Transcript AP macro Review- Final Exam

“Econ, econ,
let me tell you
about econ!!!”
The Circular-Flow Diagram
Resource Market
Labor
1
$
2
$
Which Flow Represents?
4 A. Goods/services?
3 B. Consumer expenditures?
1 C. Land, labor, capital and
.
Businesses
2
$
entrepreneurial ability?
D. Rent, wages, interest,
and profits?
Fuzzy Wuzzy
3
4
Product Market
$
Households
Product Market
“Gangsta” cars
1
2
Which flow represents?
2 A. Consumer expenditures?
1 B. Goods and services?
4 C. Land, labor, capital, and
.
Households
entrepreneurial ability?
3 D. Rent, wages, interest,
and profits?
Labor for
3
“Gangsta Cars”
4
Resource Market
Businesses
Chrysler Plant
Businesses
Comparative and Absolute Advantage
Haiti
Coffee
Haiti’s DCC
4 C 100
1B = __
1/4 B = 1C
__
80
can produce at a lower productive opportunity cost]
“A prisoner of
my own PPC.”
90
Coffee
[Comparative Advantage
Cuba
“I can consume
only on my PPC.”
Cuba’s DCC
6 C
1B = __
1/6 B = 1C
__
Terms of Trade
5 coffees
1 bread = __
World CC
5 Coffees
1 Bread=__
1/__
5 Bread=1 Coffee
0 Bread 15 18
20
“Trade is the free lunch of economics.”
o
Bread
1. (Haiti/Cuba) has an absolute advantage in coffee and (Haiti/Cuba) has an
absolute advantage in bread.
2. Haiti will export (bread/coffee) [comparative advantage] and import (bread/coffee).
[comparative disadvantage] & Cuba will export (bread/coffee) & import (bread/coffee).
3. Mutually advantageous trade can occur between Haiti & Cuba when 1 bread is exchanged
for (3/5/7) tons of coffee. Production in both is subject to (increasing/constant) opportunity costs.
“Export” what it can produce at a lower relative price and “import” goods it can buy at a lower relative price.
Absolute Advantage - more efficient, can produce more with the “Do what you do best
same number of inputs [who can do the most in absolute numbers] & trade for the rest.”
The countries of:
“Fuzzy” and “Wuzzy”
Fuzzy
A
B
CC D E F DCC: Fuzzy Wuzzy A B
D E F DCC: Wuzzy
B C
5 P
2500 1500 1000 500 0 1G = __
Plums 1500 1200 900
3 P Plums 3500
1G = __
900 600 300 0 1G
35002500
1/5 G = 1P
150 300 450 575 700__
1/3 G= 1P Grapes
1P
Grapes 0 100 200
0 150
200 300 400 500
500__
Terms of Trade
1
Grape = 4
__ Plums
11. In Wuzzy, the opportunity cost of 1 grape is (1/2/3/4/5) plums.
12. Fuzzy has a comparative advantage in & should produce (plums/grapes).
13. The terms of trade will be 1 grape for somewhere between (3&5/2&6) plums.
14. Assume that if Fuzzy did not specialize it would produce combo “C” and if Wuzzy
did not specialize it would produce combo “B”. The gains from specialization
and trade are: (0/100/150) plums and (0/100/150) grapes.
[lower # of hours gives absolute advantage]
Fish
Wheat
Djibouti
10 hours
20 hours
DCC: Djibouti
2
1W =__F
1W
___
1/2 W=1F
Canada
Fish 20 hours
Wheat 60 hours
DCC: Canada
3 F
1 W = __
___W
= 1F
1/3
Terms of Trade:
1 Wheat = 2
__
.5 Fish
27. (Djibouti/Canada) has an absolute advantage in both commodities.
(Djibouti/Canada) has a comparative advantage in producing wheat.
28. (Djibouti/Canada) has an absolute disadvantage in both, but a
comparative advantage in fish.
29. Advantageous trade can occur between the two when
1 wheat is exchanged for (1/2.5/3) fish.
We are going to turn inputs into outputs.
In 20 hours, Djibouti can produce an output of 1 wheat or 2 fish.
In 60 hours, Canada can produce an output of 1 wheat or 3 fish.
Absolute Advantage [Outputs v. Inputs]
Remember that with outputs or quantity, the larger
number indicates absolute advantage; that country
can produce absolutely more from the same inputs,
and is more efficient.
Product
Market
And with inputs (hours), the smaller number indicates absolute
advantage; that country is more efficient because it can produce
a good absolutely faster than the other with the same inputs.
Resource
Market
2nd Most Missed Question On 95 AP Exam [26% correct]
Country
Food
Clothing
Ducky
20 hours
50 hours
Wucky
10 hours
20 hours
Wucky
Ducky
a. Ducky has a comparative advantage in the production
of both food and clothing.
b. Wucky has a comparative advantage in the production
of both food and clothing.
c. Ducky has a comparative advantage in food production, &
Wucky has a comparative advantage in clothing production.
d. Ducky has a comparative advantage in clothing production,
& Wucky has a comparative advantage in food production.
e. Neither country has a comparative advantage in the
production of either good.
Country
Food
Clothing
Ducky 20 hrs 50 hrs
1C = 2.5F; .4C = 1F
1C = 2F;
Wucky 10 hrs 20 hrs
1C
.5C = 1F
Terms of Trade might be 1C = 2.2F
Output v. Input Comparative and Absolute Advantage
Wabbit
Rabbit
1G=3B
1/3 G=1B Rabbit Wabbit
1G=2B
1/2 G=1B
Wabbit
Rabbit
1B=3G
1/3 B=1G Rabbit
Wabbit
1B=2G
1/2 B=1G
Terms of Trade: 1G = 2.5 B
Product Market [outputs]
Country Guns Butter
Rabbit
40 units 120 units
Wabbit
20 units
40 units
Terms of Trade: 1B = 2.5 G
Resource Market [inputs]
Country Guns Butter
Rabbit
40 hours 120 hours
Wabbit
20 hours
40 hours
What country has an absolute
advantage in guns? Rabbit
Why does Rabbit have an
absolute advantage in guns?
What country has an absolute
advantage in guns?Wabbit
Why does Wabbit have an
absolute advantage in guns?
Wabbit can produce guns
absolutely faster than Rabbit
Rabbit can produce absolutely
more guns than Wabbit
[40 units v. 20 units]
What country has a
comparative
advantage in guns?
Wabbit
Wabbit can produce guns at a lower
opportunity cost [2 butters v. 3 butters]
[20 hours v. 40 hours]
What country has a
comparative
advantage in guns? Rabbit
“Let’s change inputs into outputs.”
Rabbit can produce guns at a lower
opportunity cost [1/3 butter v. 1/2 butter]
Increase in U.S. Growth Rate (Y)
[We buy more from Japan appreciating
the yen and depreciating the dollar]
D1
Price of
$1.50
$1.00
D2
S
D
“Booming” Economy
AS
AD2
AD1
YR
Y*
Quantity of
A
“We want more
Japanese cars,
computers, DVD
Players, digital
cameras, and
camcorders.”
