Monday, August 25, 2014

AP MACROECONOMICS SYLLABUS SEMESTER #1 2014-2015

AP ECONOMICS SYLLABUS SEMESTER 1, 2014-2015

AP MACROECONOMICS

The class is formally titled AP Macroeconomics, but students have the option of taking only the AP Macroeconomics exam (all students) or taking both the AP Macroeconomics and AP Microeconomics exams (student choice).

Grades are based 100% on exams and practice free response questions (FRQ’s). There is no credit given for work outside the FRQ’s. The grade breakdown is 90% exams and quizzes, 10% FRQ’s.  Inadequate performance on the FRQ’s will result in a student losing one letter grade.

Grades are broken down as follows:

TOP 20%:  A to A-

MIDDLE 40%: B+ to C+

BOTTOM 40%: C+ or lower depending upon student’s overall performance

The Final Exam:  The Final Exam counts 20% of your overall grade.  It is a released AP Macro exam. Any student scoring at or above 60% (a 3.6 on the AP scale) on the final will receive a grade of A- if their grade going into the exam was a C or better. Any student scoring over 52% (a 3 on the AP scale) will receive a grade of B+ if their grade going into the exam was a C or better.

There is no text book for this class.  All the necessary materials are either online at montevistamacroeconomics.blogspot.com or provided in class.

AP MICROECONOMICS

AP Micro is supplemental to the AP Macro class. It provides students an opportunity to pass a second AP econ test.  It requires students do to 20 minutes of graphing homework a week and attend practice problem sessions on planning days from 8:45 AM to 9:25 AM and on Tuesdays and Thursdays during advisory.

The advantage of taking AP Micro is obvious.  It allows students to get credit for another 3 unit college class with minimal time commitment (2 hours a week), and usually results in a higher overall grade in the class, since the required average score on both finals combined to earn an A or A- is 5.8 (an average of 2.9 between both exams).

Students failing to attend the required Micro meetings will be dropped from the Micro portion of the class.


ABSENCES:  Students are allowed five (5) total absences.  Any absences greater than five will have to be made up from 8:45 AM to 9:25 AM on planning days.

Friday, August 1, 2014

MACRO PLAYLIST

MACRO PLAYLIST

Unit 1

Opportunity Cost

Every decision you make to do one thing instead of another, to buy one thing instead of another involves a trade-off. You give up one option for another. Whatever you give up when you make one choice instead of the other is referred to as your opportunity cost.

This concept is very important in economics. For example, if a nation chooses to borrow money for consumption instead of investment, the opportunity cost of consuming now is slower economic growth and a lower standard of living in the future because less productive capacity is being purchased so that the nation can enjoy more consumption now.

The concept of opportunity cost is very important in international trade. Nations engaged in trade should always export (sell to other countries) the goods and services they produce with the lowest opportunity cost and import (buy from other countries) the goods for which they have the highest opportunity cost.

Let's look at an example involving the US and Korea. The US (Boeing) is great at making airplanes, and Korea (Hyundai and Kia) is great at making cars. So if trade takes place between the two, the US will export planes and Korea will export cars.

Let's assume the two countries can produce the following in one year (an output problem, because it is how much each country can produce, not how many resources they use for one unit of output): The US HAS an absolute advantage in both cars and planes because they can produce more of both in one year.

                                                   Cars            Planes

                                    US           40               10

                                    Korea      10               1

We can quantify this to illustrate the difference in opportunity cost for planes. Suppose Korea has to give up 10 cars to make one plane, while the United States only has to give up 4 cars to make one plane. Korea's opportunity cost for one plane is 10 cars/1 plane (10), while the US opportunity cost for planes is 40 cars/10 plane (4). Since the US has the lower opportunity cost for planes, the US should produce and export planes and Korea should produce and export cars (which is exactly what happens).

We can calculate the opportunity cost for cars for both nations and we end up with the reciprocal of the opportunity cost for planes. The opportunity cost for cars for Korea is 1 plane/10 cars (1/10) while the opportunity cost for cars for the US is 10 planes/40 cars (1/4). So the results are the same. Korea has the lower opportunity cost for cars, they should export cars, and the US should export planes since their opportunity cost for cars is higher.

A country with a lower opportunity cost is said to have a comparative advantage in that good.
Let's illustrate how to calculate an output problem using the example from above.

