AP Macro Exam Cumulative Review and Common Mistakes Students Make

1. AP Macro Exam Cumulative Review and Common Mistakes Students Make

2. 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).

3. 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.

4. 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. 

5. 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.

6. 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…

7. The difference between a change in demand and the resultant movement along a demand curvevs.Shifting of the demand curve

8. P QD GRAPHING DEMAND Price of Corn What if Demand Increases? P $5 4 3 2 1 CORN 10 20 35 55 80 $5 4 3 2 1 D o Q 10 20 30 40 50 60 70 80 Quantity of Corn

9. P QD GRAPHING DEMAND Price of Corn Increase in Quantity Demanded P $5 4 3 2 1 CORN 30 40 60 80 + 10 20 35 55 80 $5 4 3 2 1 Increase in Demand D’ D o Q 10 20 30 40 50 60 70 80 Quantity of Corn

10. The difference between a change in supply and the resultant movement along a supply curvevs.Shifting of the supply curve

11. P QS GRAPHING SUPPLY Price of Corn P What if Supply Increases? S $5 4 3 2 1 CORN $5 4 3 2 1 60 50 35 20 5 o Q 10 20 30 40 50 60 70 80 Quantity of Corn

12. P QS GRAPHING SUPPLY Price of Corn Increase in Supply P S’ S $5 4 3 2 1 CORN 80 70 60 45 30 $5 4 3 2 1 60 50 35 20 5 Increase in Quantity Supplied o Q 10 20 30 40 50 60 70 80 Quantity of Corn

13. Mislabeling or NOT labeling graphs correctly

14. EQUILIBRIUM: REAL OUTPUT AND THE PRICE LEVEL P AS Equilibrium in the Intermediate Range Price Level Pe P1 AD Q Q1 Qe Q2 Real Domestic Output, GDP

15. GROWTH IN THE AD-AS MODEL ASLR1 ASLR2 C A Price Level Capital Goods Q1 Q2 B D Real GDP Consumer Goods

16. ECONOMIC GROWTH IN THE EXTENDED AD – AS MODEL ASLR1 ASLR2 AS2 AS1 Price Level P2 P1 AD2 AD1 o Q1 Q2 Real GDP

17. THE MONEY MARKET Sm1 Sm 10 7.5 5 2.5 0 A temporaryshortage of money will require the sale of some assets to meet the need. ie Rate of interest, i (percent) Dm 0 50 100 150 200 250 300 Amount of money demanded (billions of dollars)

18. Net effects of Monetary Policy and/or Fiscal Policy onInterest Rates (Ir%)

19. FISCAL POLICY, AGGREGATE SUPPLY AND INFLATION AS Fiscal Policy And Inflation Price level P1 AD1 AD2 $495 $505 $515 Real GDP (billions)

20. 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

21. Expansionary Monetary Policy>> Interest Rate DECREASE

22. If the money supply increases to stimulate the economy... MONETARY POLICY AND EQUILIBRIUM GDP Sm1 Sm2 Investment Demand 10 8 6 0 10 8 6 0 Real rate of interest, i Dm Quantity of money demanded and supplied Amount of investment, i AS Money Supply Increases Interest Rate Decreases Price level Investment Increases P2 P1 AD & GDP Increases with slight inflation AD2 AD1 Real domestic output, GDP

23. If the money supply increases again… MONETARY POLICY AND EQUILIBRIUM GDP Sm1 Sm2 Sm3 Investment Demand 10 8 6 0 10 8 6 0 Real rate of interest, i Dm Quantity of money demanded and supplied Amount of investment, i AS More Money Supply P3 Lower Interest Rates Price level More Investment P2 P1 Still higher AD & GDP with significant inflation AD2 AD1 AD3 Real domestic output, GDP

24. MULTIPLIER(S) CONFUSION

25. Income (Spending) Multiplier • Multiplier = 1/ 1 – MPC or 1/ MPS • Initial Change in Spending X MULTIPLIER = Change in Output