Decrease in U.S. Growth Rate (Y)
Recessionary Economy
AS [We buy less from Japan
AD1
depreciating the yen and
AD2
PL
appreciating the dollar]
YR Y*
Price of
$1.00
$.50
D1
A
D2
D
Quantity of
S
“Five million of us
have lost our jobs.
We can’t buy as many
American or
Japanese products.”
Appreciation of the Dollar
Increase in taste for U.S. goods
Increase in U.S. Interest Rates
Decrease in U.S. Growth Rate
The Market for Dollars
Decrease in U.S. Price Level
Yen Price of Dollar
Exchange Rate: $1 = ¥100
P
Decrease in U.S. Currency Price
D1$
Y looking for $’s
Y150
Y100
S$
D2
$’s looking for Y
E2
D
A
Yen
depreciates
E1
Yen
appreciates
Y50
E3
D3
Depreciation of $
Decrease in Taste 0
Decrease in In. Rates
Increase Growth Rate
Increase Price Level
Increase in Currency Price
D
Q
A
Quantity
E of Dollars
1. Increase in taste
[more demand for a country’s products or assets]
2. Increase in interest rates
[Overseas investors increase their investments there.]
3. Decrease in price level
[overseas buyers want to buy our cheaper goods.]
4. Decrease in growth rate
[A country’s declining economy results
in them buying less from other countries;
decreasing demand for their currency
and thus appreciating the declining
economy’s currency]
5. Decrease in the price of a currency
relative to the other
1. If Japan buys 2 million more American cars
the dollar would (appreciate/depreciate) and our
imports from Japan would (increase/decrease).
2. If U.S. interest rates are increasing faster than
Japan’s, the dollar would (appreciate/depreciate) &
and our exports would (increase/decrease).
3. If prices are dropping more in Japan than in
the U.S., the yen will (appreciate/depreciate) and
Japan’s imports will (increase/decrease).
4. If the U.S. growth rate is faster than that of Japan,
the dollar will (appreciate/depreciate) and U.S.
imports from Japan will (increase/decrease).
5. If the dollar price of the yen decreases, the
dollar has (appreciated/depreciated) and our our
imports from Japan will (increase/decrease).
Real GDP = Nominal GDP/Index x 100
$9,299.2[1999]/104.77[1996] x 100 = $8,875.8 [So, +$1,062.6]
“Real GDP deflates nominal GDP to actual value” [takes the air out of the nominal balloon]
$5,250.8
$3,774.7
$5,671.8
3,492 117.0 x100=$_____
4,839 108.1 x 100=$_____
108.5 x 100=$_____
4,848
Figuring Inflation
[Change/Original x 100 = inflation]
(2000-later year)
(1999-earlier year)
Current year’s index – last year’s index
172.2-166.6(5.6)
C.P.I. = Last year’s index(1999-earlier year) x 100; 166.6
x100 = 3.4%
130.7-124.0(6.7)
116-120(-4)
333-300(33)
11%
-3.3%
5.4% 120 x 100 = ____
124.0 x 100 = ____
300 x 100 = ____
AD/AS Primer - No Recessionary/Inflationary Gap
AS
AD
Unemployment
3%
1. Frictional
a. quit for better job
b. fired
c. graduated
d. seasonal
2. Structural
[“technological”]
replaced by
6% [Frictional+Struc.]machinery
Real GDP
3. Cyclical
Y*F
downturn in
YP
business cycle
YA
[“real unemployment.”]
$10 tr.
E – No INFLATIONARY or RECESSIONARY GAP [Y*]
Potential output[$10 tr.] equals actual output[$10 tr.]
Actual unempl. rate[6%] equals potential unempl. rate[6%]
AD/AS Primer - Recessionary Gap
AS
AD
AD2
3%
1%
5% Cyclical(“real”) Unempl. 11%
10%[5%x2=10%] Negative Gap
YR
YA
$9 Tr.
6% [Frictional+Struc.]
Y*F
Arthur Okun
YP [Okun’s Law]
YA [GDP Gap = unemployment rate over 6% x 2]
$10 tr.
E2 Recessionary Gap(YR)
Potential output ($10) exceeds actual output($9).
Actual unemploy. rate(11%) exceeds Potential unemp. rate(6%).
Unemployment [Let’s say that Nominal GDP is $300 billion.]
Rate
1.
2.
3.
4.
3
6 %; output forgone is18
9%; real unemployment is __%;
% gap is ___
___ billion.
11%; real unemployment is 5
__%; % gap is 10
___ %; output forgone is30
___ billion.
19%; real unemployment is13
__%; % gap is 26
___ %; output forgone is 78
___ billion.
14%; real unemployment is __%;
% gap is ___
8
16 %; output forgone is ___
48 billion.
1. Frictional – short term
a. Fired
b. Graduate
[but looking for a job]
c. Quit or
“No job yet”
d. Seasonal
2. Structural – “technological”, long-term unemployment.
“These jobs are never coming back.”
Slide Rule makers
3. Cyclical – mainly durable goods jobs that decline due to
deficient AD [downturn in the business cycle].
“These jobs do come back.”
ME = 1/MPS,
1/.25 = $1/.25 = M of 4
(billions of dollars)
M is 4 & we are short of Y*[$500] by $40 billion
AE[C+Ig+G]
Equilibrium
AE[C+Ig]
AE[C+Ig+G]
G = $10 Billion
+40
Recess. Spending gap
o
Recess. GDP Gap
45
o
Recess. Gap
460
Yr
500
Y*
“M” =
Real GDP
Y/ E = 40/10 = 4
ME = 1/MPS, 1/.50 = $1/.50 = ME of 2
ME is 2 & we are beyond Y*[$840] by $40 billion
AE [C+Ig+G]
AE[C+Ig+G]
(billions of dollars)
2 x -? = -40
o
AE[C+Ig-G]
Equilibrium
Inflationary Spending
gap=$20 B
-40
45
o
Inflat. Gap
840
Y*
880 Real GDP
YI
Inflationary GDP Gap
The ME, MT, & MBB Multipliers
ME[G, Ig, or Xn] = 1/MPS = 1/.25 = 4
So, G increase of $20 bil. will incr Y by $80 bil. [$20x4=$80]
And a G decrease of $20 bil. will decrease Y by $80 bil. [-$20x4=-$80 bil.]
MT = MPC/MPS = .75/.25 = 3
So, T decrease of $20 bil. will incr Y by $60 bil. [$20 x 3=$60]
And a T increase of $20 bil. will decr Y by $60 bil. [-$20x3=-$60]
MBB = 1
So, an increase in G&T of $20 bil. will incr Y by $20 bil. [$20x1=$20]
And a decrease in G&T
of $20 bil. will decr Y by $20 bil.[-$20x1=-$20]
Any increase in expenditures x the M will increase GDP.