The rule for an output problem is as follows. Opportunity cost is always a country's internal cost, so we always compare US productivity in cars to US productivity in planes, and Korean productivity in cars to Korean productivity in planes. When we calculate the opportunity cost for an OUTPUT problem, the other value always goes over (OOO; Output Other Over). So for the US we put 10/40 (cars) and 40/10 (planes). For Korea, we put 1/10 (cars) and 10/1 (planes). Our finished grid should look like this;

                                             Cars                          Planes

                      US                 40 (1/4)                      10 (4)

                      Korea            10 (1/10)                     1 (10)

Our final answer is determined as follows;

The US has absolute advantage in both cars and planes, since they can produce more of both in one year. Korea has a comparative advantage in cars because their opportunity cost is lower (1/10 vs. ¼ ) while the US has the comparative advantage in planes (4 vs. 10).

Input problems (the amount of resource inputs a country has to use to to produce one unit of output) are the opposite of output problems. In this case, the smaller number confers (gives, determines) absolute advantage, since it means that a country has an advantage because they need to use fewer resources to produce one unit of output.

For example, suppose it takes US workers 2 hours to make a bushel of wheat and Russian workers 6 hours to make a bushel of wheat. Also, it takes US workers 4 hours to make a bushel of corn and Russian workers 8 hours to make a bushel of corn. Since workers hours are a resource input, the US has an absolute advantage in both wheat and corn since the US requires fewer hours to produce both.

That brings us to point number one about input problems. With an input problem, the smaller number is always better and confers (gives to) a country absolute advantage since they use less to produce more. The second key point regarding input problems deals with their calculation. To calculate opportunity cost for input problems, the other value always goes under (Input Other Under (IOU)).

So the US opportunity cost for wheat is 2 hours/4 hours (½ a bushel of corn), and the opportunity cost for corn is 4 hours/2 hours (2 bushels of wheat). This is easy to see, in that each two hours of labor can make one bushel of wheat, while it takes twice as long (4 hours) to make one bushel of corn. So if a worker in the US spends 4 hours making one bushel of corn, he is giving up (his opportunity cost) 2 bushels of wheat.

Our calculation should look as follows (remember, it's an input problem so the Other goes Under (Input Other Under (IOU)).

                                               Wheat                  Corn

                      US                      2 (½)                    4 (2)

                      Russia                6 (¾)                   8 (4/3)

The answer to this problem is as follows. The US has an absolute advantage in both wheat and corn because it uses fewer resources to produce both. The US has a comparative advantage in wheat because it has a lower opportunity cost (½ vs ¾) than Russia, while Russia has a comparative advantage in corn (4/3 vs 2). So the US should specialize in wheat and export wheat while Russia should specialize in corn and export corn.

To calculate the opportunity cost of any specific action, just figure out what you gave up and spent. If Monica takes a day off work and gives up $64 in wages, and spends $50 dollars on a concert ticket, her opportunity cost of the concert is $114 ($64 in lost wages plus $50 for the ticket).

If Ralph Lauren spends $100 million to build a purse factory, and they could have invested the $100 million in something else that would have earned them $10 million, their opportunity cost for the factory is $110 million ($100 million in direct expenditures (spending) and $10 million in lost income.

There is no opportunity cost for necessities you would buy regardless of your choice. For example, the opportunity cost of college includes tuition, books, and lost income since you are not working, but doesn't include food and clothes (you have to have those regardless of the choice you make).









Unit 2

Measuring the Economy

The total output of all goods and services produced in one year by the economy is called Gross Domestic Product (GDP). GDP is composed of four major components and is equal to the sum of the four compnents, the equation being GDP= C+I+G+Xn.

C= Consumption spending (spending by consumers). Sensitive to consumers incomes, confidence, savings rates, and interest rates. When incomes and confidence are up, consumers spend more. When interest rates fall and consumers are saving less, spending also goes up. Spending falls when any of these are reversed.

I = Investment spending, spending by businesses on factories (plants) and machinery for production (capital goods), and spending by consumers on homes. Investment spending is very sensitive to interest rates (the cost of borrowing money, which is the rate of interest a borrower pays on a loan). When interest rates go down, I increases, and when interest rates go up, I decreases.

