Title: COMMON MISTAKES ON THE AP MACRO EXAM Compiled by: John Ostick Malvern Prep Malvern, PA 19355
1COMMON MISTAKES ON THE AP MACRO EXAMCompiled
byJohn OstickMalvern PrepMalvern, PA 19355
2The difference between a change in demand and the
resultant movement along a demand
curvevs.Shifting of the demand curve
3GRAPHING DEMAND
Price of Corn
What if Demand Increases?
P
5 4 3 2 1
CORN
10 20 35 55 80
5 4 3 2 1
D
o
Q
10 20 30 40 50 60 70 80
Quantity of Corn
4GRAPHING DEMAND
Price of Corn
Increase in Quantity Demanded
P
5 4 3 2 1
CORN
10 20 35 55 80
30 40 60 80
5 4 3 2 1
Increase in Demand
D
D
o
Q
10 20 30 40 50 60 70 80
Quantity of Corn
5The difference between a change in supply and the
resultant movement along a supply
curvevs.Shifting of the supply curve
6GRAPHING SUPPLY
Price of Corn
P
What if Supply Increases?
S
5 4 3 2 1
CORN
5 4 3 2 1
60 50 35 20 5
o
Q
10 20 30 40 50 60 70 80
Quantity of Corn
7GRAPHING SUPPLY
Price of Corn
P
Increase in Supply
S
S
5 4 3 2 1
CORN
80 70 60 45 30
5 4 3 2 1
60 50 35 20 5
Increase in Quantity Supplied
o
Q
10 20 30 40 50 60 70 80
Quantity of Corn
8Mislabeling or NOT labeling graphs correctly
9EQUILIBRIUM REAL OUTPUT AND THE PRICE LEVEL
P
AS
Equilibrium in the Intermediate Range
Price Level
Pe
P1
AD
Q
Qe
Q1
Q2
Real Domestic Output, GDP
10GROWTH IN THE AD-AS MODEL
ASLR1
ASLR2
C
A
Price Level
Capital Goods
Q1
Q2
B
D
Consumer Goods
Real GDP
11ECONOMIC GROWTH IN THE EXTENDED AD AS MODEL
ASLR1
ASLR2
AS2
AS1
Price Level
P2
P1
AD2
AD1
o
Q1
Q2
Real GDP
12THE MONEY MARKET
Sm1
Sm
10 7.5 5 2.5 0
A temporary shortage of money will require the
sale of some assets to meet the need.
ie
Rate of interest, i (percent)
Dm
0 50 100 150 200 250 300
Amount of money demanded (billions of dollars)
13Net effects of Monetary Policy and/or Fiscal
Policy onInterest Rate (I)
14FISCAL POLICY, AGGREGATE SUPPLY AND INFLATION
AS
Fiscal Policy And Inflation
Price level
P1
AD1
AD2
495
515
505
Real GDP (billions)
15Expansionary Fiscal Policy gtgt Interest Rate
INCREASE
- Draw Money Market
- Increase Spending (AD)gtgtIncrease Demand for
MoneygtgtIncrease Interest Rate - Higher Price LevelgtgtIncrease Demand for
MoneygtgtIncrease Interest Rate
16Expansionary Monetary Policygtgt Interest Rate
DECREASE
17MONETARY POLICY AND EQUILIBRIUM GDP
Sm1
Sm2
Investment Demand
10 8 6 0
10 8 6 0
Real rate of interest, i
Dm
Quantity of money demanded and supplied
Amount of investment, i
AS
Money Supply Increases
Interest Rate Decreases
Price level
Investment Increases
P2
P1
AD GDP Increases with slight inflation
AD2
AD1
Real domestic output, GDP
18MONETARY POLICY AND EQUILIBRIUM GDP
Sm1
Sm2
Sm3
Investment Demand
10 8 6 0
10 8 6 0
Real rate of interest, i
Dm
Quantity of money demanded and supplied
Amount of investment, i
AS
More Money Supply
P3
Lower Interest Rates
Price level
More Investment
P2
P1
Still higher AD GDP with significant inflation
AD2
AD3
AD1
Real domestic output, GDP
19MULTIPLIER(S) CONFUSION
20Income (Spending) Multiplier
- Multiplier 1/ 1 MPC or 1/ MPS
- Initial Change in Spending X MULTIPLIER
Change in Output
21MONEY MULTIPLIER
- 1 / Required Reserve Ratio
- Maximum Multiple Money Expansion
22MULTIPLE DEPOSIT EXPANSION PROCESS
400.00
Total amount of money created by the banking
system
23Balanced Budget Multiplier 1(Net Result on
GDP)
24Remembering the difference between the Amount of
Money Created and theChange in the Money
Supplywhen dealing with the Money Multiplier
andMoney Creation
25FEDERAL RESERVE PURCHASE OF BONDS
New reserves
200 Required reserves
Purchase of a 1000 bond from a bank...