Any decrease in expenditures x the M will decrease GDP.
ME [Change in G, Ig, or Xn] = 1/MPS
MPC
.90
.80
.75
.60
.50
1/MPS
1/.10
1/.20
1/.25
1/.40
1/.50
=
ME
= 10
=
5
=
4
= 2.5
=
2
Reasons why the “Simple Multiplier” is not as strong as indicated.
1. Some spending will be on imports, reducing the size of the M.
2. It ignores PL changes which reduce the multiplier.
3. It ignores taxes which reduce the multiplier
MT [Change in Taxes] = MPC/MPS
MPC
.90
.80
.75
.60
.50
= MT
MPC/.10 =
9
MPC/.20 =
4
MPC/.25 =
3
MPC/.40 = 1.5
MPC/.50 =
1
MPC/MPS
When the G gives a tax cut, the MT is smaller than the ME
because a fraction [MPS] is saved and only the MPC is
initially spent. So, the MT = MPC/MPS.
Review Of The AE Graphs
in Chapters 9-12
AE[C + Ig]
(billions of dollars)
Equilibrium GDP after $20 bil. Ig [MPC=.75]
AE[C+Ig] [“Basic” or “Simple” economy]
S
$530
Private Closed
510
C + Ig
Consumption
490
Equilibrium
470
Ig = $20 Billion
450
430
410
C =$450 Billion
390
370
45
o
o
+80
390 410 430 450 470 490 510 530 550
Real domestic product, GDP (billions of dollars)
370
Equilibrium GDP after X of $10 & M of $10
AE [C+Ig+Xn] (billions of dollars)
(C[450] + Ig[20] +M[10] + X[10] = GDP[470])
$530
Private
Open
S
C + Ig+Xn
Consumption
510
490
Equilibrium
470
Ig = $20 Billion
450
430
410
C = $450 Billion
390
370
o
45
o
370
390 410 430 450 470 490 510 530 550
Real domestic product, GDP (billions of dollars)
ADDING THE PUBLIC SECTOR[“G”]
$20 bil. on National Defense
Private-public - ROW
Mixed - Open
Aggregate Expenditures (billions of dollars)
$20 Billion Government Purchases and Equilibrium GDP
S
Government
Spending of
$20 Billion
C + Ig + Xn + G
C + Ig + Xn
Consumption
Increases Y by $80
[$20 x 4 = $80]
o
45
o
390
470
550
Real domestic product, GDP (billions of dollars)
ADDING THE PUBLIC SECTOR[“ G”]
Incr. T by $20 bil.[MT = 3] Equilibrium GDP[-60]
S
$20 bil. incr in T
Mixed-Open
Aggregate Expenditures (billions of
dollars)
C + Ig + Xn + G
o
Ca + Ig + Xn + G
-20 x 3 = -$60
45
o
490
550
Real domestic product, GDP (billions of dollars)
INSTRUCTIONS FOR THE NEXT FOUR AE SLIDES
1.
We will start at $500 equilibrium GDP on each.
Inflationary spending gap
2. Of the three items (equilibrium GDP, change
in expenditures, and MPC), you will be given
two and if you know two you can always figure
out the 3rd. For instance if you knew that
equilibrium GDP increased by $400 and the
multiplier was 4, then the change in expenditures
was obviously $100.
AE2
AE
Recessionary spending gap
E2
AE1
E1
AE3
E3
500
Recessionary Inflationary
GDP gap
GDP gap
3. Except for 6, 9, 15, & 18, you will increase
equilibrium GDP above $500, because there
is an increase in G, or a decrease in T, or
an equal increase in G&T.
Ex: With MPC of .75 & therefore a ME of 4,
an increase in G of $20 means $20 x 4 = $580
4. On questions 6, 9, 15, & 18, you will decrease equilibrium
GDP below $500 because you are either decreasing G,
increasing T, or there is an equal decrease in G & T.
Ex: With MPC of .75 & therefore a ME of 4, a decrease
in G of $20 means -$20 x 4 = $420.
The Multiplier & Equilibrium GDP
[Give the correct equilibrium GDP [start from $500] using the ME, MT, MBB]
MBB = 1 [G&T ]
ME=1/MPS [chg in G, Xg, or Xn]
Inflationary
Spending gap
AE
E2
E1
Chg in
Equilibrium GDP
MPC
[So MPS &
ME, MT, & MBB]
Change in
Expenditures
[+G] 1. ME = ____
560
[-T]
2. MT = ____
548
[+G&T] 3. MBB =____
512
1
60 Y with ME
____
48
____Y with MT
12
____Y with MBB
$12
.80
ME__
5
4
MT___
MBB1
___
ME’s
[G,Ig,Xn]
MPC M
.90 = 20
.87.5= 8
.80 = 5
.75 = 4
.60 =2.5
.50 = 2
MT = MPC/MPS [Chg in T ]
540
[+G] 1. ME = ____
S
[-T]
2. MT = ____
520
AE1
520
AE2 [+G&T] 3. MBB =____
AE3
E3
40
___ Y with ME
20 with MT
____Y
20 with MBB
____Y
45°
Recessionary $500
Spending gap
$20
MT’s
700
[+G] 1. ME = ____
[-T]
2. MT = ____
650 MPC M
[+G&T] 3. MBB =____
550 .90 = 19
.87.5= 7
.80 = 4
.75 = 3
$200 Y with ME
150
_____Y with MT
.60 =1.5
_____Y
with
M
BB
50
.50 = 1
2
$50
.75
4
ME__
3
MT___
1
MBB___
.50
2
ME__
1
MT___
MBB___
1
[+G] 1. ME = ____
600
[-T]
2. MT = ____
590
510
[+G&T] 3. MBB =____
3
$100 Y with ME
90
___Y with MT
10 with MBB
___Y
$10
__
.9 ME10
9
?