G= Government expenditures on the military, roads, bridges, dams, buildings, etc. It does not include expenditures on social welfare payments that don't produce a good or service (unemployment, food stamps, etc.).

Xn= Net exports (exports – imports). The more we export, the more we produce domestically (within our own country) and the greater our GDP.


Nominal and Real GDP

Nominal GDP is just the dollar value of all goods and services produced in one year. Real GDP is nominal GDP adjusted for inflation (the change in prices year over year). For example, if nominal GDP increases by 10% but inflation was 5%, the real change in output (the real increase in goods and services produced) would only be 5%, since 5% of the nominal increase was only a result of the change in prices.


GDP Deflator

The most accurate measure of inflation or price increases since it adjusts the entire economy (GDP) for inflation and gives us Real GDP (GDP adjusted for inflation, it “deflates” or takes the inflation out). Formula is Nominal GDP/GDP Deflator = Real GDP.


Consumer Price Index (CPI)

The Consumer Price Index (CPI) is the sum of the prices of a “market basket” of specific goods and services that the government calculates at the same time each year. Inflation using the CPI is determined by taking the (CPI in year 2 - CPI in year 1)/CPI year 1. The key word here is “market basket” of goods and services that a household typically consumes which is used as a measure of consumer inflation. It is not as accurate in measuring overall inflation in the economy as the GDP Deflator since it is not limited to a small number of goods and services.


Unemployment

To be unemployed you have to be looking for a job. Unemployment is equal to the (number of people looking for a job/the number of people in the labor force). The labor force equals the number of people working + the number of people looking for a job. It excludes children under 16, retired people, and people in the military. REMEMBER THE RULE, I HAVE TO BE WORKING OR LOOKING FOR WORK TO BE IN THE LABOR FORCE, AND IF I AM NOT LOOKING FOR A JOB I CAN'T BE UNEMPLOYED.

Frictional Unemployment: People who are between jobs for any reason (they moved, got fired, etc.) and are looking for a job.

Structural Unemployment: My skills become obsolete. An example would be a VCR repairman or an auto worker replace by a robot.

Cyclical Unemployment: I get laid off because of a downturn in the economy (a recession, which is a contraction of the economy, GDP falls).

The Natural Rate of Unemployment is equal to structural plus frictional unemployment.


Business Cycle


MACRO UNIT 3

Aggregate Demand and Aggregate Supply: Aggregate (all) the demand and supply in the whole economy


Aggregate Demand (AD)

Any increase in the four main components of GDP (C+I+G+Xn) will increase Aggregate Demand and cause the AD curve to shift to the right (increase). Therefore, in its simplest form, anything that increases consumer spending, business and consumer investment (lower interest rates), government spending (expansionary fiscal policy), and net exports (lower interest rates and a decrease (depreciation) in the value of our currency which makes our products cheaper) will increase AD. Anything that decreases consumer spending, business and consumer investment (higher interest rates), government spending (contractionary fiscal policy), and net exports (higher interest rates and an increase (appreciation) in the value of our currency which makes our products more expensive) will decrease AD.

When AD shifts right (increases) the quantity of Aggregate Supply increases and the price level increases. When AD shifts left (decreases), the quantity of Aggregate Supply decreases and the price level falls.


Aggregate Supply

Aggregate Supply is driven by costs of production, Anything that lowers the cost of producing (lower wages, lower natural resource costs, lower energy and shipping costs, lower taxes, less government regulation, and subsidies (payments by the government to encourage production) will shift AS right and increase output while decreasing the price level. Anything that increases the cost of producing (higher wages, higher natural resource costs, higher energy and shipping costs, higher taxes, more government regulation, and the removal of subsidies (payments by the government to encourage production) will shift AS left and decrease output while increasing the price level.

When AS shifts right (increases) the quantity of Aggregate Demand increases and the price level falls. When AS shifts left (decreases), the quantity of Aggregate Demand decreases and the price level rises.


Long Run Aggregate Supply, Recession, and Inflation.