26. MONEY MULTIPLIER • 1 / Required Reserve Ratio • Maximum Multiple $$$ Money Expansion

27. Amount bank can lend - New money created Acquired reserves and deposits Required reserves Excess reserves Bank $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 A B C D E F G H I J K L M N Other 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 MULTIPLE DEPOSIT EXPANSION PROCESS $400.00 Total amount of money created by the banking system

28. Balanced Budget Multiplier= 1(Net Result on GDP)

29. Remembering the difference between the Amount of Money Created and theChange in the Money Supplywhen dealing with the Money Multiplier andMoney Creation

30. FEDERAL RESERVE PURCHASE OF BONDS New reserves $200 Required reserves Purchase of a $1000 bond from a bank... $800 Excess Reserves $1000 Initial Deposit $4000 Bank System Lending Total Increase in Money Supply ($5000)

31. Confusing Comparative AdvantageCalculationsInput—IOUOutput- OOO

32. Comparative and AbsoluteAdvantage[Comparative Advantagecan produce at a lower productive opportunitycost] Haiti’s DCCCuba’s DCC 1B = __ C 1B = __ C __ B = 1C __ B = 1C Haiti Cuba 90 100 6 4 1/4 1/6 80 Terms of Trade 1 bread = __coffees “A prisoner of my own PPC.” “I can consume only on my PPC.” 5 Coffee Coffee World CC 1Bread=__ Coffees __ Bread=1 Coffee 5 1/5 0 o Bread 18 20 15 Bread “Trade is the free lunch of economics.” 1. (Haiti/Cuba) has anabsolute advantage in coffeeand (Haiti/Cuba) has an absolute advantage in bread. 2.Haitiwill export(bread/coffee)[comparative advantage]andimport(bread/coffee). [comparative disadvantage] &Cubawillexport(bread/coffee) &import(bread/coffee). 3. Mutuallyadvantageous tradecan occur between Haiti & Cuba when1 breadis exchanged for (3/5/7)tons of coffee. Production in both is subject to (increasing/constant) opportunity costs. “Export”what it can produceat a lower relative priceand“import”goods it can buy at a lower relative price. Absolute Advantage- more efficient, can produce more with the same number of inputs [who can do the most in absolute numbers] “Do whatyou do best & trade for the rest.”

33. Remembering the difference between Real andNominal

34. Nominal:with InflationReal:without Inflation

35. 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 GDP

36. 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 INCOME

37. 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 INTEREST RATE (I%)

38. ANTICIPATED INFLATION 6% 11% 5% = + Inflation Premium Nominal Interest Rate Real Interest Rate

39. 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) WAGES

40. Demand-Pull Inflationvs.Cost-Push Inflation

41. DEMAND-PULL INFLATION ASLR AS2 AS1 c P3 Price Level b P2 a P1 AD2 AD1 o Q1 Real domestic output

42. COST-PUSH INFLATION Occurs when short-run AS shifts left ASLR AS2 AS1 Price Level b P2 a P1 AD1 o Q2 Q1 Real domestic output

43. COST-PUSH INFLATION Government response with increased AD ASLR AS2 AS1 Even higher price levels c P3 Price Level b P2 a P1 AD2 AD1 o Q2 Q1 Real domestic output

44. COST-PUSH INFLATION If government allows a recession to occur ASLR AS2 AS1 Price Level b P2 a P1 AD1 o Q2 Q1 Real domestic output

45. COST-PUSH INFLATION If government allows a recession to occur ASLR AS2 AS1 Nominal wages fall & AS returns to its original location Price Level b P2 a P1 AD1 o Q2 Q1 Real domestic output

46. Phillips Curvevs.Laffer Curve

47. THE PHILLIPS CURVE CONCEPT 7 6 5 4 3 2 1 0 As inflation declines... Unemployment increases Annual rate of inflation (percent) 1 2 3 4 5 6 7 Unemployment rate (percent)

48. THE LAFFER CURVE 100 Tax rate (percent) l 0 Tax revenue (dollars)

49. THE LAFFER CURVE 100 Tax rate (percent) m l 0 Tax revenue (dollars)

50. THE LAFFER CURVE 100 n Tax rate (percent) m l 0 Tax revenue (dollars)