MT___
1
MBB___
[+G] 1. ME = ____
550
[-T]
2. MT = ____
530
[+G&T] 3. MBB =____
520
4
___ Y with ME
50
____Y
30 with MT
____Y
20 with MBB
$20
ME__
2.5
MT___
1.5
1
MBB___
[+G] 1. ME = ____
575
[-T]
2. MT = ____
560
[+G&T] 3. MBB =____
515
7
$15
___
75 Y with ME
____Y
60 with MT
15 with MBB
____Y
ME__
5
MT___
4
MBB___
1
[+G] 1. ME = ____
600
[-T]
2. MT = 550
____
[+G&T] 3. MBB =____
550
5
100
___ Y with ME
50 with MT
____Y
____Y with MBB
50
ME__
2
MT___
1
MBB___
1
$50
[+G] 1. ME = ____
900
[-T]
2. MT = 800
____
[+G&T] 3. MBB =____
600
8
___
400 Y with ME
____Y with MT
300
____Y with MBB
100
$100
ME__
4
MT___
3
1
MBB___
[-G] 1. ME = 460
___
465
[+T] 2. MT =___
[-G&T]3.MBB=___
495
6
-40
___ Y with ME
-35
____Y with MT
____Y
-5 with MBB
-$5
ME__
8
7
MT___
MBB___
1
[-G] 1. ME =___
300
[+T] 2. MT =___
320
[-G&T]3.MBB=___
480
9
-200
___ Y with ME
____Y with MT
-180
____Y with MBB
-20
-$20
ME__
10
MT___
9
MBB___
1
AE (C+Ig)
N
P
E
H
J
S
AE (C+Ig2)
AE (C+Ig1)
Consumption
G
45
0
D
C
B
A
Real GDP
AS
1. At income level “OA”, the volume of consumption is _____.
2. At income level “OA”, the volume of saving is _____.
SN
3. The “APC” is equal to “1” at income level _____.
OC
4. If Ig is Ig1, then “equilibrium GDP” is _____.
OB
5. If Ig is Ig2, then “equilibrium GDP” is _____.
OA
BA
6. If Ig increases from Ig1 to Ig2, equilibrium GDP increases by _____.
GS/BA
7. If Ig increases from Ig1 to Ig2, the “MPC” is equal to __________.
HP/CB
8. As we move from income level OC to OB, the “MPS” is ________.
9. The economy is “dissaving” at income level _____.
OD
10. Consumption will be equal to income at income level _____.
OC
1. D 2. b 3. a 4. b 5. a 6. c 7. b 8. b 9. b 10. b
The AE Quiz
1.The economy is dissaving
at a. OK b. OQ c. OM d. ON
2. Aggregate saving will be
Hard Quiz
$200
zero where GDP is
a. $200 b. $400 c. $600
3. At AE1, savings totals
a. $300 b. $700 c. $1,000
4. If the FE GDP is OL & we
are at AE3 the inflationary
gap is a. BC b. AB c. CD
5. If the FE GDP is OL & we are at AE1 we can conclude that at
the FE GDP: a. “S” exceeds Ig by GF b. Ig exceeds “S” by GF
6. Moving from J to H, the MPC is: a. FE/KL b. IP/OK c. IP/QK
7. A movement from AE2 to AE3 would be caused by a(an)
_______ of the dollar? A. appreciation b. depreciation
8. If the FE GDP is OL & we are at AE1 the recessionary gap is:
a. AB
b. BC
c. CD
9. Consumption is equal to GDP at: a. 200 b. $400 c. $600
10. At AE1($1,000 GDP), G increases G&T by $100 billion. With
a “M” of 2, GDP increases to: a. $1,000 b. $1,100 c. $1,200
[Incr G; Decr T]
PL
AD2 LRAS
AD1
Start from a
Balanced Budget
G & T = $2 Trillion
$2
T
G
$2 T PL2
T
SRAS
“I can’t
get a job.”
PL1
E1
E2
YR YF
G
T
AD
DI
Y/Empl./PL;
C
“Now, this is better.”
AD
Real
GDP
G
Y/Emp/PL; T
LFM
LFM
I.R.
IR
[Decr G; Incr T to close a contractionary gap]
PL
SRA
LRAS
AD S
Start from a
Balanced Budget
G & T = $2 Trillion
2
PL1
$2T
G
E1
$2T PL
2
T
E2
AD1
YF YI Real
[like we have
“money trees”]
GDP
G
T
Y/Empl./PL;
AD
DI
C
AD
LFM
G
Y/Emp/PL;
T
LFM
I.R.
IR
[Inverse]
Macro Law of Demand
[Law of AD]
Price Level Change
AD
Point to Point Movements
PL1
PL2
PL
AQD
AQD1
AQD2
Macro Law of Demand
[cause]
[effect]
PL decr; AQD incr.
PL incr; AQD decr.
“AD” refers to whole curve.
“AQD” is a pt on the curve
based on a particular PL.
Reasons For Downsloping “AD” Curve
AD[if PL decreases, this happens]
1. Interest Rate Effect – more Ig
2. Real-balance Effect – more “C”
3. Foreign Purchase Effect - foreigners buy more
PL1
Change in AQD
PL
AQD
1. Price Level change
2. Movement [up or down
the AD curve
3. Pt to pt [along the AD curve]
PL2
Inverse
relationship
2
AQD
1 AQDcurve”.
“AD” refers to the
“whole
[“all PLs”]
“AQD” refers to a “point on the curve”
based on a “particular price level.”
Macro Law of Supply [DIRECT ]
[Law of AS]
PL Change, Point to Point Movement
AS
PL1
PL2
AQS2 AQS1
Price Level increases; AQS increases
Direct
Price Level decreases; AQS decreases
“AS” refers to the “whole AS curve” & refers to “all price levels”
“AQS” refers to a “point on the AS curve” & refers to a “particular price level”
Change in “AQS”
1. Price Level change
2. Movement (up/down) “AS” curve)
3. Point to point (along “AS” curve)
AS
PL2
PL1
AQS1 AQS2
Reasons For Upsloping “AS” Curve
1. There is increasing opportunity cost if firms don’t produce.
2. Current producers produce more [overtime/more shifts]
3. New producers are attracted to the market.
C
Consumption
Mariah Carey Concert
1. “Non price Level” change-either C, Ig, G, or Xn
2. “Whole AD curve” shifts
[There is a change in AQD but it is not caused by
a change in price level.]
Ig
AD1 AD2
AD3
G
PL
Let there be more
military weapons
XN
Chevy
Ferarri
[Exports-Imports]
AQD3 AQD1 AQD2 RDO
Change in AS
1. “Non price level change”. Either R,Anything
E, or P that lowers
the cost of production
2. “Whole AS curve” shifts.
shift AS right.
3. AQS changes but is not caused bywill
a change
in PL
AS Shifters(REP)
1. Resource cost
2. Environment [legal-institutional
Increase in
environment for businesses change,
the affecting
availability
of Resources
production
costs
[subsidies, bus. taxes, regulations]
3. Productivity
PL
1. Lower business taxes
2. Decrease in regulations
3.
AS3 AS1 AS2
So – AS Shifters are
REP
You save money. We don’t require
dental or medical insurance. You
don’t have to pay us a pension
and we don’t take sick days. And
– we can dance.
Increase in subsidies
Environment
[Legal-institutional]
AQS3 AQS1 AQS2
Increase in Productivity
SRAS/LRAS Question on 95 Exam
1. If AD remains constant, the equilibrium price levels in the
OB
OA
short run and in the long run will be _____
& _____?
2. If the government uses fiscal policy to get out of the
OC
recession, price level will end up at _____?
33-42 on NS
D
___33.
Decrease in the availability of key natural resources (R)?
C
___34.
Increase in resource productivity (P)?
A
___35.
Increase in foreign spending on our products (Xn)?
B
___36.
Substantial reduction in government spending (G)?
