Transcript COMMON MISTAKES ON THE AP MACRO EXAM

AP Macro Exam
Cumulative Review and
Common Mistakes
Students Make
General Stuff- MC’s
To Guess Or Not To Guess On MC’s:
The general rule of thumb: choose your best
answer, and don’t skip the question if you
can confidently rule out at least one of the multiple
choice answers as not being the correct answer.

Guessing if one can eliminate at least one answer as
not correct provides a statistical, but not
guaranteed, advantage in the students favor as the 1
point awarded for the correct answer has a larger payoff
than the smaller 1/4 point deduction for selecting the
wrong answer.

However, there are other factors to consider; be especially
careful on the earlier multiple choice questions since usually
these questions are often somewhat easier than those
questions towards the end of the multiple choice section
(maximize your overall score by omitting "stupid mistakes" or
mistakes due to rushing).
General Stuff- MC’s Cont’d
The first half of the MC portion of the test is
a bit easier than the second half. If you
have extra time (finish early) on the
multiple choice, go back and look over your
first 3 or four answers (many students
screw up in the very beginning of most
tests). Only change an answer if it is
obvious that a mistake was made.
 Warm-up- do some simple S and D
problems before the exam starts out of
your PR book to get the brain going.

General Stuff- FRQ’s
Bring two blue pens, two black pens and two (or more) or more
sharpened pencils)
Three questions, no pick and choose as in US History, do them all, one
is the 'long' essay' worth the value of the other two put together. Spend
half your time there. You get 60 minutes (10 review/50 write).


Read the question. See what it is about. Then read it again now that you
know what it is about and its direction. Then read and sketch an answer. If
you can see where nine or ten questions are buried in the long question, try
to nail one more than half. Don't waste time trying to figure out an extra
point until you have attempts at all three.
On the short-essays, see if you can identify four, five or six points in the
format of the question. Once again, nail down one more than half on each of
the shorties. Anything over that and it is pure gravy.
The vast majority of Q's on AP econ FRQ situations ask for ONE
and ONLY ONE shift. If you feel compelled to shift two things you’re
probably overanalyzing the question.

