common mistakes on the ap macro exam compiled by: john ostick malvern prep
DESCRIPTION
COMMON MISTAKES ON THE AP MACRO EXAM Compiled by: John Ostick Malvern Prep. The difference between a change in demand and the resultant movement along a demand curve vs. Shifting of the demand curve. P. Q D. GRAPHING DEMAND. Price of Corn. What if Demand Increases?. P. $5 4 3 2 1. - PowerPoint PPT PresentationTRANSCRIPT
COMMON MISTAKES ON THE AP MACRO EXAM
Compiled by:
John OstickMalvern Prep
The difference between a change in demand and the resultant movement along
a demand curve
vs.
Shifting of the demand curve
P
Qo
$5
4
3
2
1
P QD$5
4321
1020355580
D
Price of Corn
Quantity of Corn
CORN
10 20 30 40 50 60 70 80
What ifDemand
Increases?
GRAPHING DEMAND
P
Qo
$5
4
3
2
1
P QD$5
4321
D
Price of Corn
Quantity of Corn
CORN
10 20 30 40 50 60 70 80
D’Increase
inDemand
Increasein QuantityDemanded10
20355580
30406080 +
GRAPHING DEMAND
The difference between a change in supply and the resultant movement along
a supply curve
vs.
Shifting of the supply curve
SP
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
What ifSupply
Increases?
GRAPHING SUPPLY
SP
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
Price of Corn
Quantity of Corn
$54321
60503520 5
P QS
CORN
8070604530
S’Increasein
Supply
Increasein QuantitySupplied
GRAPHING SUPPLY
Mislabeling or NOT labeling graphs correctly
Pric
e Le
vel
Real Domestic Output, GDPQ
P AS
AD
Equilibrium in theIntermediate Range
QeQ1 Q2
EQUILIBRIUM: REAL OUTPUTAND THE PRICE LEVEL
P1
Pe
GROWTH IN THE AD-AS MODEL
A
B
C
D
Cap
ital G
oods
Consumer Goods
Pric
e Le
vel
Real GDP
ASLR1 ASLR2
Q1 Q2
ECONOMIC GROWTH IN THEEXTENDED AD – AS MODEL
Pric
e L
evel
Real GDPo
P1
AS2
ASLR1
AD2
Q1
ASLR2
Q2
AD1
AS1
P2
Rat
e of
inte
rest
, i (p
erce
nt)
Amount of money demanded(billions of dollars)
0 50 100 150 200 250 300
10
7.5
5
2.5
0
Dm
ie
Sm
A temporary shortageof money will requirethe sale of some assetsto meet the need.
Sm1
THE MONEY MARKET
Net effects of Monetary Policy and/or Fiscal Policy
onInterest Rate (I%)
FISCAL POLICY, AGGREGATE SUPPLY AND INFLATION
Pric
e le
vel
Real GDP (billions)
AS
AD2
$495 $515
P1
AD1
Fiscal PolicyAnd Inflation
$505
Expansionary Fiscal Policy >> Interest Rate
INCREASEDraw Money MarketIncrease Spending (AD)>>Increase Demand for Money>>Increase Interest RateHigher Price Level>>Increase Demand for Money>>Increase Interest Rate
Expansionary Monetary Policy>> Interest Rate
DECREASE
Real domestic output, GDP
Dm
InvestmentDemand
Rea
l rat
e of
inte
rest
, i
10
8
6
0Quantity of money demanded and supplied Amount of investment, i
MONETARY POLICY AND EQUILIBRIUM GDPSm1
AS
AD1P1
10
8
6
0
Sm2
AD2
P2
Money Supply Increases
Interest Rate Decreases
Investment Increases
AD & GDP Increaseswith slight inflation
If the moneysupply increasesto stimulate the
economy...
Pric
e le
vel
AD3
Pric
e le
vel
Real domestic output, GDP
Dm
InvestmentDemand
Rea
l rat
e of
inte
rest
, i
10
8
6
0Quantity of money demanded and supplied Amount of investment, i
MONETARY POLICY AND EQUILIBRIUM GDPSm1
AS
AD1P1
10
8
6
0
Sm2
AD2
P2
More Money Supply
Lower Interest Rates
More Investment
Still higher AD & GDPwith significant inflation
Sm3
P3 If the moneysupply increases
again…
MULTIPLIER(S) CONFUSION
Income (Spending) Multiplier
Multiplier = 1/ 1 – MPC or 1/ MPS
Initial Change in Spending X MULTIPLIER = Change in Output
MONEY MULTIPLIER 1 / Required Reserve Ratio
Maximum Multiple $$$ Money Expansion
MULTIPLE DEPOSIT EXPANSION PROCESS
BankAcquired reserves
and depositsRequiredreserves
Excessreserves
Amount bankcan lend - Newmoney created
ABCDEFGHIJKLMNOther banks
$100.00 80.00 64.00 51.20 40.96 32.77 26.22 20.98 16.78 13.42 10.74 8.59 6.87 5.50 21.97
$20.00 16.00 12.80 10.24 8.19 6.55 5.24 4.20 3.36 2.68 2.15 1.72 1.37 1.10 4.40
$80.00 64.00 51.20 40.96 32.77 26.22 20.98 16.78 13.42 10.74 8.59 6.87 5.50 4.40 17.57
$80.00 64.00 51.20 40.96 32.77 26.22 20.98 16.78 13.42 10.74 8.59 6.87 5.50 4.40 17.57
$400.00Total amount of money created by the banking system
Balanced Budget Multiplier
= 1
(Net Result on GDP)
Remembering the difference between the
Amount of Money Created
and theChange in the Money
Supplywhen dealing with the Money Multiplier and
Money Creation
New reserves$800
ExcessReserves
$4000Bank System Lending
FEDERAL RESERVEPURCHASE OF BONDS
Purchase of a$1000 bondfrom a bank...