C
___37.
Declines in the prices of imported resources (R)?
B
___38.
Declines in the incomes of our trading partners (Xn)?
A
___39.
Improvement in business profit expectations (Ig)?
B
___40.
Stock market plunge affects consumer wealth (C)?
B
___41.
There is an increase in interest rates [stable prices] (C & Ig)?
A
___42.
Consumer indebtedness is very low (C)?
Extra
D
___43.
Increased government regulations are forced on businesses (A)?
C
___44.
The government increases subsidies to all farmers (A)?
Dennis Rodman deposits $1 with A 10% RR
Rodman’s
.10
RR
90 cents
Excess Reserves
Total(Actual) Reserves
One bank’s loan becomes
One Dollar another bank’s DD.
PMC = M x ER, so 10 x .90 = $9
TMS = PMC[$9] + DD[$1] = $10
[MS = currency + DD of Public]
Rodman’s Bank Borrows $1 From The Fed [10% RR]
Fed
Rodman’s Bank
0
RR
One Dollar
Excess Reserves
Total(Actual) Reserves
One Dollar
PMC = M x ER, so 10 x $1 = $10
TMS [$10] = PMC[$10]
[MS = currency + DD of public]
$1,000 DD by Katy [MS=Currency+DD of Public]
New Deposits
[New Reserves]
Bank
DD
DD Created By
New Loans
[equal to new ER]
New Required
Reserves
RR=40%
A
$1,000.00
$400.00
600.00
600.00
B
600.00
$240.00
360.00
C
360.00
$144.00
216.00
D
216.00
$86.40
129.60
PMC = ER[$800 x M[5]
PMC
$1,000.00 + $1.500.00
Katy’s DD +
PMC = $1,500.00
=
=
TMS
$2.500.00
$400 to Michael
Jackson for
dance lessons
Prom date
with Britney
Practice cigarette
cessation lessons
with Bruce Willis
Prom date
with Napoleon
Dynamite
MS grows by
multiple of 2.5
$1,000 DD by Katy
New Deposits
[New Reserves]
DD
Bank
[MS=Currency+DD of Public]
DD Created By
New Required
Reserves
New Loans
[equal to new ER]
RR=50%
A
$5,000.00 $2,500.00
2,500.00
B
2,500.00 $1,250.00
1,250.00
C
1,250.00 $625.00
625.00
D
625.00
$312.50
312.50
PMC = ER[$2,500 x M[2] PMC = $5,000.00
Katy’s DD
+
PMC
$5,000.00 + $5,000.00
=
=
Duck that
can
dance
Dance
Lessons w.
Laura Bush
Hunting with
Dick Cheney
Prom Dance
lessons with
N. Dynamite
TMS
$10,000.00
MS grows by
multiple of 2
$1,000 DD by Ann [MS=Currency+DD of Public]
New Deposits
[New Reserves]
DD
Bank
DD Created By
New Loans
[equal to new ER]
New Required
Reserves
RR=10%
A
$1,000.00
$100.00
900.00
900.00
B
900.00
$90.00
810.00
C
810.00
$81.00
729.00
D
729.00
$72.90
656.10
PMC = ER[$900] x M[10]
Ann’s
DD +
PMC
$1,000.00 + $9,000.00
=
=
Dog that can YoYo
One year “all u can
eat” hot wings at
Hooters
$729.00 for a
“cat bodyguard”
PMC =$9,000.00
TMS
Smoking cat
$10,000.00
MS grows by
multiple of 10
nominal Interest Rate
Price level
If there is a
RECESSION
MS will be
increased.
DI
MS MS2
1
8%
8
6%
6%
4%
4
0
DM
Buy
Money Market
AD
AD
1
2
0
Investment
Demand
QID1 QID2
AS
I want a job
as a Rockette
PL2
PL1
E2
E1
FEDERAL RESERVE BANK OF THE U.S.
Real GDP
Buy
Bonds
MS
YR
I.R.
Y*
QID
AD
Y/Emp/PL
Price level
If there is
INFLATION,
MS will be
decreased.
Nominal Interest Rate
“It’s cheaper
to burn money
than wood.”
10
Dm
Bonds
8%
6
6%
Sell
Money Market
AS
AD2 AD1
0
like
“money trees”
QID2 QID1
E1
PL1
PL2
MS
Investment
Demand
10%
E2
Y* YI
FEDERAL RESERVE BANK OF THE U.S.
Sell
MS2MS1
8
0
DI
I.R.
QID
AD
Y/Empl./PL
Money Supply = DD + Currency of the Public
ER
“PMC”
Loans
$100[10% RR] [1st Bank] [1st Bank]
Banks/Public DD [$100]
$90
$90
Fed /Public/Banks DD[$100]
$90
$90
“PMC”
Crea. In
“TMS”
“Potential”
System
Total MS
$900
$1,000
$900
$1,000
[*Fed buys bonds from public who put the money in their DD]
Banks/Fed
Fed Loan[$100]
$100
[or sells bonds to Fed]
ER
$100
“PMC”
Loans
$1,000
$100 [20% RR] [1st Bank] [1st Bank]
Banks/Public DD [$100]
$80
$80
Fed/Public/Banks DD [$100]
$80
$80
“PMC”
Crea. In
$1,000
“TMS”
“Potential”
System
Total MS
$400
$500
$400
$500
[*Fed buys bonds from public who put the money in their DD]
Banks/Fed
Fed Loan[$100]
$100
[or sells bonds to Fed]
$100
$500
$500
Money Creation Formulas
[MS = Currency + DD of public]
Public
Public: Student deposits $1.00 in a bank
1. RR+ER=TR; TR–RR=ER; TR–ER=RR
2. ER x MM = PMC
3. PMC + 1st DD =TMS
Fed
No Public: [Fed gives $1.00 loan to a bank]
1. RR+ER=TR; TR-RR=ER; TR-ER=RR
2. ER x MM = PMC & TMS
MS = Currency + DD of PUBLIC
RR is 25%
Assets
DD (Liabilities)
TR[RR+ER]=$25 mil. $100 million
1. How much can this bank loan out? $______
0
2. If Pam Anderson puts $4,000 in this
bank(DD),ER will increase by $_______.
3,000
12,000
3. Possible Money Creation in the system could be $_______.
16,000
4. Potential Total Money Supply could be as much as $________.
TR 11-14 MS = Currency + DD of PUBLIC
RR is 20% Assets
DD(Liabilities)
TR[RR+ER] = $20 mil. $100 million
11. How much can Pam’s bank loan out? $______
0
12. If Pam Anderson’s Bank borrows $1,000 from the Fed
ER will increase by $1,000
_______.
Pam Anderson’s Bank
Fed
5,000
13. Possible Money Creation in the system could be $_______.
5,000
14. Potential Total Money Supply could be as much as $________.
Extra Practice MS = Currency + DD of PUBLIC
RR is 40% Assets
DD (Liabilities)
TR[RR+ER]=$40 mil. $100 million
1. How much can this bank loan out? $______
0
2. If Cameron Diaz puts $10,000 in this bank(DD),
6,000
ER will increase by $_________.