Long Run Aggregate Supply (LRAS) is the maximum sustainable output the economy can produce in the long run independent of the price level (that is why the curve is vertical). It results from the fact that the economy at any point in time only has so many factors of production (workers, natural resources, level of technology, number of factories, level of infrastructure (roads, airports, bridges, trains, harbors) and education level and productivity (output per worker) of the labor force, etc.) LRAS can shift right if any of these factors of production increase or a country engages in trade with other countries. However, if any of these factors of production decrease or trade with other countries decreases, LRAS will shift left.


Inflation is an increase in the price level over a fixed period of time.

A Recessionary Gap results when the intersection of AD and AS (equilibrium) is to the left of LRAS. In this case the economy is operating below full employment with a recession and policies to shift AD right (expansionary fiscal or monetary policy) and/or AS right (lowering business taxes) should be undertaken to move equilibrium towards LRAS (full employment) and increase output and decrease unemployment.

An Inflationary Gap results when the intersection of AD and AS (equilibrium) is to the right of LRAS. In this case the economy is operating above full employment with inflation and policies to shift AD left (contractionary fiscal or monetary policy) should be undertaken to move equilibrium towards LRAS (full employment) and decrease output and decrease the price level.



The Phillips Curve

The Phillips Curve reflects the trade-off between inflation and unemployment. When AD shifts right, output goes up, the price level goes up, and unemployment goes down since a larger number of workers are required to produce the increased level of output. When AD shifts left, the opposite happens. When output goes down, the price level goes down, and unemployment goes up since a smaller number of workers are required to produce the decreased level of output.

The rule to remember is this. When AD shifts, we move along the Phillips curve opposite the shift in AD. If AD shifts right, we move up and to the left along the Phillips curve (higher inflation, lower unemployment). If AD shifts left, we move down and to the right along the Phillips curve (lower inflation, higher unemployment).

IF AS SHIFTS, THE WHOLE PHILLIPS CURVE SHIFTS IN THE DIRECTION OPPOSITE TO THE SHIFT IN AS.

The Long Run Phillips Curve (LRPC) is independent of the price level (like LRAS) because it represents the natural rate of unemployment (NARU) when the economy is in long run equilibrium (also called full employment output because we always have structural and frictional unemployment).

Assuming no change in the labor force, when LRAS shifts right or left, the Long Run Phillips Curve (LRPC) shifts in the opposite direction.


AS: Keynesian vs Classical

The Keynesian curve assumes in a deep recession we can have an increase in AD, an increase in output, and no increase in prices because there is so much unused capacity (slack). The Keynesian AS curve transitions from horizontal (recession), upward sloping around full employment, and becomes almost vertical (similar to LRAS) when we have a large inflationary gap (high inflation).
The Classical AS curve (the one we use) is upward sloping throughout its range.


Non-Discretionary vs. Discretionary Fiscal Policy (Fiscal policy is government spending and taxes)

Non-Discretionary fiscal policy is government spending over which the government has no control (no discretion). Non-Discretionary fiscal policy expenditures (spending) includes social security payments, unemployment, food stamps, housing subsidies, other social welfare expenditures (spending), etc. These programs are known as entitlements, which means that people automatically qualify for them if they need them and don't have a high enough level of income. The laws governing these expenditures are already in place so the government has no discretion (choice) to change them. For this reason, these non-discretionary expenditures are also known as automatic stabilizers, meaning they help stabilize the economy when we go into a recession by providing financial support to individuals in need which causes AD to fall less than it would without these supplemental sources of income.

Discretionary fiscal policy includes changing the levels of government spending and/or tax policy to achieve desired macroeconomic outcomes. For example, if we are in a deep recession, the government might increase spending and cut income taxes to increase AD (shift AD right), and decrease business taxes to increase AS (shift AS right). With inflation, the government might decrease spending and raise income taxes in an effort to decrease AD and reduce inflationary pressures.


The Spending Multiplier

All spending is multiplied throughout the economy. For example, if Ajahn buys something from Teresa's store, Teresa's employees earn wages, and they buy from Monica's store, and Monica's employees buy from Amber's store, etc., etc.,etc. The formula governing the value of the multiplier is 1/MPS (The Marginal Propensity to Save, the fraction of people's income they save instead of spend). For example if MPS=0.2, the spending multiplier = 1/0.2=5. If MPS falls to 0.1, the multiplier becomes 1/0.1=10. This makes sense. If people are saving less, they are spending more.

