the reduction of _30___ will cause AD to move ____31_____, but not all the way
back to the original, recessionary position.
20.
Keynesians
believe this because the ___32_____ is more important than the ____33______.
Monday, April 6, 2015
Semester Topics (1-17)
Topic 1: Introductory Materials and Production
Possibilities
·
For an economist, __________ is
scarce.
·
All decisions require an _____________ ______.
·
Most problems of predicting changes will require
c_______
p________ assumptions.
·
The most common labels on the PPC are Y Axis =
_________, X Axis = _________
·
Students must know the significance of points
inside the Frontier, on the Frontier, and outside the Frontier. They are equal to: _______________, ___________, _________.
·
Students must understand that moving the
Frontier requires more _______ __ _______.
Big Chart Graph: Production Possibilities Curves/Frontiers
(#1)
Topic 2: Supply
and Demand Basics and Currency Exchanges
·
When product prices are changed first, move
points on the ______. This is known
as a __________ Change and this will create a surplus or a shortage.
·
When government steps in with artificial price
floors and ceilings, they are trying to help suppliers with _________ and
consumers with __________.
·
Artificial floors always create greater
______________.
·
Artificial ceilings always create greater
______________.
·
When any other product factor changes first, move
either the __ or __ _______. This is
known as a “Supply or Demand” Change.
·
This will create a new ___ and ___ for that
market.
·
When the price of a good increases, a
substitute’s demand will __________.
·
When the price of a good increases, a complement’s
demand will _________.
·
Perfectly inelastic supply lines are
__________________. (Elaticity)
·
For the
rest of a macro course, skip discussions or lessons on elasticity.
·
Currencies
are supply and demand products.
·
Demand for currencies will flow to the
__________ economy.
·
If D changes for one currency, __ must change
for the other currency.
·
The two currency graphs will move in ___
________ direction.
·
One currency will always appreciate, the other
will _________.
·
Appreciation of a currency hurts _________,
depreciation helps make them cheaper.
·
Big Chart
Graphs: Dollar Graph, Other Currency
Graph (#2, #3)
Topic 3: Goods and
Government
·
Durable goods and non-durable goods are based on
length of ________ _____.
·
Transfer payments are from government to
_________.
·
Subsidies are payments from government to
_________.
Topic 4: GDP Accounting
·
The expenditure approach of __ + __ + __ + __
must be memorized.
·
The expenditure approach is equal to ____.
·
The expenditure approach is also equal to _______________.
·
__ is the most significant in the US, __ has no
savings leak, __ is affected by interest rates (in an inverse way for the
domestic market).
·
For GDP accounting, intermediate goods are ___
________.
·
Unsold inventory is counted as __ at year’s end.
·
Used goods do ___ count in the year they
re-sell.
·
Goods and
_________ both count as Consumption.
·
GDP to NDP accounts for Depreciation of Capital
or Consumption of Fixed Capital (CFC).
This gives the _____ measure of growth.
·
Nominal minus Inflation = ____.
Topic 5: Business Cycles
·
The up-sloping Secular Trend is a Classical
Theory of gradual improvement of lifestyles over time. It can be connected to_____ Law.
·
The minimum time span for a change in the cycle
is ______________________.
·
The cycle is measured from ________ to _________.
·
_______ and _______ can only be recognized after
they have occurred.
·
Expansions
and Contractions/Recessions can be recognized as they occur.
·
The average cycle for the US has been about ________
(200 years of data).
·
Recessions have historically lasted about ___
months (20 century and beyond).
·
It will be assumed that Recession will have
excess ______________.
·
It will be assumed that Expansions will have
some excess _____________.
·
Big Chart
Graph: Business Cycles (#4)
Topic 6: Employment
and Unemployment
·
Part time workers are ___________ as “employed”.
·
Discouraged workers are ____ ___________ as unemployed.
·
“Full Employment Unemployment” (FE) is the ________
____ __ __________ for a country.
·
The
differences between frictional and structural unemployment are important.
Topic 7: CPI, GDP Deflators, Inflation
·
An Index Year is always made equal to _______.
·
Real
change of values over time can always be calculated with the formula: Later Year – Earlier Year/Earlier Year. This = the Rate of Change. The Rate x 100 = Inflation %.
·
CPI measures monthly purchases by _______, the
GDP deflator looks at the _____ ___________.
·
G spending changes are assumed to be more
important that private C changes because C changes always have a __________
leak.
·
Demand Pull inflation is caused by excessive ____________________. It can be manipulated by governmental
policies.
·
Cost Push inflation is a _______ ___
_____________ and often can’t be corrected.
·
Stagflation is the presence of rising
unemployment and rising inflation, and can be created by ___________
______________.
Topic 8: Spending Multipliers
·
Marginal
Propensity to Consume or Marginal Propensity to Save are results of new money
being given to citizens, or being taken away from citizens.
·
The MPC + MPS must always = ___.
·
The
Spending Multiplier Formula is therefore a guess on how many times new income
will be spent by a series of consumers.
The formula will be: 1/1-MPC or 1/MPS.
·
Big Chart
Graphs: Consumption Function, Savings
Function, Consumption and Savings Link (#5, #6, #7)
Topic 9: Investment Demand
·
On the domestic market, interest rates (i) are a
____ of borrowing and have an inverse effect on the willingness to create Ig.
·
Big Chart
Graph: Investment Demand Graph (#8)
Topic 10: Aggregate Analysis (AD and SRAS) (AD/AS)
·
Any change that can be connected to C + Ig + G +
Xn will be a change in ____ first. Students often miss the Ig part.
