AP Macroecon - Study Guide/Help

Test Preparation AP Test Preparation
1

<p>I'm gonna try something new. Let's make a thread, where everytime you are introduced to something new or tricky, or just something important in general sticky it here ... for reference for you and everyone else.</p>

<h2>Then the days before the test we can look back on this thread, and know some of the areas to know. </h2>

<p>So anyways, I have an international trade market test tommorow, and I think it's really important to know the Expansionary/Contractionary Fiscal and Monetary Policy. </p>

<p>Problem Recession
- Expansionary Fiscal Policy (AD increases) --> Higher domestic interest rates --> Increased foreign demand for dollars --> Dollar appreciates --> Net exports decline
Problem Inflation
-Contractionary Fiscal Policy (AD decreases) --> Lower domestic interest rates --> Lower foreign demand for dollar --> Dollar depreciates -> Net Exports increase</p>

<p>Problem Recession
- Easy Monetary Policy (AD increases) --> Lower interest rate --> decreased foreign demand for dollar --> dollar depreciates --> Net exports increase
Problam Inflation
-Tight Monetary Policy (AD decreases) --> Interest rates increase --> increase foreign demand for dollar --> dollar appreciates --> Net exports decrease</p>

<p>Here's my question:
I understand the Fiscal Policy interest rate increasing/decreasing, because as AD moves up interest rates increase.
However, in monetary (money) policy why does an increase in AD lead to lower interest rates and a decrease in AD leads to an increase in interest rates. How does this work?</p>

2

<p>The Phillips curve is a historical inverse relation between the rate of unemployment and the rate of inflation in an economy. Stated simply, the lower the unemployment in an economy, the higher the rate of change in wages paid to labor in that economy, in data from a number of countries and historical periods.</p>

3

<p>The difference between the Money Market and the Currency Market
Currency Market :
Y-axis = Exchange Rates
X-axis = Money Unit
Money Market:
Y-axis = Price Level
X-axis = Real GDP</p>

<p>Can someone go into more detail and explain the difference between the two.
For example - When supply increases in the money market the money unit appreciates, but when supply increases in the currency market the money unit depreciates... what's the difference?</p>

4

<p>Can someone go over these topics:
-Automatic and Discretionary Stabilizer
-Circular Flow Diagram (variations with government, international trade, and financial markets.)
-Classical-Keynesian Model
-Fiscal and Monetary policy effects on LRAS
-Money Market (effect of changes in FED policy)
-Loanable Funds Market (how interest rates correlate with investment on graph)
-Exhange rate graph
-Correlate Money Market Investment Demand Market and AD/AS (basically draw them together)
-Difference between Absolute and Comparative Advantage (What exactly is absolute advantage, and is
comparative advantage between two coutries or one country?)
-Flexible (free floating exchange rates) and Fixed Exhange Rate (Section: Foreign Exchange)</p>

5

<p>No one is taking macro?? -- These topics are frequently tested on the AP Exam</p>

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<p>"Classical-Keynesian Model"</p>

<p>Classical model refers to the markets being self-correcting. This is brought on once again by the Neo-Classical model, but in different words by Milton Friedman. (This is my little digression though)
Keynesian model refers to the help of government to stimulate the government. It calls upon a mixed economy - one of the government and the markets to "mix" together for economic growth and stability. No single government used this model completely.</p>

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<p>Thanks for that.
We were given a practice macro ap exam in class and I hopefully recieved a 5, so I think i'm good.</p>

<p>This question keeps confusing me:
If the government was to cut buisness taxes what would happen to Aggregate Demand and Aggregate Supply?
I was stuck between these two - (1) AD increase only or (2) AD and AS increases</p>

<p>At first I thought it would be AD because cutting taxes means AD shifts right since firms will spend more. But then I thought they mentioned "buisness" for a reason. I ended up picking (2) ... here's my rationale: Demand has to increase no matter what, but when buisnesses have a greater profit (less taxes) then they will increase production or increase wages. An increase in production or wages will increase AS.</p>

<p>What's the right answer?</p>

8

<p>I think when taxes go down, businesses increase their purchases for capital, thus increasing the AS as well as the AD.</p>

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<p>
[quote]
-Automatic and Discretionary Stabilizer

[/quote]

An automatic stabilizer is part of fiscal policy that does not require the Congress to do anything. For example, a person's tax percentage increases because he moved into a different income bracket.
A discretionary stabilizer is a policy Congress passes to help the economy -- increasing G.

[quote]
-Circular Flow Diagram (variations with government, international trade, and financial markets.)

[/quote]

Factor Market:
B ---- Wages, interest, rent, profit--> H ---labor, land, capital, entrepreneurial ablility. </p>

<p>B <--- TP ---- Government --- TP ----> H
B ---- Taxes ---> Gov <---- Taxes---H</p>

<p>Product Market
B ---- goods and services --> H <---- CIGXn ---- Business </p>

<p>
[quote]
Money Market (effect of changes in FED policy)

[/quote]

OMOs: Buy bonds -> MS Inc.
Sell bonds -> MS dec</p>

<p>
[quote]
-Loanable Funds Market (how interest rates correlate with investment on graph)

[/quote]

Looks like a Supply, demand graph. when the either the supply or the demand of the currency in the world market increases or decreases, the graph shifts accordingly.

[quote]
-Difference between Absolute and Comparative Advantage (What exactly is absolute advantage, and is
comparative advantage between two coutries or one country?)

[/quote]

Absolutely advantage is the country that can make something with the least cost.... Comparative is the countries in partnership with another one can making something with the least inputs or most outputs.</p>

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<p>I'm still confused on what absolute advantage means. </p>

<p>Let's say there are 2 countries, country A and country B.
A produces 6 mangos and 12 apples
B produces 4 mangos and 6 apples.</p>

<p>A - Opportunity Cost for mangos: 2 apples
Opportunity Cost for apples: 1/2 mango
B - Opportunity Cost for mangos: 3/2 apples
Opportunity Cost for apples: 2/3 mangos</p>

<p>In this case A has the comparative advantage in mangos, while B has the comparative advantage in apples.
Now how do you find which country has the absolute advantage?</p>

11

<p>Well when I think of absolute advantage, I think of whoever produces the most without specialization and trade. In your scenario:</p>

<p>A produces 6 mangoes and 12 apples
B produces 4 mangoes and 6 apples.</p>

<p>A has the absolute advantage in both products because it produces 6 mangoes while B produces 4 and 12 apples compared to 6 apples.</p>

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<p>Ahhhh, that makes more sense.
Thanks for the clarification.</p>