Unless there are TWO SEPARATE actions, you should not look for two
separate reactions or effects.
General Stuff- FRQ’s Cont’d
Remember, pure declarative answers generally get
you nothing. An answer of "increases" just doesn't
win a point. It is your defense of why increases is
correct. And remember that one point is not a lot of
heavy lifting. If you’re going on-and-on for one point,
then you probably don't know the answer.
No calculators, no cheat sheets, no copying. Essays
do not have to use complete sentences. Many of the
best essays use very few words. And abbreviations
are fine right from the get go. NI is National Income,
GDP is..well you know. An arrow pointing up is read
as increases or increasing or increased as grammar
befits.
General Stuff- FRQ’s Cont’d
Write big and neat--If I can’t read it, it’s
wrong.
Write clearly, skipping lines between
responses.
Make bigger graphs.
Use the symbols and abbreviations
we’ve used in class; don’t invent your
own on the spot.
DO NOT put an LRAS line on a
loanable funds market graph…
The difference between a
change in demand and the
resultant movement along
a demand curve
vs.
Shifting of the demand
curve
GRAPHING
DEMAND
Price of Corn
P
CORN
P
$5
4
3
2
1
QD
10
20
35
55
80
$5
4
3
2
What if
Demand
Increases?
1
o
D
10 20 30 40 50 60 70 80
Quantity of Corn
Q
GRAPHING
DEMAND
Price of Corn
Increase
in Quantity
Demanded
P
CORN
P
$5
4
3
2
1
QD
10 30
20 40
35 60
55 80
80 +
$5
4
3
2
1
o
Increase
in
Demand
10 20 30 40 50 60 70 80
Quantity of Corn
D’
D
Q
The difference between a
change in supply and the
resultant movement along
a supply curve
vs.
Shifting of the supply
curve
GRAPHING
SUPPLY
Price of Corn
P
$5
4
3
2
S
What if
Supply
Increases?
1
o
10 20 30 40 50 60 70 80
Quantity of Corn
CORN
P QS
$5
4
3
2
1
Q
60
50
35
20
5
GRAPHING
SUPPLY
Price of Corn
P
$5
4
3
2
1
Increase
in
Supply
S
S’
CORN
P QS
$5
4
3
Increase 2
in Quantity 1
Supplied
o
10 20 30 40 50 60 70 80
Quantity of Corn
Q
60 80
50 70
35 60
20 45
5 30
Mislabeling or NOT
labeling graphs correctly
EQUILIBRIUM: REAL OUTPUT
AND THE PRICE LEVEL
Price Level
P
AS
Equilibrium in the
Intermediate Range
Pe
P1
AD
Q1
Qe Q2
Real Domestic Output, GDP
Q
GROWTH IN THE AD-AS MODEL
ASLR1 ASLR2
C
Price Level
Capital Goods
A
B
D
Consumer Goods
Q1 Q2
Real GDP
ECONOMIC GROWTH IN THE
EXTENDED AD – AS MODEL
ASLR1
ASLR2
AS2
Price Level
AS1
P2
P1
AD2
AD1
o
Q1
Real GDP
Q2
Rate of interest, i (percent)
THE MONEY MARKET
Sm1
Sm
10
7.5
ie
5
Dm
2.5
0
A temporary shortage
of money will require
the sale of some assets
to meet the need.
0
50
100
150
200 250 300
Amount of money demanded
(billions of dollars)
Net effects of Monetary
Policy and/or Fiscal Policy
on
Interest Rates (Ir%)
FISCAL POLICY, AGGREGATE
SUPPLY AND INFLATION
Price level
AS
Fiscal Policy
And Inflation
P1
AD1
AD2
$495 $505 $515
Real GDP (billions)
Expansionary Fiscal
Policy >> Interest Rate
INCREASE
Draw Money Market
Increase Spending (AD)>>Increase
Demand for Money>>Increase Interest
Rate
Higher Price Level>>Increase Demand
for Money>>Increase Interest Rate
Expansionary Monetary
Policy>> Interest Rate
DECREASE
MONETARY POLICY AND EQUILIBRIUM GDP
Real rate of interest, i
Sm1 S
m2
10
10
8
8
6
6
Investment
Demand
Dm
0
Quantity of money demanded and supplied
Price level
AS
P2
P1
0
Amount of investment, i
Money Supply Increases
If the money
supply increases
Investment
Increases
to stimulate
the
economy...
AD &
GDP Increases
Interest Rate Decreases
AD1
AD2
Real domestic output, GDP
with slight inflation
MONETARY POLICY AND EQUILIBRIUM GDP
Real rate of interest, i
Sm1 S S
m2
m3
10
10
8
8
6
6
Dm
0
Quantity of money demanded and supplied
AS
Price level
Investment
Demand
P3
P2
P1
0
Amount of investment, i
More Money Supply
If theInterest
moneyRates
Lower
supply increases
More Investment
again…
AD1
AD2 AD3
Real domestic output, GDP
Still higher AD & GDP
with significant inflation
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
Bank
Acquired reserves Required
and deposits
reserves
Excess
reserves
Amount bank
can lend - New
money created
$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
Total amount of money created by the banking system $400.00
A
$100.00
B
80.00
C
64.00
D
51.20
E
40.96
F
32.77
G
26.22
H
20.98
I
16.78
J
13.42
K
10.74
L
8.59
M
6.87
N
5.50
Other banks 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
Balanced Budget
Multiplier
=1
(Net Result on GDP)
Remembering the
difference between the
Amount of Money Created
and the
Change in the Money
Supply
when dealing with the
Money Multiplier and
Money Creation
FEDERAL RESERVE
PURCHASE OF BONDS
Purchase of a
$1000 bond
from a bank...
New reserves
$800
Excess
Reserves
$4000
Bank System Lending
$200
Required
reserves
