<p>Those were great questions, I’m too lazy to do the graphing, but I know I can do it.</p>
<p>Thanks for those questions! WHere did you get them?</p>
<p>Most of the questions came from a review book that went along with our textbooks. And some came from previous AP tests and some came from my teacher.</p>
<p>I hope they are as helpful as they are to me! Now i have to finish self studying AP micro!!! Yikes XD</p>
<p>Today is the AIM session @ 12 PM PST.</p>
<p>Click on the little AIM icon near below my name! Let’s have a nice study session! haha.</p>
<p>I really want to try this out XD</p>
<p>It’s diseconomies of scale. MC is defined as the change in total cost (per unit?).</p>
<p>Anyone going to give the FRQ a try?</p>
<p>
</p>
<p>We’re talking about the MC curve here, which is the extra cost of increasing production by one unit of output. </p>
<p>Economies/Diseconomies of scale refers to fall/rise in average cost per unit and is obtained through expansion of the firm. You find it on the Long Run Average Cost curve - it’s a long-run concept because the scale of a firm’s operations can be varied only in the long run. Unless, of course, the question was actually about the LRAC instead of the MC curve, and you made a typo? Or maybe the MC curve in question is a long-run MC curve?</p>
<p>^I thought about that when I was answering the question. Really Diseconomies of scale is not a good answer, something like labor cost would have been more appropriate, but it was the best answer out of the 4 so I went with it.</p>
<p>Can you go more into detail why its labor and more into diseconomies.</p>
<p>Well so why would labor change marginal cost:</p>
<p>Labor is one of the main factors for a business and its a variable cost. So a company producing 1 unit of output may only hire one laborer, but 3 when producing 5. Hiring three would obviously cost more than hiring 1 right? That means for every additional output the marginal cost increases due to the increasing cost of labor. Another could simply be the cost of resources. As you increase production you will need more resources. Fixed costs also play a role in Marginal cost. Since it is still a cost. Anything that will be a cost to the firm will affect marginal cost. </p>
<p>Diseconomies of Scale: Diseconomies of scale are the forces that cause larger firms to produce goods and services at increased per-unit costs. Essentially its the notion that a firm can expand beyond efficiency. Think about a factory with too many workers, they will distract each other leading to higher costs and lower efficiency. Its the idea that you can over expand. I don’t really remember the question. It had something to do with increase in marginal costs. I think the discrepancy is whether it asks for long run or short run. Diseconomies can only play a factor in the long run because it lays on the assumption of expanding the size of capital. In the short run, however, production capabilities are fixed and held constant. </p>
<p>I hope that helped.</p>
<p>thanks vasudevank for the great explanation 
I agree - if given those choices, I would go with diseconomies of scale, it’s the best answer though not the right one.</p>
<p>no problem, it sort of helped me synthesize the information I knew</p>
<p>Thanks! It really helped me understand it a bit better. And omg… it’s like a 70+ curve to get a 5 :C I don’t think i’m THAT confident in Micro lol.</p>
<p>I need only a 4 for credit, so I am not too worried.</p>
<p>yo guys, are the Princeton Review cracking the ap econs praqctice tests similar in difficulty to the real test?</p>
<p>Ok guys I’m gonna do ChristianWu’s big Free Response question, here it is:</p>
<p>
Ok, so where did you get this question from first of all? It’s not really complete. I know that the balanced budget multiplier is one, but since I don’t know what the spending and tax increase is, I don’t actually know how much equilibrium output will rise by! So I can’t do the math and give you a specific number, but whatever. The point of this intro is to tell us that we are in a normal economic situation with no inflationary or recessionary gap, and that we’re operating at our full employment output. Let’s continue.</p>
<p>
i) Output will increase, employment will increase, as the the AD curve shifts upwards a little (by the spending and tax increase #, let’s say x, for each point)
ii) Price Level - will increase
iii) Will increase slightly. Because the AD curve shifted upwards, this means that the demand for money also increases. So in the Loanable Funds Market graph, the demand for loanable funds line would shift upwards, raising the interest rate (this is basically the crowding out effect)</p>
<p>
Buying bonds on the open market means expansionary monetary policy, as the Fed is injecting more money into the economy and causing a money multiplier. Thus:</p>
<p>
i) Interest rates will decrease, as the Money Supply vertical line on the Money Market graph will shift to the right, causing the equilibrium point to shift right and thus, interest rates have decreased
ii) By mainstream and monetarist opinion at least (by those who view the investment line to be elastic, aka responsive to chances in the interest rate): investment is inversely related to the interest rate, and since the interest rates have decreased, this means that real investment will increase. An increase in investment shifts the AD curve upwards (I could draw this out with an Aggregate Expenditures graph, but I doubt they’d care too much if I did), thus moving the output level up. As output increases employment rises as firms hire more workers to make the increasing output, so employment also rises.
iii) The price level rises too, because the AD curve shifted upwards.</p>
<p>
Ok so basically Part A was expansionary fiscal policy and Part B was expansionary monetary policy. So now the affects on both of them together. And clearly I can’t draw a graph out, but I’ll try and describe what it would look like. I use an AD-AS graph for part i) and ii), and a Money Market Graph for part iii.</p>
<p>
i) Output and employment both go up, as both expansionary fiscal and monetary policy cause this to happen. This is from a two-fold upward shift in the AD curve.
ii) The price level will go up quite a bit, as both expansionary fiscal and monetary policy cause this to happen. This is from the same two-fold upward shift in the AD curve as I just said above.
iii) This is a little trickier. On the one hand, expansionary monetary policy is basically an increase in the money supply, so the vertical money supply line shifts right, lowering interest rates. On the other hand, an increase in government spending from Part A increases the demand for money, because the government is probably going to do deficit financing. So the downward-sloping Demand for Money curve shifts upward, raising the interest rate. Thus, one policy raised the rates and one lowered the rates, and so it’s impossible to say what the final effect will be.
P.S. For anyone who’s not sure, the Money Market Graph is this: the Y axis is the Nominal Interest Rate, the X axis is the Quantity of Money. The Supply of Money is vertical (like the long run Aggregate Supply line…), and the Demand for Money is downward-sloping (like the AD line)</p>
<p>Tada!</p>
<p>The free response does not ask for specific answers, it simply asks what will happen to the area you are given.</p>
<p>If there is a tax increase what does it affect, and thus what happens to AD/AS and therefore what is the result.</p>
<p>The question isn’t asking about specific answers, nor will the actual AP FRQs. They could ask about nominal interest rates/actual and actual unemployment/natural rate of unemployment, but they will give you numbers for them.</p>
<p>My questions asks for the holistic affect of fiscal policies on the short run graphs.</p>
<p>Yeah sorry, ChristianWu, I posted awhile ago and then was editing in the answers as I went. Re-read, it’s done now!</p>
<p>Those answers all seem correct to me. Good job!</p>
<p>yay!
Although I personally ignored any effects on the Aggregate Supply curve that the government’s tax increases might have had. I wonder if we’re supposed to do that or not? (And then it gets really complicated, like does a shift in the AS curve affect interest rates?!)</p>
<p>So very screwed for Macro…
Micro is really really easy though.</p>
<p>Also, rumor has it that the PR practice exams are very similar to the real thing, maybe slightly easier… not to the point where your grade would be diff. though.</p>