AP Macroeconomics FRQ discussion/answers!

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1

<p>Here are the questions in case you guys forget them: <a href="http://apcentral.collegeboard.com/apc/public/repository/ap10_frq_macroecon.pdf%5B/url%5D"&gt;http://apcentral.collegeboard.com/apc/public/repository/ap10_frq_macroecon.pdf&lt;/a&gt;&lt;/p>

<p>1) a) draw your standard SRAS/AD graph with the LRAS through the intermediary part of the SRAS curve (and the AD curve through the point of intersection of the LRAS and SRAS curves). Ye and PLe were the corresponding RGDP and PL levels at this equilibrium point.</p>

<p>b) AD will increase (shift to the right) and the unemployment rate will decrease in the short run (under the natural rate of unemployment)</p>

<p>c) SRAS will shift to the left in order to reach the new long-run equilibrium (label the corresponding PL level)</p>

<p>d) Draw your standard loanable funds graph (looks like your standard supply/demand graph though the labeling should be interest rate on the vertical axis and quantity of loanable funds on the horizontal axis), and shift the demand curve to the right</p>

<p>e) Investment will decrease since interest rates have increased (I drew the Investment v. Interest Rate Graph to demonstrate this) and the rate of economic growth will decrease since there is less investment in capital goods and thus there will be lower production levels in the future (than there could have been)</p>

<p>2) a) Draw the money market graph with a vertical MS curve and a downward sloping MD curve (labeling was quantity of money vs. interest rates I believe). Demand for money shifts leftward (decreases).</p>

<p>b) Bond prices will decrease.</p>

<p>c) PL will increase since lowered interest rate will increase investment which will shift AD to the right.</p>

<p>d) The Fed should sell bonds in order to constrict the money supply and move the MS curve to the left so that the previous interest rate could be re-established.</p>

<p>3) a) Aggregate demand will shift to the left since net exports will decrease because exports have not changed while imports have increased (and net exports is simply found by X-M).</p>

<p>b) There will be a current-account surplus since there is a merchandise trade surplus (I put that there will thus be a capital account deficit but you didn't need to put that).</p>

<p>c) Draw your exchange rate market (dunno the proper term) graph with quantity of US dollars demanded on the x-axis and Peso/USD exchange rate on the y-axis (the graph looks like your basic supply/demand graph). Shift supply to the left so supply decreases and the value of the peso decreases (value of US Dollar increases).</p>

<p>d) The US Dollar will appreciate relative to the peso (thus the peso will depreciate) because each individual peso is now worth less (due to there being more of them) than it was previously was and, since this didn't happen to the same extent with the US Dollar, the US dollar appreciated and the peso depreciated relative to each other. <em>I think my explanation for this one is wrong. I'm pretty sure the proper explanation has something to do with imports/exports.</em></p>

<p>I don't have my green booklet with me so I might have mis-remembered what I put so correct at will!</p>

2

<p>oh man
for 1C, why doesn’t LRAS shift right?</p>

3

<p>In the long-run the SRAS curve has to return to the point where the AD/LRAS curves intersect and since AD has shifted to the right, the SRAS will thereby shift back to the left so that they will all intersect at the same point again. </p>

<p>Why would the LRAS shift to the right? The actions specified in the question can only shift the aggregate demand curve, I don’t see what could possibly cause a shift in the LRAS curve given what was given.</p>

4

<p>do we have to label REeal Gdp? Or we we allowed to just label GDP</p>

5

<p>I believe 2b) was bond prices increase. I also think 2c) was the PL doesn’t change, as the money supply isn’t changed, especially in the SR.</p>

6

<p>nope bond prices and interest rate are inveresly related. and also PL does increase because of the reason he stated</p>

7

<p>Oh ya, you’re right about 2b, I meant increAse. However, you’re wrong about 2c</p>

8

<p>Right. They’re inversely related, so if IR decreases, then bond prices increase.</p>

<p>Think about it like this.</p>

<p>It costs $100 to buy a $106 bond at 6% interest.
If the IR decreases, then it will take more than $100 to buy a $106 bond at less than 6% interest.</p>

<p>Not sure about PL though.</p>

9

<p>AD shifts to the right so PL increases. But ya, that’s what I thought for 2b as well.</p>

10

<p>sorry to repeat my question but i REALLY don’t want to lose a point for something easy like this…(will i lose a point for putting GDP on the X axis instead of REAL GDP?)</p>

11

<p>I don’t think so.</p>

12

<p>Wait, will they take off if you only put Interest rate and not nominal/real interest rate?</p>

13

<p>I doubt that they will take off a point for that. Even so, according to the fischer effect, nominal and real interest rates differ only by inflation, and usually there is a 1-1 correspondence between them so I highly doubt they will.</p>

<p>However, if they do it’s probably only because they said to label nominal interest rate (but im sure they will understand if you just put interest rate)</p>

14

<p>For 1, I don’t think unemployment will decrease. It said it was at equilibrium (full employment) so it’s at the vertical part of AS, so any movement will only increase PL, inflation.</p>

