A SUMMERSTIME PRODUCTION 2008


1
AP MACROECONOMICS REVIEW
A SUMMERSTIME PRODUCTION 2008
2
Explain what the points A B and the curve
represent in this graph.
B
A
3
This is a Production Possibilities Frontier
It shows the maximum output of any two
products or types of products
The curve represents full employment of resources
at productive efficiency
Point A represents underallocation of
resources Point B represents an unobtainable
level of production with the current technology
and resources
PPF CURVE
Capital Goods
B
A
Consumer Goods
4
Define the type of efficiency that
cannot be
identified from a PPF.
5
ALLOCATIVE EFFICENCY is
The apportionment of resources among firms and
industries to obtain the production of the
products most wanted by society at the lowest
possible cost.
6
Sm
This graph would be used to show what happens
when the Demand For or
the Supply Of MONEY changes.
Explain what happens in each of four
possible scenarios.
Dm
1 Supply Increases 2
Supply Decreases 3 Demand Increases 4 Demand
Decreases
7
Interest Rates Decrease
Supply Increases
Interest Rates Increase
Supply Decreases
Interest Rates Increase
Demand Increases
Interest Rates Decrease
Demand Decreases
8
Given The Exchange Rate Changes from
5 Pesos for 1.00 U.S.

to

10 Pesos for 1.00 U.S.
Describe what happens to the number of our
imports FROM Mexico and why.
Describe what happens to exports from the U.S.
TO Mexico and why.
9
One Dollar buys twice as many Pesos so IMPORTS
from Mexico to the U.S.
INCREASE
It takes twice as many Pesos to buy one Dollar so
EXPORTS from the U.S.
to Mexico
DECREASE
10
LRAS 1
LRAS 2
Price Level
YF1
YF2
Real GDP
Name the four primary causes of the change
illustrated by this graph
11
1 Change in the Infrastructure
2 Change in technology
3 Change in the quantity or resources
4 Change in the quality of resources
12
Go to the board and draw a shortage.
and while you are there be sure to identify
the government policy that created this problem!
13
Not Enough Apartments
S
Pe
Pc
D
Qs
Qd
Qe
Pc Price Ceiling caused the shortage
14
Define
ECONOMICS
15
A social science which studies the unlimited
wants of a society faced with scarce resources.
16
Go to the board and using graphs show the two
ways we have learned to illustrate a country
experiencing economic growth.
17
LRAS 1
LRAS 2
Price Level
YF1
YF2
Real GDP
Capital Goods
PPF 1
PPF 2
Consumer Goods
18
What happens to each if inflation in the U.S. is
higher than in other countries
Aggregate Demand
Exports
Value of the Dollar
19
Aggregate Demand

Exports
Value of the Dollar

20
When the interest rate in Italy increases
relative to the rest of the world what happens
to the following



Capital Flow
The Value of the Lira
21
IN
Capital Flows
UP
The value of the Lira goes
22
What are the FISCAL POLICIES
that could be used
to combat
inflation
23
Decrease Government Spending
Increase Taxes
24
When the Federal Government tries to put the
breaks on inflation with a tax increase or tries
to jump-start the economy with a tax breakthey
must take into account the tax multiplier. What
is that formula
25
MPC MPS
26
When a monetary or fiscal policy is designed to
get an economy out of a recession it is said to
be ______.
When a monetary or fiscal policy is designed to
get an economy out of an inflationary period it
is said to be ________.
27
When a monetary or fiscal policy is designed to
get an economy out of a recession it is
EXPANSIONARY
When a monetary or fiscal policy is designed to
get an economy out of
an inflationary period it is
CONTRACTIONARY
28
When productivity goes up
What happens to wages.
and why
29
As productivity goes up
the cost to produce the product goes down
so the demand for labor goes up
which drives up wages.
30
Who gains from unanticipated
inflation
Lenders
select the correct answer(s)
Borrowers
Renters
Landlords
Granny on a fixed income
31
Who gains from unanticipated inflation
Lenders
Borrowers
Renters
Landlords
WHY Because
they are paying their debt with money that is
worth less than when they signed the papers.
Granny with a fixed income
32
Name the Monetary Policies that could be
instituted in order to ease a country out of a
recession.
33
The Fed could
BUY BONDS
LOWER the REQUIRED RESERVE
RATIO
DECREASE the DISCOUNT RATE
DECREASE the FEDERAL FUNDS RATE
34
What probably happens after this to income and
employment
Price Level
AS1
AS2
AD
Real GDP
35
As output increased employment most likely
INCREASED
As demand for labor increased wages most likely
INCREASED
36
Define OPEN MARKET OPERATIONS and explain what
they specifically do
37
An OPEN MARKET OPERATION
is when the FEDERAL
RESERVE
BUYS or SELLS BONDS
to INCREASE or DECREASE the MONEY
SUPPLY
38
The answer will be
APPRECIATE
DEPRECIATE