·
Any change that can be connected to input costs,
resource availability, wage rates, or worker productivity will change the ________________
·
The LRAS
is approximately equal to the PPF and Full Employment GDP.
·
Changes in basic factors of production can move
the _____________.
·
Big Chart
Graphs: AD/AS (3 Versions while using
McConnell 15th) (#9, #10, #11)
Topic 11: Schools of Economics
·
Classical economists believe that competition is
______ and the invisible hand will create better goods, cheaper goods, and more
competition.
·
Classical economists believe in ________ prices
and wages, long run balance near Full Employment GDP (Say’s Law).
·
Classical economists want government to promote
competition, stop monopolies and cheating, stop actions that limit _____________
prices and wages.
·
Neo-classical economists like the idea of tax______
for trickle down growth.
·
Neo-classical economists also like the idea of
tax ______ to starve government’s ability to interfere with competition.
·
Keynesians believe that competition is ________
and must be corrected in the Short Run.
·
Keynesians believe that Fiscal Policies will
focus on ______ and _________.
·
Keynesians believe that wages are sticky and
prices are stuck by the ________ effect.
·
Monetary policy advocates don’t think Keynesians
can _______ policy correctly.
·
Monetary policy advocates don’t think Keynesians
can fight ___________.
·
Monetary policy advocates support fine tuning
with ____________ rates.
Topic 12: Countercyclical Policies: Fiscal and Monetary
·
Always connect ______ Policies to Keynes and ______________.
·
Congress can change taxes and government
spending and target ___ and ___ of AD.
Use the terms “expansionary and contractionary” policies
·
When in a recession, assume that tax _____ and
spending __________will create ________ and that crowding out can occur.
·
Always
connect Fiscal Policies to automatic stabilizers like Social Security and
Unemployment Compensation.
·
Always connect Monetary Policies to the ______________________________
·
The Fed
can control Bonds, target the Fed Fund Rate, change the Discount Rate, and
change the Reserve Requirement.
·
When the Fed buys bonds it is “______ Money”
policy (expansionary). Remember BB = BB
(Buy Bonds = Big Bucks).
·
When the Fed sells bonds it is “______ Money”
policy (contractionary).
Remember SB = SB (Sell Bonds = Small
Bucks).
·
The OMC
(FOMC) is always connected to the bond markets.
·
Bond “prices” and interest rates are____________
in values.
·
All Fed policies target the Money Supply,
interest rates, Ig, ______.
·
Big Chart
Graphs: Money Market, Loanable
Funds/Private Savings Market, Versions of Crowding Out (#12, #13, #14).
Topic 13: Banks Creating Money
·
The Money Multiplier formula is _____________________.
·
Demand Deposits (DD) are a bank __________ and
must equal bank assets
·
Required Reserves (RR) are a bank ________ and
are set by the rr.
·
Excess Reserves (ER) are the monies banks can
lend from each DD.
·
RR and ER must _______ DD.
·
ER x the Loan Multiplier will equal to new loans
for the economy which are assumed to be new ___________ ____________.
·
If someone
is using cash to create a new DD, then the ER x Loan Multiplier will equal New
Money Supply.
·
If the Fed
is buying bonds that become DDs, then the ER x Loan Multiplier plus the
original bond amount will equal New Money Supply.
Topic 14: Phillips Curves
·
The relationship between inflation and
unemployment is assumed to be _________.
·
Combining the inflation % and the unemployment %
is known as the ________ Index.
·
The changes in the business cycle due to changes
in AD will move points _____ the Short Run Phillips Curve (SRPC).
·
Changes in SRAS will move the _______ SRPC. The two curves will move in ________
directions.
·
When the SRPC moves outward, it will usually be
connected to __________.
·
The Long Run Phillips Curve (LRPC) is equated to
the _________ _______ __ ______________ for a country.
·
It is
assumed by Classical Economists that the NRU is greater for countries that give
the unemployed more help, or time to find a new job.
·
Big Chart
Graphs: Phillips Curve, Phillips-AD/AS
Connection (#15, 16)
Topic 15: Monetarism (Not the Same as Monetary Policy
by the Fed!)
·
The Equation of Exchange is ____ = ____.
·
Monetarists assume that velocity is ___________.
·
The general assumption of this thinking is that
most inflation can be controlled by limiting the growth of the ___________
______________.
Topic 16: International Comparative Advantages
·
If two countries have similar resources, the
country that can produce the most has the _______________ Advantage.
·
The country with the lowest opportunity cost has
______________ Advantage.
·
Countries
will trade to gain beyond their own domestic opportunity cost.
·
Both countries must gain for trade to occur, but
both will _______ if they trade their own comparative advantage products.
Topic 17: International Balance of Payments Accounting
·
BOP Assets (Credits) are ____________ for a
country’s money and are “inflows”.
·
BOP Liabilities (Debits) are _____________ of a
country’s money and are “outflows”.
·
______________ Accounts are the transfer of
money/wealth that is immediate.
·
________________ Accounts are the transfer of
money/wealth that occur between countries, but hope to create future revenue.
·
Reserves are used by countries if Current
Accounts do not __________ Capital/Financial Accounts.
Subscribe to:
Posts (Atom)