15,000
3. Possible Money Creation in the system could be $________.
25,000
4. Potential Total Money Supply could be as much as $_________.
Quiz 4
Commercial Bank Fed Public
1. RR are 40% & there are no ER in the Pineda Bank. Matt
deposits (DD) $50.00 there. This one bank can increase
its loans by a maximum of $______.
$30.00
2. RR are 50%; the Llewellyn Bank borrows $80,000 from the Fed.
This one bank can increase its loans by a maximum of $___.
80,000
3. RR are 50%; the Fed buys $10,000 of securities from the Public.
Potential Money Creation in the banking system could be $____.
10,000
4. The Thibodaux Bank has DD of $20 million;
RR are 40%; RR & ER are equal. TR are $_____.
16 M
5. The Venable Bank, with no ER, borrows $20 M from the Fed.
40 M
With a RR of 50%, PMC in the banking system could be $___.
6. RR are 40%; the Fed buys $100 M of securities from the Public.
150 M
Potential Money Creation in the banking system could be $____.
7. RR are 50%; the Cornell Bank borrows $100 M from the Fed;
100 M
this single bank’s ER are increased by $_______.
8. RR are 50%; Fed buys $10 billion of securities from the Public.
20 M
Potential Total Money Supply (TMS) could be as much as $____.
9. The RR is 40% & the Fed buys $50 M of bonds from a bank.
125 M
Potential Money Creation in the banking system is $_____.
48.00
10. No ER in a bank & RR is 25%. DD of $16 is made. PMC is $____
Monetarist View of Transmission Mechanism v. Keynesian View
DI(K) Investment
MS1 MS
10
2
10%
8%
6%
0
AD2(M)
A
AD
AD1
2
S
Demand
DI(M)
8%
Dm(K)
PL2
PL
PL2
1
6%
Dm(M)
Money Market
0
Dm is more inelastic
[I.R. more sensitive]
QID1 QID2
DI is more
(K)
QID2
elastic
[or more responsive]
YR Y*YI
Mainly, we end up just
getting inflation.
Keynesian view is that DI is rather steep so monetary
AD2 AS
AD1
policy is not that strong. Fiscal policy is “top banana.”
Also, the Keynesians don’t think the lower interest rate
is as important as “profit expectations.”
Extending the Analysis of AS[SRAS] to the LR[LRAS]
[when PL changes are unanticipated]
SR – output prices
LRASAS3 AS1
increase but input prices
[wages] remain fixed
AD1 AD2
in the presence of
unanticipated inflation.
6%
3%
LR
E3
.
There is an unanticipated
increase in AD and PL.
E2
E1
- both output prices
and input (wages)
prices increase.
With more profits, firms work
their workers overtime, and
entice others like homemakers
& retirees, and hire and train
the structurally unemployed.
5%
3%
You’re crazy if you think
we’re going to accept 3%
wage increases while
prices are going up 6%.
LRAS
Price Level
Lower PL reduces nominal wages & shifts SRAS right.
LRAS
SRAS1
AD1
SRAS3
PL1[3%]
AD2
PL1[1%]
The LRAS Shifters are the same
things that shift the PPC out –
more or better Resources
[land, labor, capital,
o or
entrepreneurial ability]
better technology
E1
E2
E3
Y & employment
decreased in the
SR but not the LR.
Recessionary
Gap
9%
5%
Real domestic output
GROWTH IN THE AD-AS MODEL
Economic Growth
1. Increase in resources LRAS1 LRAS2
c
2. Better resource quality -
3. Technological
advances -
Price Level
Capital Goods
a
U
b
Consumer Goods
d
Y1 Y2
Real GDP
Adaptive expectations view - SRPC & LRPC
There is a SRPC [output prices are changing] and a LRPC
[output & input prices chg after unanticipated inflation or disinflation]
LRPC - when unemployment = the natural rate and there is
no tendency for PL to be incr/decr. PL is stable & contracts reflect it.
LRPC
My salary just
isn’t keeping up.
Let’s say that inflation
has averaged 3% for three
years. 3% is anticipated.
15%
SRPC3
Wow, my raise exceeds inflation.
12%
But my raise
was only 6%.
SRPC2
9%
b3
a3
b2
SRPC1
a2
6%
But my salary went up
by only 3%.
3%
0
But when it comes time to sign
a new contract, his boss says …
It can’t get any better.
My raises exceed inflation.
c3
b1
a1
c2
Inflat.
Gap
2%
4%
Recess.
Gap
6%
Let’s say that inflation
has averaged 9% for
the past few years.
9% is anticipated.
C1
8%
10%
“Let me do the
praying this time.
The lord is my …”
The End
A
___2.
What is given up when moving from "C" to "D"?
a. capital goods
b. consumer goods
C
___3.
Which will not cause a "Change in Aggregate Demand" ?
a. increase in consumption
c. change in the price level
Capital Goods
C
___1.
At what point would there be the most economic growth
in the future if a country were producing there now?
C
B
D
A
E
Consumer Goods
D
b. decrease in “G” spending on the military
d. depreciation of the dollar
B
___4.
A depreciation of the dollar would shift the AD curve to the?
a. left
b. right
E
A
___5.
A depreciation of the dollar would shift the AS curve to the:
a. left
b. right
D
___6.
The aggregate supply curve would shift to the right if:
a. consumption increased
b. businesses taxes increased
c. price level increased
d. productivity increased
C
___7.
An increase in AD could be caused by:
a. appreciation of the dollar.
b. businesses taxes increased
c. increase in incomes of our trading partners d. productivity decreased
C
___8.
Unemployment is 18%. Nominal GDP is $300 billion. Real (cyclical) unemployment is
___%, & the GDP output gap being forgone is ____.
a. 10%; $24 billion
b. 24%; $48 billion
c. 12%; $72 billion
___9.
If our price level is increasing faster than that of Djibouti, the Djiboutin franc will
D
(appreciate/depreciate) and their exports to the U.S. will (increase/decrease).
a. appreciate/increase b. depreciate/decrease
c. depreciate/increase d. appreciate/decrease
___10.
If the dollar price of the euro increases, then the dollar
B
(appreciates/depreciates) and European exports to the U.S. will (increase/decrease).
a. appreciate/increase b. depreciate/decrease
c. depreciate/increase d. appreciate/decrease
___11.
Monetary policy (change the RR, DR, & buying/selling bonds) during a depression
B
would be more effective if you?
