Macroeconomics Question

Test Preparation
1

<p>Check out question number 3(c) here: <a href="http://www.collegeboard.com/prod_downloads/ap/students/economics/ap05_frq_macro_economics.pdf%5B/url%5D"&gt;http://www.collegeboard.com/prod_downloads/ap/students/economics/ap05_frq_macro_economics.pdf&lt;/a>
Its on page 4. </p>

<p>I drew a graph that has a vertical line through it considering inflation was on the y axis and unemployment rate on the x axis. However I dont think this is correct. Pretty much the only question I had difficulty on the FRQs. Taking the make up tomorrow!</p>

2

<p>You are correct, since they ask for the LONG RUN phillips curve. This is so since the unemployment rate (measured through real GDP) is fixed in range 3 of the AS curve and only the price level changes (inflation rate) with shifts of AD- the long run.</p>

3

<p>Excellent. Just have 2001 FRQ also. Got all of them right. Lets just hope tomorrow's exam is as easy as last thursday. Fingers and toes crossed. :)</p>

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<p>Okay. Now if say the fed buys bonds this would reduce the supply of the money market which would reduce interest rates right? Confused about this.</p>

5

<p>bump someone please help.</p>

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<p>No one can answer it :o. Come on folks need the info.</p>

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<p>No, if the Fed buys bonds, they increase the money supply. This shifts the supply of money curve to the right, which pushes down interest rates. I know you didn't ask this next part . . . but, the decrease in interest rates would increase consumption and investment since it's now "cheaper" to borrow money. This would cause AD to shift back to the right and therefore that countered the effect that the Japanese recession had on the American market.</p>

8

<p>The Fed should never buy bonds. The government should not bail itself out of any economic situation. It citizens should</p>

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<p>galgrl> However doesnt selling bonds stimulate consumption although interest rates are increased. The question was to name an open market policy of the fed to reduce the inflationary gap. And then explain the impact of this on interest rates.</p>

10

<p>"The Fed should never buy bonds. The government should not bail itself out of any economic situation. It citizens should."</p>

<p>The Fed = The federal reserve. And the federal reserve should (and does) always buy bonds to increase demand.</p>

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<p>Also, buying bonds lowers interest rate and thus increases exports because currency depreciates . i only mentioned the effects on aggregate investment though.</p>

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<p>Ok. Let's see. The fed buys bonds, it increases the supply of money in the economy, thus lowering the interest rate because the demand for the dollar would be driven down by the increase in money supply. Thus, businesses are more inclined to borrow, same goes for consumers (spending), and thus, it drives up the expenditures, thus, increases total GPA, thus the curve shifts the demand curve to the right. The decrease in interest rate makes our goods cheaper overseas, too - and as a result, the demand for our total exports may also go up, shifting the demand curve to the right. </p>

<p>Selling bonds decreases demand - it DOES NOT increase consumption in anyway. I think you got like the questions all mushed up. Because the question was "how can the Feds curb the effects of Japanese recesssion" and asked you about an open market policy that it could take. Thus, it buys bonds. The price level would decrease, interest rate would decrease, AD would increase, and output would increase.</p>

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<p>Ooopps. GPA?!?!Make a correction. GDP for my above post.</p>

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<p>if the government does stuff correctly, it can pull of a 3.8, maybe even a 4.0 if it gets lucky</p>