People's willingness to spend, or the fraction of their income they spend instead of save, is known as the Marginal Propensity to Consume (MPC). The sum of MPC+MPS always is equal to 1, since you only have two options with each dollar of income, spend it or save it. Therefore, 1-MPC=MPS, and 1-MPS=MPC.




Economic Growth

Economic Growth is an increase in Real (inflation adjusted) GDP (output), represented by a rightward shift in LRAS. The best measure of economic growth is an increase in real (inflation adjusted) per capita (per person) GDP, which means that the standard of living has increased for the average person.

Things that shift LRAS right include more workers (a larger labor force), greater natural resources, a higher level of technology, a larger number of factories, an improved level of infrastructure (roads, airports, bridges, trains, harbors),higher education levels and productivity (output per worker), foreign trade, and lower interest rates which increase investment in productive capacity.



INTEREST RATES

The interest rate is a rate expressed as a percentage that a borrower has to pay for a loan. When interest rates are low, businesses are more likely to borrow to expand their productive capacity (investment), and consumers are more likely to borrow to buy houses (investment) and cars (consumption). Therefore, low interest rates stimulate economic activity by increasing I and C, and therefore, AD in the short run and LRAS in the long run (as a result of increased investment in productive capacity). Borrowers like low interest rates. When interest rates are high, the reverse happens, and businesses and consumers borrow less, which has a negative impact on output in both the short and long run.

Real interest rates are the nominal (given) rate minus the inflation rate. So if I have a 6% loan and the inflation rate is 3%, my real cost of borrowing is 3% and the bank's real earnings are 3% (6%-3%=3%).

Savers (lenders) are just the opposite of borrowers. They like high interest rates, or a greater return on their savings (remember, when you save, or put money in the bank, you are loaning money to the bank to lend to lend to others, that is why the bank pays you interest on your savings). Therefore, when interest rates increase, the quantity of money supplied also increases, and when interest rates decrease, the quantity of money supplied decreases.

Interest rates impact the value of a country's currency (money) as a result of the behavior of lenders (savers). If Japan has a higher real (inflation adjusted) interest rate than the US, people will take their money out of US banks and put it into Japanese banks to earn a higher real rate of return. To do this, they have to buy Japanese Yen in the foreign exchange market to deposit in Japanese banks. This increased demand for Yen causes the Yen to go up in value (appreciate). This transaction also causes the dollar to fall in value, because the increase in the supply of dollars in the foreign exchange market causes the dollar to go down in value (depreciate). So the rule is, higher relative real interest rates will cause a country's currency (money) to appreciate, while lower relative real interest rates will cause a country's currency to depreciate.


Monetary Policy

Monetary Policy is control of a nation's supply of money, and therefore interest rates, foreign exchange
rates, and inflation rates by a nation's central bank. The three tools a central bank usually uses are buying and selling government bonds (securities) from commercial banks, changing the rate at which the central bank charges commercial banks for a loan (the discount rate), and changing the reserve requirement (the amount of deposits banks are not allowed to lend).

When the central bank buys bonds from commercial banks, it is sending cash to the banks in exchange for the bonds (securities), so the banks now have more money to lend, increasing the supply of money and decreasing interest rates, which increases investment and consumption since businesses and consumers can borrow money at a lower cost. Bond prices also increase since the demand for bonds increases, which also causes interest rates to fall.\

When the central bank sells bonds (securities) to commercial banks, it is receiving cash from the banks in exchange for the bonds (securities), so the banks now have less money to lend, decreasing the supply of money and increasing interest rates, which decreases investment and consumption since businesses and consumers now have to pay more for borrowed money. Bond prices also decrease since the supply of bonds increases, which causes interest rates to rise.

Another tool to control the money supply is use of the discount rate, the rate the central bank charges commercial banks for a loan. If the discount rate is lowered, banks can borrow more inexpensively, they charge less for loans to their customers (lower interest rates), which increases investment and consumption since businesses and consumers can borrow money at a lower cost.

If the discount rate is raised, bank borrowing costs increase, they charge more for loans to their customers (higher interest rates), which decreases investment and consumption since businesses and consumers now have higher borrowing costs.