A. raise, raise, sell
B. lower, lower, buy
B
___l2.
During a recession, an easy money policy means (buy/sell) bonds, which (incr/decr)
the MS, which (incr/decr) the I.R., which (incr/decr) investment, which (incr/decr) GDP.
a. sell/incr/decr/incr/incr b. buy/incr/decr/incr/incr
___l3.
RR is 20%; Fed buys $50 million of bonds from the Public. The MS is increased
B
by _____? Possible money creation in the banking system is ________?
a. $40 mil, $200 mil b. $50 mil, $200 mil c. $50 mil, $250 mil
B
___l4.
Suppose the Lynch Bank has ER of $20,000 and DD of $100,000. If the RR is 40%
what is the TR?
a. $40,000 b. $60,000 c. $80,000 d. $120,000
___l5.
Assume the RR is 20% & the Lynch Bank borrows $100,000 from the Fed. As a result
B
this one bank's ER are increased by _____? And PMC in the banking system is _____?
a. $80,000, $500,000 b. $100,000, $500,000 c. $80,000, $400,000
B
___l6.
If nominal GDP is $100 billion & unemployment is 12%, then the GDP output gap
being foregone is: a. $6 billion b. $12 billion c. $18 billion
___l7.
A decrease in price level will cause:
C
a. increase in AD b. decrease in AS c. decease in AQS D. decrease in AQD
C
___l8.
The real money-balance effect indicates that a higher price level will (increase/decrease)
the real value of assets and cause a(n) (increase/decrease) in consumption which would
a. (increase/increase/increase) b. decrease/increase/increase c. decrease/decrease/decrease
A
___l9.
Which of the following will cause an increase in AQS?
a. increase in PL
b. decrease in resource cost
c. decrease in business taxes
B
___20.
Which of the following will not shift the aggregate supply curve?
a. depreciation of the dollar b. increase in the PL
Apples
Plums
Apples
60
A
0
60
B
20
40
C
40
20
Spain’s PPF
0 Plums 60
D DCC:Spain China
60 1P = _
Apples
1A
0
Plums
Terms of Trade
1Plum = _______
2.5 Apples
A
0
15
B
C
20 40
10 5
60
D DCC:China
60 1P = _4 A
0 1/4
/ P=1A
China’s PPF
Apples
Spain
c. increase in resource cost
0 P 15
21. In China, the opportunity of cost of 1 ton of plums is (1/3/4/5) tons of apples.
22. Spain has an absolute advantage in (apples/plums).
23. If trade occurs, Spain will export (apples/plums) & China will export (apples/plums).
24. For Spain, the opportunity cost of one ton of plums is (1/3/4/2.5) tons of apples.
25. Prior to specialization and trade, China chose “C” and Spain chose “B”. Now each
specializes according to comparative advantage. The resulting gains from trade will be
(0/10/15/25) tons of apples and (0/20/15/25) tons of plums.
26. If interest rates are increasing faster in the U.S. compared to those in Bangledesh, the
dollar will (appreciate/depreciate) and our exports to Bangledesh will (increase/decrease).
27. If our price level is decreasing compared to Mexico, the dollar will
(appreciate/depreciate) and our imports from Mexico will (increase/decrease).
28. If Russia decides to buy 50 million Fuzzy Wuzzies from the U.S., the Russian ruble
would (appreciate/depreciate) and our imports from Russia would (increase/decrease).
29. If the Djiboutian Franc price of the dollar increases, then the Djiboutian Franc has
(appreciated/depreciated) and Djibouti’s exports to the U.S. should (increase/decrease).
30. If our growth rate(income) is increasing faster than that of Mexico, the Mexican peso
will (appreciate/depreciate) and their exports to the U.S. will (increase/decrease).
C The monetarists believe the money demand curve is (more flat/more vertical), and the
___1.
investment demand curve is (more flat/more vertical).
a. more vertical; more vertical b. more flat; more flat
c. more vertical; more flat d. more flat; more vertical
C A Jag produced in 2004 but not sold to your economics teacher until 2005 is counted as:
___2.
a. consumption b. investment c. disinvestment
B “Supply creates demand” was a motto of the:
___3.
a. Keynesians b. Classicals c. Democrats
___4.
B “Don’t do something, just stand there” is the recession advice by the:
a. Keynesians
b. Classicals
c. Democrats
B “The economy has fallen and can’t get up,” might have been stated by a
___5.
a. Republican
b. Keynesian
c. Classicals
___6.
A Advocates of monetary policy and particularly fiscal policy would be the:
a. Keynesians
b. Rational Expectations
c. Classicals
d. Monetarists
B According to the Keynesians, velocity varies (directly/inversely) with the interest rate and
___7.
(directly/inversely) with the money supply. a. inversely/directly b. directly/inversely
C A decrease in the RR (increases/decreases) the MS, (increases/decreases) the
___8.
excess reserves, and (increases/decreases) the multiplier.
a. decreases/decreases/decreases b. decreases/increases/increases
c. increases/increases/increases
[Chg in AD is caused by “C+Ig+G+Xn”; Chg in AQD is caused by a PL change (inverse)]
D
___9. Which of the following will cause an "Increase in AD"?
a. decrease in price level b. increase in price level c. decrease in consumption d. increase in G
A
___10.
Which of the following will cause an "Increase in AQD"?
a. decrease in price level b. increase in price level c. decrease in consumption d. increase in G
[Change in AS is caused by “REP”; Change in AQS caused by a PL change (direct)]
C
___11.
Which of the following will cause a "decrease in AS"?
a. decrease in PL b. increase in PL c. increase in business regulations d. increase in productivity
A
___12.
Which of the following will cause a "decrease in AQS"?
a. decrease in PL b. increase in PL c. increase in business regulations d. increase in productivity
110,000
13. A bank has ER of $10,000, DD of $200,000 & RR of 50%. TR are $ _________.
14. There are no ER. Josh Howard deposits $100,000. With a RR of 25%, how
75,000 Potential money creation in the banking system
much can this bank loan out $________
400,000
is $ ___________.
Potential TMS is $__________.
300,000
15. Assume the RR is 10% & the Lynch Bank borrows $1 from the Fed. This bank's ER
$1 Possible money creation in the banking system is $_______.
10.00
are increased by _____.
16. RR is 25%. Econ Bank borrows $50,000 from the Fed. This bank's ER are
increased by $ 50,000
______ Possible money creation in the banking system is $ _________.
200,000
17. RR is 10%. Fed buys $10 million of bonds from the Public. The MS is increased
by $___
10 million. ER are increased by $__
9 million. Possible money creation in the
90 million. Potential TMS is $_____
100 million.
banking system is $___
18. RR is 50%. Fed buys $100 million of bonds from the Public. The MS is increased
by $____
100 million. ER are increased by $___
50 million. Possible money creation in the
100 million. Potential TMS is $_____
200 million.
banking system is $____
19. RR is 25%. Fed buys $50 million of bonds from the Public. The MS is increased
50 million. ER are increased by $______
37.50 million. Possible money creation in the
by $___
banking system is $_____
150 million. Potential TMS is $______
200 million.
20. If the dollar price of the Thailand baht decreases, the dollar has (appreciated/depreciated)
and Thailand's exports to the U.S. (our imports) would (increase/decrease).