or

THERE IS NO WAY TO TELL
Given
Inflation is down and interest rates are up.
What will the dollar do
39
APPRECIATE
40
The answer will be
APPRECIATE
DEPRECIATE

or

THERE IS NO WAY TO TELL
Demand for American goods is increasing and so is
the supply of dollars in the Foreign Exchange
Market.
What will the dollar do
41
There is no way to tell for sure !
The demand for American Goods would cause the
dollar to APPRECIATE but the supply of dollars
flooding the Foreign Exchange Market would cause
the dollar to DEPRECIATE
42
The Federal Government is increasing its deficit
spending.
What does this do to the Interest
Rate
What does this do to Business
Investment
What does it do to the International Value of
the Dollar
43
The Federal Government increases deficit spending.
What does this do to the Interest Rate
What does this do to Business Investment
What does it do to the International Value of the
dollar
44
What term is used to describe the fact that when
the government finances its deficit by borrowing
less Business Investors can afford to borrow for
things like construction and machinery
45
Crowding Out
46
What open market operation will be used by the
Fed if they want to decrease Aggregate Demand
47
The Fed will
SELL BONDS
Now the Fed has the Money
and the public holds the bonds
So the
Money Supply has Decreased and Aggregate
Demand will Fall
48
What is the difference between the FEDERAL FUNDS
RATE and the
DISCOUNT RATE
49
The Federal Funds Rate is how much Banks charge
other banks when they need to borrow money from
them.
The Discount Rate is how much the Fed charges
banks who need to borrow money from the Fed.

50
Given James has autonomous consumption of
1000.00 and marginal propensity to save is .2
Then his Disposable Income increases by 5000.00
How much will his consumption spending increase
by
51
4000.00
52
If the Consumer
Price Index is increasing
at a rate of 20
what will have to happen for real output
to remain constant
53
Nominal National Income will also have to
increase by 20
Wages must keep up with price level increases or
it will take less output to satisfy what people
are willing and able to demand.
54
(The answer will be

increase decrease or unable to determine.)
What will happen to Gross Domestic Product if all
of the following occur
1 Investment Expenditures and Government
Spending decrease by the same amount and
2 Interest rates and taxes both increase and
3 Imports and Exports both increase by the
same amount.
55
Gross Domestic Product will
DECREASE
56
Income in the U.S. goes up
compared to
the other countries
of the world
What will happen to the value of the dollar
57
The Dollar
DEPRECIATES
Income Up
Consumer Spending Up Aggregate
Demand Up Prices Up
Inflation

Value of the Dollar Falls
(it just doesnt buy what it used to)
58
Do the math
If the nominal interest rate is 10
And the expected rate of inflation is 3
What is the
real interest rate
59
7
60
The answer is
Increase Decrease
or