The third tool of monetary policy a central bank can use is the reserve requirement. The reserve requirement, usually stated as a percentage, is the amount of a customer's deposit that banks must keep in reserve (how much of a deposit they are not allowed to lend). If the reserve requirement is decreased, banks can now lend a higher percentage of their deposits, so the supply of funds available to be lent would increase, decreasing interest rates. If the reserve requirement is increased, the supply of funds available to be lent would decrease, increasing interest rates.

The US central bank is the Federal Reserve Bank, which is usually called the “Fed”.







Money Multiplier

Money lent by banks is multiplied throughout the banking system in the same way that spending is multiplied throughout the economy. If Monica gets a loan and buys construction material from Victor, Victor deposits the money Monica spent in his bank. His bank then loans the money to Victoria, who spends it at Jackie's business. Jackie then deposits it in her bank, who lends it to Mariela, etc., etc., etc.

The amount of new money created by any new deposit is related to the reserve requirement (RR), the amount of any new deposit banks are required to hold in reserve (the amount they can't lend). Therefore, the lower the reserve requirement (RR), the more banks can lend and the larger the money multiplier.

The formula for the money multiplier is 1/RR. To calculate the total new money that can be created by a deposit, we do the following. If the deposit is $1000 and RR=0.2, the total increase in the money supply is equal to $1000 times 5 because (1/.2 = 5), which equals $5000, but then we have to subtract out the original $1000 (since it was already in the money supply), so the total potential increase in the money supply is $4000. We called it the potential increase in the money supply because banks don't always lend all their excess reserves (the reserves that they are not required to keep, which are the reserves available for lending).

When the Federal Reserve buys bonds, sending cash to the bank for the bonds, the bank can lend all of the money it received since it is their money (not a depositors) and they are not required to hold any of it in reserve. If the Fed buys $1000 in bonds from Wells Fargo and the reserve requirement(RR) is 0.1, the total new money creation is $1000(10)=$10,000.

The rule to remember is banks can always lend ALL THEIR EXCESS RESERVES, and cash at the Federal Reserve is not considered to be a part of the money supply.

When calculating problems dealing with a withdrawal by depositors or the Fed selling bonds, the math is exactly the same, except it is now a decrease in the potential money supply, so it is preceded by a negative sign (we put a minus in front of it).



Loanable Funds Market

The loanable funds market differs from the money market (which is controlled by central bank actions) in three ways. First, it represents the total supply and demand for money in the economy and can be affected by the behavior of borrowers (demand for money) and savers and lenders (supply of money) outside control of the central bank. Second, it does not have the vertical supply curve like the money market, it's supply curve is upward sloping characteristic of a normal market. Finally, it uses real interest rates as a price signal as opposed to nominal interest rates used in the money market.

Budget Deficits and “Crowding Out” of private investment

When the government runs a budget deficit (when the government spends more than it takes in in taxes), the government is forced to borrow money in the loanable funds market to cover the shortfall in revenue. This increased demand for money by the government causes the demand for money curve to shift up and to the right, increasing real interest rates, which decreases investment. The government, in essence, has “crowded out” private investment since it's demand for money causes real interest rates to rise.

The rule for us is this. If we see the word “budget deficit”, we think “crowding out”, with the increased interest rates decresing investment and shifting AD left.

“Crowding in” would reverse the process, lower government borrowing from a surplus (more tax revenue than spending) resulting in less demand for money, lower interest rates, and more investment. However, “crowding in” is uncommon and we will most likely not see it on the test.


FOREIGN EXCHANGE AND TRADE

Currency Appreciation: When a country's currency appreciates (goes up in value), it costs less to buy another country's currency, making it less expensive to buy foreign products. However, it now costs more in the foreign currency to buy the appreciating currency, causing exports to fall since products denominated (priced) in the appreciating currency are now more expensive.

Currency Depreciation: When a country's currency depreciates (goes down in value), it costs more to buy another country's currency, making it more expensive to buy foreign products. However, it now costs less in the foreign currency to buy the depreciating currency, causing exports to rise since products denominated (priced) in the depreciating currency are now less expensive

The value of a nation's currency has a direct effect on AD and output. When a nation's currency depreciates, it's products become less expensive for foreign buyers, it's exports will increase, it's imports will fall (since foreign products become more expensive with the depreciation of the currency), causing the value of it's net exports to increase, increasing AD and output.