$1000
Initial
Deposit
Total Increase in Money Supply ($5000)
Confusing
Comparative Advantage
Calculations
Input—IOU
Output- OOO
Comparative and Absolute Advantage
Haiti
Coffee
Haiti’s DCC
4 C 100
1B = __
1/4 B = 1C
__
80
can produce at a lower productive opportunity cost]
“A prisoner of
my own PPC.”
90
Coffee
[Comparative Advantage
Cuba
“I can consume
only on my PPC.”
Cuba’s DCC
6 C
1B = __
1/6 B = 1C
__
Terms of Trade
5 coffees
1 bread = __
World CC
5 Coffees
1 Bread=__
1/__
5 Bread=1 Coffee
0 Bread 15 18
20
“Trade is the free lunch of economics.”
o
Bread
1. (Haiti/Cuba) has an absolute advantage in coffee and (Haiti/Cuba) has an
absolute advantage in bread.
2. Haiti will export (bread/coffee) [comparative advantage] and import (bread/coffee).
[comparative disadvantage] & Cuba will export (bread/coffee) & import (bread/coffee).
3. Mutually advantageous trade can occur between Haiti & Cuba when 1 bread is exchanged
for (3/5/7) tons of coffee. Production in both is subject to (increasing/constant) opportunity costs.
“Export” what it can produce at a lower relative price and “import” goods it can buy at a lower relative price.
Absolute Advantage - more efficient, can produce more with the “Do what you do best
same number of inputs [who can do the most in absolute numbers] & trade for the rest.”
Remembering the
difference between
Real
and
Nominal
Nominal:
with Inflation
Real:
without Inflation
GDP
Nominal 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
INCOME
NOMINAL 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
ANTICIPATED INFLATION
11%
=
+
5%
Nominal
Interest
Rate
Real
Interest
Rate
6%
Inflation
Premium
WAGES
NOMINAL 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)
Demand-Pull Inflation
vs.
Cost-Push Inflation
DEMAND-PULL INFLATION
ASLR
AS2
Price Level
AS1
c
P3
b
P2
a
P1
AD2
AD1
o
Q1
Real domestic output
COST-PUSH INFLATION
Occurs when short-run AS shifts left
ASLR
AS2
Price Level
AS1
b
P2
a
P1
AD1
o
Q2 Q 1
Real domestic output
COST-PUSH INFLATION
Government response with increased AD
ASLR
AS2
Price Level
AS1
c
P3
b
P2
a
P1
Even
higher
price
levels
AD2
AD1
o
Q2 Q 1
Real domestic output
COST-PUSH INFLATION
If government allows a recession to occur
ASLR
AS2
Price Level
AS1
b
P2
a
P1
AD1
o
Q2 Q 1
Real domestic output
COST-PUSH INFLATION
If government allows a recession to occur
ASLR
AS2
Price Level
AS1
b
P2
a
P1
Nominal
wages fall &
AS returns
to its original
location
AD1
o
Q2 Q 1
Real domestic output
Phillips Curve
vs.
Laffer Curve
THE PHILLIPS CURVE CONCEPT
Annual rate of inflation
(percent)
7
As inflation declines...
6
5
Unemployment
increases
4
3
2
1
0
1
2
3
4
5
6
7
Unemployment rate (percent)
THE LAFFER CURVE
Tax rate (percent)
100
l
0
Tax revenue (dollars)
THE LAFFER CURVE
Tax rate (percent)
100
m
l
0
Tax revenue (dollars)
THE LAFFER CURVE
100
Tax rate (percent)
n
m
l
0
Tax revenue (dollars)
THE LAFFER CURVE
Tax rate (percent)
100
n
m
m
Maximum
Tax
Revenue
l
0
Tax revenue (dollars)
Appreciation of the Dollar
Increase in taste for U.S. goods
Increase in U.S. Interest Rates
Decrease in U.S. Growth Rate
The Market for Dollars
Decrease in U.S. Price Level
Yen Price of Dollar
Exchange Rate: $1 = ¥100
P
Decrease in U.S. Currency Price
D1$
Y looking for $’s
Y150
Y100
S$
D2
$’s looking for Y
E2
D
A
Yen
depreciates
E1
Yen
appreciates
Y50
E3
D3
Depreciation of $
Decrease in Taste 0
Decrease in In. Rates
Increase Growth Rate
Increase Price Level
Increase in Currency Price
D
Q
A
Quantity
E of Dollars
1. Increase in taste
[more demand for a country’s products or assets]
2. Increase in interest rates
[Overseas investors increase their investments there.]
3. Decrease in price level
[overseas buyers want to buy our cheaper goods.]
4. Decrease in growth rate
[A country’s declining economy results
in them buying less from other countries;
decreasing demand for their currency
and thus appreciating the declining
economy’s currency]
5. Decrease in the price of a currency
relative to the other
1. If Japan buys 2 million more American cars
the dollar would (appreciate/depreciate) and our
imports from Japan would (increase/decrease).
2. If U.S. interest rates are increasing faster than
Japan’s, the dollar would (appreciate/depreciate) &
and our exports would (increase/decrease).
3. If prices are dropping more in Japan than in
the U.S., the yen will (appreciate/depreciate) and
Japan’s imports will (increase/decrease).
4. If the U.S. growth rate is faster than that of Japan,
the dollar will (appreciate/depreciate) and U.S.
imports from Japan will (increase/decrease).
5. If the dollar price of the yen decreases, the
dollar has (appreciated/depreciated) and our our
imports from Japan will (increase/decrease).