21. If the U.S. price level is increasing faster than that of Mexico, the peso will
(appreciate/depreciate) and their exports to the U.S. would (increase/decrease).
50
1 TVs
U.S.’s DCC: 1C = ___
4 TVs
Japan’s DCC: 1C = ___
____
1/4 C = 1 TV
0
U.S.
TVs
TVs
40
Computers
U.S.
50
Japan
Japan
0 Computers 10
22. In the above example, (Japan/the U.S.) has a comparative advantage in
computers and (Japan/the U.S.) has a comparative advantage in TVs.
23. In Japan, the opportunity cost of one computer is (2/3/4/5/6) TVs.
24. In the U.S., the opportunity cost of one computer is (1/2/4/7/8) TVs.
25. (Japan/The U.S.) has an absolute advantage in both computers & TVs.
Country
Swaziland
Zaire
Fish
5 hours
10 hours
Corn
20 hours
80 hours
4 F
Swaziland’s DCC: 1C = __
1/4 C = 1 F
___
8 F
Zaire’s DCC: 1C = __
___
1/8 C = 1 F
26. Swaiziland has an absolute (advantage/disadvantage)
in (fish/corn/both fish & corn).
27. (Swaiziland/Zaire) has a comparative advantage in
fish and (Swaiziland/Zaire) has a comparative advantage in corn.
28. In Swaiziland, the opportunity cost of one corn is (2/4/6/8) fish.
29. In Zaire, the opportunity cost of one corn is (2/4/6/8) fish.
30. If nominal GDP is $200 billion & unemployment is 17%, then cyclical
unemployment is ___
11 %; the per cent gap is ___
22 %; and the GDP output
44 billion. [11 x 2% = ___
gap being foregone is $___
22 %]
We are going to turn inputs into outputs.
In 20 hours, Swazi can produce an output of 1 corn or 4 fish.
In 80 hours, Zaire can produce an output of 1 corn or 8 fish.
K
J
AE[C+Ig]
F
G
S AE[C+Ig2]
AE[C+Ig1]
Consumption
I
H
E
0 A B
C
D
DI
1. At income level “OD”, the volume of consumption is _____.
IK
2. At income level “OD”, the volume of saving is _______.
3. If Ig is Ig2, then “equilibrium GDP” is __________.
OD
4. If Ig increases from Ig1 to Ig2, then equilibrium GDP increases by ______.
CD
5. If Ig increases from Ig1 to Ig2, the “MPC” is equal to __________.
HI/CD
6. As we move from income level OB to OC, the “MPS” is _________.
FG/BC
7. The economy is “dissaving” at income level ________.
0A
8. Consumption will be equal to income at income level _________.
OB
9. Which of the following will cause an “increase in AD” ?
a. decr in price level b. incr in price level c. decrease in consumption d. increase in G
10. Which of the following will cause an “increase in AQD”?
a. decr in price level b. incr in price level c. decrease in investment d. increase in Xn
11. Which of the following will cause a “decrease in AS”?
a. decr in price level b. incr in price level c. decrease in productivity d. decrease in G
12. Which of the following will cause a “decrease in AQS”?
a. decr in price level b. incr in price level c. decrease in productivity d. decrease in Xn
13. Suppose a bank has ER of $13,000, DD of $500,000 & RR of 50%. TR are $__________.
263,000
14. There are no ER. Elizabeth Hurley deposits $200,000. With a RR of 50%, how much can this
bank loan out? $_______
100,000 PMC in the banking system is $_______.
200,000 TMS could be $_______.
400,000
15. Assume the RR is 20% & the Lynch Bank borrows $200 from the Fed. This bank’s ER
are increased by $______.
PMC and TMS could both become as much as $_______.
200
1,000
16. RR is 50%. Econ Bank borrows $2 million from the Fed. This bank’s ER are increased
4 million.
by $_______.
2 million PMC in the banking system & TMS could both be as much as $__
17. RR is 50%. Fed buys $50 million of bonds from the Jennifer Lopez (Public). The MS
is increased by $___
50 million. ER are increased by $___
25 million. Potential money creation in the
banking system is $___
50 million. TMS could be $______
100 million.
18. RR is 20%. Fed buys $25 million of bonds from Kerri Russell (Public). The MS is
increased by $____
25 million. ER are increased by $____
20 million. PMC in the banking system
is $_____
100 million. TMS could be $_____million.
125
19. RR is 50%. Fed buys $16 million of bonds from Gwyneth Paltrow (Public).
The MS is increased by $____
16 million. ER are increased by $__
8 million. Potential money
32 million.
creation in the banking system is $___
16 million. TMS could be $____
20. If the Japanese bought 70,000 American autos in 2000 but in 2001 bought 4 million American
autos[taste], the dollar would (apprec/deprec) and our imports from Japan would (incr/decr).
21. If U.S. growth rate is increasing faster than that of Canada, the Canadian dollar (loonie)
will (appreciate/depreciate) and our exports to Canada should (increase/decrease).
Cuba’s DCC: 1C = ___
2 W
____C = 1 W
1/2
Haiti’s DCC: 1C = ___
4W
____ C = 1 W
1/4
80
Cuba
Terms of Trade
1 C = ___
3 W
Wheat
Wheat
60
Haiti
0 Corn 30
0 Corn 20
22. (Cuba/Haiti) has an absolute advantage in corn & (Cuba/Haiti) has an
absolute advantage in wheat.
23. (Cuba/Haiti) has a comparative advantage in corn & (Cuba/Haiti) has a
comparative advantage in wheat.
24. The terms of trade would be 1 corn for (1/3/5/7) wheat.
25. The opportunity cost of 1 wheat in Cuba is (1 / ½ / 2 / 3 / 4) corn.
Country
Chad
Fish
10 hours
Corn
50 hours
5 F
Chad’s DCC: 1C = __
1/5 C = 1 F
___
Gabon
5 hours
15 hours
3 F
Gabon’s DCC: 1C = __
___
1/3 C = 1 F
Terms of Trade
1 C = __
4 F
26. Chad has an absolute (advantage/disadvantage) in (fish/corn/both fish & corn).
27. (Chad/Gabon) has a comparative advantage in corn and (Chad/Gabon) has a
comparative advantage in fish.
28. The opportunity cost of 1 corn in Chad is (2/3/4/5/6) fish.
29. If nominal GDP is $100 billion and unemployment is 16%, then
10
20 %; & the
cyclical unemployment is ____%;
the per cent gap is ____
GDP output gap being foregone is $____
20 billion.
30. If nominal GDP is $500 billion and unemployment is 8%, then
cyclical unemployment is ____%;
the per cent gap is ____
%, and
2
4
the GDP output gap being foregone is $____
20 billion.
Again, we are going to turn inputs into outputs.
In 50 hours, Chad can produce an output of 1 corn or 5 fish.
In 15 hours, Gabon can produce an output of 1 corn or 3 fish.