There Is No Way To Tell
What happens to interest rates if the Fed
increases the Reserve Requirement at the same
time the government increases taxes
61
The increased Reserve Requirement causes the
Supply of Money to fall so interest rates
should go up
But when the government increases taxes there is
less demand for money so interest rates should
fall
So we dont know what will happen!
62
Define Labor Force
63
The Labor Force is everyone with a job and
everyone who is willing and able to work
Plus those who do not have a job and are still
looking
64
So what is the formula
used to determine the unemployment rate
65
UNEMPLOYED
LABOR FORCE (Employed Unemployed)
66
If there are no fiscal or monetary policies how
would this economy self-correct in
the long run even if
people stay discouraged
LRAS
Price Level
AS
AD
Real GDP
Yf
67
As costs fall Aggregate Supply increases and
output returns to Full Employment with prices at
a new lower Price Level .
AS1
Price Level
LRAS
AS2
PL1
PL2
AD
Yf
Y1
Real GDP
68
What is the formula for the simple spending
multiplier
69
1
1-mpc
or
1
mps
70
I just quit my job because it was boring and I
thought it would be a good idea to quit first and
then look for another job.
What am I besides an idiot
71
Frictionally
Unemployed
72
Alpha has a comparative advantage in Aluminum and
Beta has a comparative advantage in Bricks.
What should the terms of trade be for one ton of
Bricks
Aluminum (tons)
Aluminum (tons)
100
100
ALPHA
BETA
100
Bricks (tons)
50
Bricks (tons)
73
Beta will want more than 1 ton of aluminum for
each ton of bricks and Alpha will want to give up
less than 2 tons of aluminum for each ton of
bricksso the terms of trade would be
1 ton of Bricks for 1.5 tons of Aluminum
Aluminum (tons)
Aluminum (tons)
100
100
BETA
ALPHA
100
50
Bricks (tons)
Bricks (tons)
74
So just what does the Phillips Curve demonstrate
75
Inflation
PHILLIPS CURVE
Unemployment
The inflation-unemployment relationship
76
What does the Long Run Phillips Curve look like
and why
Dont just sit therethis is a board question!
77
LRPC
Phillips Curve
Inflation
SRPC
Unemployment
NRU
Because the economy eventually returns to full
employment level of output (YF) at the Natural
Rate of Unemployment
78
DRAW AND DEFINE
stagflation
79
A period of
high unemployment
and
high inflation.
AS2
LRAS
Price Level
AS1
PL2 PL1
AD
YF
Y1
Real GDP
80
Define
GROSS DOMESTIC PRODUCT
81
the TOTAL market value of
all FINAL
goods and services
produced WITHIN
a
countrys borders in a GIVEN
year.
82
DEFINE
Comparative Advantage
83
The ability to produce a good or service at a.
lower opportunity cost
than the competition
84
Go to the board and draw a surplus. and while
you are there be sure to identify the government
policy that created this problem!
85
S
Too Many Radishes
Pf
Pe
D
Qd
Qs
Qe
Pf Price Floor caused the Surplus
86
Explain the expenditure formula for determining
GDP
87
C Ig G Xn
C Consumption
Ig Gross Investment Spending
G Government Spending
Xn Exports - Imports
88
What is the formula used by the FED to determine
the impact of a change in the money supply
89
1
R
Which Stands For
1
Required Reserve Ratio
90
The Functions of Fiat Money
A Store of _____
A Standard of ____ Payment
A Unit of _______
A ______ of Exchange
91
The Functions of Fiat Money
a store of
value
a standard of
deferred
payment
a unit of
account
of Exchange
a
medium
92
What happens in the long-run and the short-run to
our Economy Graph if Labor Productivity Increases
with some Technological Innovation
93
The Short Run Aggregate Supply Curve will
Shift to the Right
And
The Long Run Aggregate Supply Curve will also
Shift to the Right
94
Do the math
Given A bank is keeping just the minimum in
required reserves and the rate is 20
If Laura puts the 1000.00 bill she found on the
sidewalk into her checking account...
what is the maximum the money supply can
increase
95
The bank must keep 200.00 (20)
in Required Reserves
So if they lend out all of the remaining 800.00
Taking the money multiplier of
1/.2 5
the MAXIMUM addition to the total money supply is