$200Requiredreserves
$1000Initial
Deposit
Total Increase in Money Supply ($5000)
Confusing Comparative Advantage
Calculations
Remembering the difference between
Real and
Nominal
Nominal:with Inflation
Real:without Inflation
GDPNominal GDP: GDP measured in terms of current Price Level at the time of measurement. (Unadjusted for inflation)
Real GDP: GDP adjusted for inflation; GDP in a year divided by a GDP deflator (Price Index) for that year
INCOMENOMINAL INCOME: number of dollars received by an individual or group for its resources during some period of time
REAL INCOME: amount of goods and services which can be purchased with nominal income during some period of time; nominal income adjusted for inflation
INTEREST RATE (I%)NOMINAL I%: interest rate expressed in terms of annual amounts currently charged for interest; not adjusted for inflation
REAL I%: interest rate expressed in dollars of constant value (adjusted for Inflation) and equal to the NOMINAL I% minus the EXPECTED RATE OF INFLATION
NominalInterest
Rate
RealInterest
Rate
InflationPremium
=11%
5%
6%+
ANTICIPATED INFLATION
WAGESNOMINAL WAGES: amount of money received by a worker per unit of time (hour, day, etc.); Money Wage
REAL WAGES: amount of goods and sevices a worker can purchase with their NOMINAL WAGE; purchasing power of the nominal wage.(Real = Nominal – Inflation rate)
NOMINAL/REAL TIPsIf nominal rates INCREASE and Price Level INCREASE, the CHANGE in Real is “indeterminable.”If nominal Wage rates do NOT change and Price Level fall. REAL WAGES increase.NOMINAL RATES “PIGGY-BACK” REAL RATES & NOT VICE VERSA.
Confusing calculationsusing
MPC / MPSto determine changes necessary to correct
Recessionary andInflationary Gaps
FULL-EMPLOYMENT GDP
Agg
rega
te E
xpen
ditu
res
(bill
ions
of d
olla
rs)
o45 o
Real domestic product, GDP (billions of dollars)
490 510 530
AE0
Recessionary Gap
AE1
530
510
490
Recessionary Gap= $5 Billion
Full Employment
FULL-EMPLOYMENT GDP
Agg
rega
te E
xpen
ditu
res
(bill
ions
of d
olla
rs)
o45 o
Real domestic product, GDP (billions of dollars)
490 510 530
AE0
Inflationary Gap
AE2
530
510
490
Inflationary Gap= $5 Billion
Full Employment
Demand-Pull Inflation
vs.
Cost-Push Inflation
DEMAND-PULL INFLATION
o
P1
AS1
ASLR
AD1
a
Q1
Pric
e L
evel
Real domestic output
bP2
P3
AD2
AS2
c
Q2
COST-PUSH INFLATION
o
P1
AS1
ASLR
AD1
a
Q1
Pric
e L
evel
Real domestic output
bP2
AS2
Occurs when short-run AS shifts left
Q2
COST-PUSH INFLATION
o
P1
AS1
ASLR
AD1
a
Q1
Pric
e L
evel
Real domestic output
bP2
P3
AD2
AS2
Government response with increased AD
c
Evenhigherpricelevels
COST-PUSH INFLATION
o
P1
AS1
ASLR
AD1
a
Q1
Pric
e L
evel
Real domestic output
bP2
AS2
If government allows a recession to occur
Q2
Q2
COST-PUSH INFLATION
o
P1
AS1
ASLR
AD1
a
Q1
Pric
e L
evel
Real domestic output
bP2
AS2
If government allows a recession to occur
Nominal wages fall &AS returns
to its originallocation
Phillips Curve
vs.
Laffer Curve
Ann
ual r
ate
of in
flatio
n(p
erce
nt)
Unemployment rate (percent)
7
6
5
4
3
2
1
01 2 3 4 5 6 7
As inflation declines...
THE PHILLIPS CURVE CONCEPT
Unemploymentincreases
0
100
l
THE LAFFER CURVE
Tax revenue (dollars)
Tax
rate
(per
cent
)
0
100
m
l
THE LAFFER CURVE
Tax revenue (dollars)
Tax
rate
(per
cent
)
0
100
m
n
l
THE LAFFER CURVE
Tax revenue (dollars)
Tax
rate
(per
cent
)
0
100
m m
n
l
THE LAFFER CURVE
Tax revenue (dollars)
Tax
rate
(per
cent
)
MaximumTax
Revenue