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2011 AP Macroeconomics free response question Form B

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Guadalupe Solis

on 25 April 2014

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Transcript of 2011 AP Macroeconomics free response question Form B

AP® Macroeconomics
2011 Free-Response Questions
Form B

Assume that the economy of Meekland is in a long-run equilibrium with a balanced government budget
LRAS
SRAS
AD
AD
1
-------------
----------
PL
PL
----------
Y
Y
As consumer confidence falls, AD will decrease leading to a decrease in both price level and output lever
Using a correctly labeled graph of the short-run and long-run Phillips curves, show the effect of the fall in
consumer confidence on inflation. Label the initial long-run equilibrium point A and the new short-run
equilibrium point B.

As consumer confidence falls, inflation decreases and according to the Phillips curve as inflation decreases unemployment increases
.
.
A
B
----------
------------------
unemployment
inflation
If the government and the central bank do not pursue any discretionary policy change, how does the fall in
consumer confidence affect government transfer payments in Meekland? Explain.

The fall in consumer confidence would cause an increase in government transfer payments because as the consumer confidence falls, consumers spend less leading to a decrease in demand and thus an increase in unemployment; which in turn will need to more people needing transfer payments.
There is an increase in the demand for funds because the unemployment has increased, thus causing the demand curve to shift rightward. The supply of funds has not changed resulting in an increase in the interest rate.
Draw a correctly labeled graph of the loanable funds market in Meekland and show the effect of the change in government transfer payments you identified in part (d) on the real interest rate.

AS of funds
AD
AD
--------------------------
interest rate
-------------------
IR
IR
------------------------
----------------
Quantity of funds
Q
Q
In the absence of any changes in fiscal and monetary policies, in the long run will the short-run aggregate supply curve shift to the left, shift to the right, or remain unchanged as a result of the fall in consumer
confidence? Explain.


It will remain unchanged because the fall in consumer confidence affects the demand, not supply.
(ii) The level of employment. Explain

The level of employment in the short run is rising as seen how the value of their dollar has risen to the Euro
(i) Aggregate demand. Explain.

AD in the short run is increasing because the Singaporean dollar has increased in its exchange value to the Euro
Assume that yesterday the exchange rate between the euro and the Singaporean dollar was 1 euro = 0.58 Singaporean dollars. Assume that today the euro is trading at 1 euro = 0.60 Singaporean dollars.
(a) How will the change in the exchange rate affect each of the following in Singapore in the short run?
(b) Suppose that Singapore wants to return the exchange rate to 1 euro = 0.58 Singaporean dollars.

(i) Should the Singaporean central bank buy or sell euros in the foreign exchange market?

They should sell Euros in the foreign exchange market

(ii) Instead of buying or selling euros, what domestic open-market operation can the Singaporean central bank use to achieve the same result? Explain.

The Singaporean central bank should sell government bonds
2009 Quantity 2009 Price (base year) 2010 Quantity 2010 Price

6 $2.5 8 $2.5

5 $6 10 $10

2 $4 5 $5



Entertainment
Food

Clothes

(a) The outputs and prices of goods and services in Country X are shown in the table above. Assuming that 2009 is the base year, calculate each of the following.
(b) If in one year the price index is 50 and in the next year the price index is 55, what is the rate of inflation
from one year to the next?
5/50 = 10%

The difference between the indexes over the original
(c) Assume that next year’s wage rate will be 3 percent higher than this year’s because of inflationary expectations. The actual inflation rate is 4 percent. At the beginning of next year, will the real wage be higher, lower, or the same as today?

Real wage will be lower because the actual inflation rate is higher than the increase in wage rate
(i) The nominal gross domestic product (GDP) in 2010
2010 quantity X 2010 price = $145
(ii) The real GDP in 2010
2009 price X 2010 quantity = $100
(d) Assume that Sara gets a fixed-rate loan from a bank when the expected inflation rate is 3 percent. If the actual inflation rate turns out to be 4 percent, who benefits from the unexpected inflation: Sara, the bank, neither, or both? Explain.

Sara benefits from the inflation because the amount of what is being paid back is worth less than the amount she borrowed
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