15

<p>^That is incorrect. Equilibrium means that it’s at the natural rate of unemployment and it is wholly possible for a country to have an unemployment rate less than the natural rate of unemployment. In fact, that was tested elsewhere in the test.</p>

<p>As well, simply think about it for a second. When a country is at the natural rate of unemployment (or equilibrium), there is no set-line saying that once an economy is at a 5% unemployment rate (the natural rate for the US), NO ONE else can possibly be employed. The concept of the natural rate of unemployment is simply an estimate of the combined unemployment that is caused by the reality structural and frictional unemployment and, by nature of it being an estimation, can thereby be incorrect to a degree. However, this does not answer the question as you’re wondering how an economy can go from being at the natural rate to something below the natural rate. I’ll be honest, a precise explanation for it escapes me at this time, but I believe that as aggregate demand shifts to the right, the rate of unemployment ALWAYS decreases, regardless of the change in GDP.</p>

<p>Also, I just realized that for 1C I said nothing about higher wages causing the decrease in the SRAS; will I miss points for that?</p>

16

<p>

I’ve heard both yes and no. Some prep books stress the importance of differentiating the NIR in Money Market and RIR in Loanable Funds while others completely disregard it.</p>

17

<p>The thing is that they explicitly mentioned to make a graph with the nominal interest rate on one of the axis (and the real interest rate when that applied) so I kind of assumed that they would infer that I was talking about real interest rate and nominal interest rate on the respective questions.</p>

18

<p>motion 1234,</p>

<p>I agree with your answers overall (2b-price of bonds are inverse to interest rates and 3 d-relative PL differences are explained through relatively more/less expensive goods/services i.e X and M), but I am trying to figure out the point allocation for the rubric and am coming to a disconcerting conclusion.</p>

<p>The rubric will have more points than usual or will require multiple items (assertion + explanation) per rubric point.
Your answers are probably more articulate than most, but I fear a little nickle-diming in the rubric creation and grading process. A few years ago an FRQ mentioned directions like “on your graph in a…” and when correct answers were written in freshly drawn graphs full credit was NOT awarded. (3 points total- 1 for correct shift in graph in a, 1 for cause, one for effect on PL)</p>

<p>A purely speculative potential high end rubric point allocation for 2010 Macro #1:
1A 1+1+1
1 Point correctly labeled AD/AS graph, 1 Point LRAS/vertical capacity constraint, 1 point for using the designated labels in the correct spots
1B 1+1+(1)
1 point for a right shift of AD in graph in a, 1 point for decrease UE, The word explain in he question could be as simple as communicating the linkage between changes in G with AD or perhaps as harsh as requiring that the decrease in UE below the natural rate is a result of the short run increase in output. If an output linkage is required this cake walk question starts to look a bit tougher. In the past when questions asked for AD and then UE and required the rGDP/output causation they would us a letter like b to ask for delta AD and rGDP and then ask in part c based on your answer in b what happens to UE.
1C 1+1+1
1 point for a left shift AS, 1 point for an argument such as upward pressure on nominal wages increases the cost of production, 1 point for indicating the new PL at LRAS.
1D 1+1+1
1 point for a correctly labeled LF market, 1 point for a left shift Supply of LF (perhaps with a private LF notation in the title or discussion of the sale of new bonds as the mechanism of choice for the government borrowing)or my preferred answer of a right shift Demand of LF, 1 point for indicating an increase in real interest rates.
1E 1+1+1
1 point for a linkage between increase r and decrease I (or quantity of I demanded), 1 point for a linkage between the decrease in I and a decrease in capital formation/stock of K explanation, 1 point for indicating a decrease in growth.</p>

<p>Your score is still pretty awesome with this rubric (either 13/15 or 13/14 on # 1), but your all correct answer earning less than full points is not super encouraging for those with less thorough answers. ( btw- I figure you for >25 on the FRQ overall.)</p>

19

<p>For 1d, I believe the supply of loanable funds decreases as oppose to the demand of loanable funds increasing. I saw this in 5 Steps to a 5.</p>

20

<p>

</p>

<p>Because goods and services are cheaper in the United States, foreign consumers will want to buy more from the US than they do Argentina. As demand for US goods go up, foreign consumers will bid up the demand for the dollar. Thus, the dollar appreciates relative to the peso.</p>

<p>

</p>

<p>Because the govt needs more money to carry out its defense expansion, it will bid up the demand for loanable funds (rightward shift), and, by extension, the interest rate.</p>

<p>BTW, for 3c, I drew my graph with Pesos on the X-axis and Dollars/Pesos on the Y-axis.</p>

<p>I did it like that because decreased American investment in Argentina decreases the demand for Pesos, so the demand curve for Pesos will shift left, which makes it more fitting to have Pesos (oh donkey-brains I put Pesos instead of quantity of Pesos demanded; I could be wrong either way) on the X-axis.</p>

<p>However, I did get that the supply of US Dollars will decrease because Americans will need and want fewer US Dollars to trade in for Pesos. And for part ii of 3c, I just said that because the demand for Pesos has gone down, it will depreciate relative to the dollar.</p>

<p>Feel free to correct me.</p>

<p>EDIT: woohoo 500th post</p>