4000.00
you do NOT include the M1 cash that went from the
sidewalk to the bank.
96
But if the Fed had created new money by
purchasing a 1000.00 bond
how much would the money supply change with
that same 20 Required Reserve Ratio
97
The bank still must keep 200.00 (20)in Required
Reserves
So if they lend out all of the remaining 800.00
you would multiply that times the money
multiplier 1/.2 5 which creates that 4000.00.
This new money is in addition to the 1000.00 the
Fed Created for a grand total of 5000.00 of new
money.
98
If the interest rates are too low
What is most likely to happen next in a given
Economy
Go to the board and graph your answer.
99
Demand-Pull Inflation
Price Level
LRAS
AS
PL2
PL1
AD2
AD1
REAL GDP
YF
Y1
100
What are the three components of Ig
101
New Construction
Equipment and Machines
Changes in Inventory
102
Explain (in terms of
imports and exports) what makes a trade deficit
increase and decrease
103
If exports increase and imports decrease then
our trade deficit
shrinks.
shrinks.
If exports decrease and imports increase then
our trade deficit
expands.
104
Lucky you! You are off to the board to draw an
example of
Cost-Push Inflation!
105
Cost-Push Inflation
LRAS
Price Level
AS2
AS1
PL2
PL1
AD
REAL GDP
YF
Y1
106
Which economies are
defined below
1 Everything is under the control of the
government
2 Has private ownership and supply and demand
rule
3 Is a combination of both of the above
107
Economy Types To Know
Command Economy
Market Economy
Mixed Economy
108
Governments have to issue bonds to finance their
____ ____.
109
Deficit Spending
110
What can we conclude about the Consumer Price
Index from 1994-1995
Item Quantity 1994 1995
(per unit) (per
unit) Food 4 10 12
Shelter 3 15 10
Energy 2 5 16
Clothing 1 5 2
111
It increased by
12
112
What formula is the foundation of monetarisman
economic view that focuses on the supply of money
113
MV PQ
114
Explain the formula
MV PQ
115
M the supply of Money
V the Velocity of money (the number of
times per year a dollar is spent on final
goods and services)
P the Price Level
Q the Quantity of all goods and services
produced
116
What do we call the record of international trade
and financial transactions for a country
117
International
Balance
of
Payments
118
You might need to explain the components of the
Balance of Payments Record.
Lets start with the 3 sections of
CURRENT ACCOUNTS
119
Current Accounts Includes
Exports and Imports
(of goods and services)
Net Investment Income (foreign
dividends and interest paid in and out)
Net Transfer Payments
(for example disaster relief donations
to a foreign nation)
120
The Balance of Payments Record has a second major
component.
Explain what items are considered to be part of
CAPITAL ACCOUNTS
121
Capital Accounts Includes
Capital Assets
Such as Real Assets Construction
and Equipment
Financial Assets
Such as Stocks and Bonds
(If it is purchased by a foreign entity it is
added and if it is sold it is subtracted from the
Capital Account)
122
There is one final component of the Balance of
Payments Record.
The Final Section You Must Explain
Official Foreign Reserves
123
Foreign Reserves Include
Money the Fed holds in the form of Foreign
Currency
If we gain more foreign currency than we spend
we have imported that currency and the
official reserves number will be negative. If we
spend more that we gain we have exported that
currency and the official reserves number will be
positive.
This number will always reflect the difference
between the current and capital account totals.
124
Draw the
Business Cycle
125
Growth
GDP
The Business Cycle
peak
trough
Recession
Expansion
Time
126
Define
Recession
and
Depression
127
Recession
when the Real GDP falls for 2
quarters (aka 6 months)
Depression
a severe or prolonged
recession
128
Besides this review presentation
what are the
4
things you should do to prepare for the AP Exam
129
Four Keys To AP Test Success
1 Go over your Macro tests
2 Go over your pre-test review packets
3 Go over your take home Free Responses
4 Repeat 1 2 and 3
130
The End