800 Excess Reserves
1000 Initial Deposit
4000 Bank System Lending
Total Increase in Money Supply (5000)
26Confusing Comparative AdvantageCalculations
27Remembering the difference between Real
andNominal
28Nominalwith InflationRealwithout Inflation
29GDP
- Nominal GDP GDP measured in terms of current
Price Level at the time of measurement.
(Unadjusted for inflation)
- Real GDP GDP adjusted for inflation GDP in a
year divided by a GDP deflator (Price Index) for
that year
30INCOME
- NOMINAL INCOME number of dollars received by an
individual or group for its resources during some
period of time
- REAL INCOME amount of goods and services which
can be purchased with nominal income during some
period of time nominal income adjusted for
inflation
31INTEREST RATE (I)
- NOMINAL I interest rate expressed in terms of
annual amounts currently charged for interest
not adjusted for inflation
- REAL I interest rate expressed in dollars of
constant value (adjusted for Inflation) and equal
to the NOMINAL I minus the EXPECTED RATE OF
INFLATION
32ANTICIPATED INFLATION
Inflation Premium
Nominal Interest Rate
Real Interest Rate
33WAGES
- NOMINAL WAGES amount of money received by a
worker per unit of time (hour, day, etc.) - Money Wage
- REAL WAGES amount of goods and sevices a worker
can purchase with their NOMINAL WAGE purchasing
power of the nominal wage. - (Real Nominal Inflation rate)
34NOMINAL/REAL TIPs
- If nominal rates INCREASE and Price Level
INCREASE, the CHANGE in Real is
indeterminable. - If nominal Wage rates do NOT change and Price
Level fall. REAL WAGES increase. - NOMINAL RATES PIGGY-BACK REAL RATES NOT VICE
VERSA.
35Confusing calculationsusing MPC / MPSto
determine changes necessary to correct
Recessionary andInflationary Gaps
36FULL-EMPLOYMENT GDP
Recessionary Gap
AE0
530 510 490
AE1
Recessionary Gap 5 Billion
Aggregate Expenditures (billions of dollars)
Full Employment
o
490 510 530
Real domestic product, GDP (billions of dollars)
37FULL-EMPLOYMENT GDP
Inflationary Gap
AE2
Inflationary Gap 5 Billion
AE0
530 510 490
Aggregate Expenditures (billions of dollars)
Full Employment
o
490 510 530
Real domestic product, GDP (billions of dollars)
38Demand-Pull Inflationvs.Cost-Push Inflation
39DEMAND-PULL INFLATION
ASLR
AS2
AS1
c
P3
Price Level
b
P2
a
P1
AD2
AD1
o
Q1
Real domestic output
40COST-PUSH INFLATION
Occurs when short-run AS shifts left
ASLR
AS2
AS1
Price Level
b
P2
a
P1
AD1
o
Q2
Q1
Real domestic output
41COST-PUSH INFLATION
Government response with increased AD
ASLR
AS2
AS1
Even higher price levels
c
P3
Price Level
b
P2
a
P1
AD2
AD1
o
Q2
Q1
Real domestic output
42COST-PUSH INFLATION
If government allows a recession to occur
ASLR
AS2
AS1
Price Level
b
P2
a
P1
AD1
o
Q2
Q1
Real domestic output
43COST-PUSH INFLATION
If government allows a recession to occur
ASLR
AS2
AS1
Nominal wages fall AS returns to its
original location
Price Level
b
P2
a
P1
AD1
o
Q2
Q1
Real domestic output
44Phillips Curvevs.Laffer Curve
45THE PHILLIPS CURVE CONCEPT
7 6 5 4 3 2 1 0
As inflation declines...
Unemployment increases
Annual rate of inflation (percent)
1 2 3 4 5 6 7
Unemployment rate (percent)
46THE LAFFER CURVE
100
Tax rate (percent)
l
0
Tax revenue (dollars)
47THE LAFFER CURVE
100
Tax rate (percent)
m
l
0
Tax revenue (dollars)
48THE LAFFER CURVE
100
n
Tax rate (percent)
m
l
0
Tax revenue (dollars)
49THE LAFFER CURVE
100
n
Tax rate (percent)
m
m
Maximum Tax Revenue
l
0
Tax revenue (dollars)