The reverse happens when a country's currency appreciates. When a nation's currency appreciates, it's products become more expensive for foreign buyers, it's exports will decrease, it's imports will increase (since foreign products become less expensive with the appreciation of the currency), causing the value of it's net exports to decrease, decreasing AD and output.

The value of a nation's currency is strongly influenced by the supply of it's currency both in the domestic (home) market and the foreign exchange market.


If the money supply is increased in the domestic market, nominal and real interest rates fall, and foreign demand for the home currency will decrease due to the lower real rate of return for foreign investors, and the currency will depreciate. At the same time, investors in the home country will want to move money into other countries to earn the higher real rates of return, increasing the supply of the home currency, resulting in a decrease in the value of the currency (depreciation). Therefore, expansionary monetary policy also results in a depreciation of the domestic (home) currency.

If the money supply is decreased in the domestic market, nominal and real interest rates rise, and foreign demand for the home currency will increase due to the higher real rate of return for foreign investors, and the currency will appreciate. At the same time, investors in the home country will want to move money back into the home country to earn the higher real rates of return, decreasing the supply of the home currency, resulting in an increase in the value of the currency (appreciation). Therefore, contractionary monetary policy results in an appreciation of the domestic (home) currency.

Demand changes for a nation's currency will impact it's value. If demand for the home currency increases in the foreign exchange market, the currency will appreciate, exports will fall, imports will rise, and output will decline as a result of a decrease in net exports.

If demand for the home currency decreases in the foreign exchange market, the currency will depreciate, exports will rise, imports will fall, and output will increase as a result of an increase in net exports.

Supply changes for a nation's currency will impact it's value. If supply of the home currency increases in the foreign exchange market, the currency will depreciate, exports will rise, imports will fall, and output will increase as a result of an increase in net exports.

If supply of the home currency decreases in the foreign exchange market, the currency will appreciate, exports will fall, imports will rise, and output will decline as a result of a decrease in net exports.

The keys to remember in the foreign exchange market and analysis are these.

  1. Depreciating currency, more net exports, increased AD and output. If the country is dependent on foreign resource inputs, the depreciating currency can have a negative impact however, by decreasing AS (shifting it up to the left).
  2. Appreciating currency, less net exports, decreased AD and output. If the country is dependent on foreign resource inputs, the appreciating currency can have a positive impact however, by increasing AS (shifting it down to the right).
  3. The domestic (home) currency is always priced with the number of foreign currency units needed to buy one unit of the home currency. For example, in the dollar market the dollar is priced in Japanese Yen/1$ (you can't price dollars in dollars). On the flip side, in the Yen market the price signal is always US$/1 Yen.







Balance of Payments

A nation's current account balance (balance of trade) is really just a reflection of it's net exports. If net exports to the rest of the world are positive, a nation has a current account surplus. If net exports to the rest of the world are negative, a nation has a current account deficit.

The sum of the current account + the financial (capital) account is always 0.


Graph Review


Course Review









Friday, October 18, 2013

Review for Test II



Study Guide #2

(D) = Decrease
(I) = Increase

1) U.S Price Level changes and Xn

* PL Increases, Exports Decrease, Imports Increase, Xn Decreases
* PL Decreases, Exports Increase, Imports Decrease, Xn Increases

2) AD Shifters right (GDP up) ''Demand pull inflation''

*Consumer confidence (I)
*Government spending (I)
*Reserve requirement (D)
*Consumption (I)
*Money supply (I)
*Interest rates (D)
*Investment (I)
*Buy bonds
*Fed funds (D)
*Exports (I)
*Discount rate (D)
*Imports (D)
*People think there will be inflation

3) AD shifters left (GDP down) 

*Exports (D)
*Sell bonds
*Reserve requirement (I)
*Government spending (D)
*Consumption (D)
*Investment (D)
*Interest Rate (I)
*Money supply (D)
*Imports (I)
*Discount rate (I)
*Fed funds (I)
*Consumer confidence (D)
*People think there will be deflation (prices decreasing)


4) LRAS shifters ( how much we can produce)

*Technology
*Productivity
*Resources
*Education
*Population
*Investment
*Trade with other countries

5) AS shifters right (GDP up, PL down) [ driven by production cost]

*Business Taxes (D)
*Wages(D)
*Resource cost (D)
*Subsidies (I) (Paying a business to make something)
*Anticipated  deflation

6) AS shifters left (GDP down, PL up) ''stagflation''
''cost push inflation''
*Wages (I)
*Business Taxes (I)
*Anticipated inflation
*Resource cost (I)
*Subsidies (D)

Tuesday, October 8, 2013

Macro Practice Test



AP MACRO MIDTERM #2 PART 1 FORM B

1.        Which of the following would theoretically DECREASE the money supply?
a)        An open market sale of Treasury bonds
b)       An increase in the required reserve ratio
c)        A decrease in the discount rate
d)       Both a and b
e)        Both a and c


2.        How much is the multiplier if the required reserve ratio is 20%?
a)        4
b)       5
c)        8
d)       20

3.        Which of the following would theoretically decrease the money supply?
a)        An open market sale of treasury bonds by the Fed.
b)       A decrease in the required reserve ratio.
c)        An increase in the discount rate.
d)       Both a and b.
e)        Both a and c.

4.        Suppose $200 is deposited in Key Bank. The required reserve ratio is 20%. What is the amount of total money created (potential deposit creation)?
a)        $2,000
b)       $1,800
c)        $200
d)       $800

5.        Which of the following shifts will cause lower rates of both unemployment and inflation?
a)        An increase in SRAS (AS).
b)       A decrease in SRAS (AS).
c)        An increase in aggregate demand.
d)       A decrease in aggregate demand.

6.        The components of GDP (aggregate expenditure) include:
a)        Consumption, taxes, and savings.
b)       Consumption, investment, net imports, government expenditure.
c)        Consumption, investment, government expenditures and net exports.
d)       Consumption, investment, disposable income.


7.        Which of the following would be caused by less government spending when the economic equilibrium lies on the Long Run Aggregate Supply Curve?
a)        An inflationary gap.
b)       Decreasing unemployment.
c)        A decrease in output.
d)       An inflationary gap.
e)        An increase in prices.












8.        Which of the following would be likely to increase OUTPUT?
I.                     A decrease in productivity.
II.                   An increase in consumer spending.
III.                 A decrease in interest rates.
a)        I only
b)       II only
c)        III only
d)       I and II only
e)        II and III only

9.        What would be most effective in increasing AD?
a)        The Federal Reserve Sells Bonds.
b)       The Federal Reserve Buys Bonds.
c)        The Federal Reserve Lowers the Discount Rate and Buys Bonds.
d)       The Federal Reserve Raises the Discount Rate and Buys Bonds.

10.     A tax cut for businesses and a tax increase for consumers would
a)        Shift AD right and AS left
b)       Shift AD right and AS right
c)        Shift AD left and AS right
d)       Shift AD left and AS left
e)        Wouldn’t affect AS, it would only effect AD

11.     Andreas deposits $1,000 in the Bank of Leon. The reserve requirement is 20% . How much new money will be created by the deposit?
a)        $900
b)       $4,000
c)        $5,000
d)       $9,000
e)        $10,000

12.     Aggregate demand shifts to the right when:
a)        Government taxes are increased.
b)       Government transfers are decreased.
c)        Government purchases are decreased.
d)       All of the above.

13.     Under monetary policy, which of the following occur(s) when the Fed buys Treasury bonds?
a)        Interest rates rise
b)       Investment increases
c)        Money supply decreases
d)       AD Falls
e)        Consumption Decreases

14.     Which of the following would INCREASE the money supply?
a)        An open market sale of Treasury bonds.
b)       An decrease in the required reserve ratio.
c)        A decrease in the discount rate.
d)       Both a and b.
e)        Both b and c.

15.     A tax cut is less powerful than an increase in government purchases of the same size because:
a)        A portion of the tax cut is spent on exports.
b)       A portion of the tax cut is saved.
c)        Tax cuts do not increase disposable income.
d)       The tax-cut multiplier is equal to 1.

16.     Aggregate demand shifts to the right when:
a)        Government taxes are increased.
b)       Money supply is decreased.
c)        Government purchases are decreased.
d)       Interest rates go down due to an increase in the money supply.

17.     Suppose $1,000 is deposited in M&T Bank. The required reserve ratio is 20%. How much can the bank lend?
a)        $500.
b)       $600.
c)        $7000.
d)       $8000.