AP Macroeconomics øvingsprøve: enhet 1 til 6

• A. Country X has a comparative advantage in both goods because it can make more of each
• B. Country X has a comparative advantage in hats, and Country Y has a comparative advantage in radios
• C. Country Y has a comparative advantage in hats because its opportunity cost of a radio is lower
• D. Neither country gains from trade, since Country X is better at making both goods

Svar: B. Country X has a comparative advantage in hats, and Country Y has a comparative advantage in radios

Compare opportunity costs, not output. Country X gives up 1/3 of a radio for each hat and 3 hats for each radio. Country Y gives up 1/2 of a radio for each hat and 2 hats for each radio. X has the lower opportunity cost of hats, and Y has the lower opportunity cost of radios, so each has a comparative advantage in one good. Country X has an absolute advantage in both goods, but that does not stop trade from helping both countries when each specializes where its opportunity cost is lower.

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• A. A haircut sold this year
• B. The resale of a used car between two households
• C. A new house completed and sold this year
• D. Steel bought by a car maker to build the cars it sells this year
• E. A Social Security payment to a retiree
• F. A car assembled this year in a US plant owned by a foreign company

Svar: A. A haircut sold this year, C. A new house completed and sold this year, F. A car assembled this year in a US plant owned by a foreign company

GDP counts the market value of final goods and services produced within a country's borders in a year. A haircut is a final service, a new house is counted as investment in the year it is built, and a car assembled in the US counts even though the owner is foreign, because GDP is about where production happens. A used car was counted when it was new, steel bought to make cars is an intermediate good whose value is already in the price of the car, and a Social Security payment is a transfer, not payment for current production.

• A. It rose by 10 percent, the same as nominal GDP
• B. It rose, because nominal GDP rose
• C. It fell, because prices rose faster than nominal GDP
• D. It cannot be determined without the population

Svar: C. It fell, because prices rose faster than nominal GDP

Real GDP is nominal GDP divided by the price index, with the index written as a decimal. Here that is 11 trillion divided by 1.12, about 9.8 trillion, compared with 10 trillion at the start (where the deflator was 100, so real and nominal were equal). Nominal GDP grew 10 percent, but prices grew 12 percent, so the increase was more than eaten up by inflation and real output fell by roughly 2 percent. A rising nominal figure alone never tells you that output grew.

• A. Unemployment is zero
• B. Frictional and structural unemployment still exist, and cyclical unemployment is zero
• C. Only cyclical unemployment exists
• D. Only frictional unemployment exists

Svar: B. Frictional and structural unemployment still exist, and cyclical unemployment is zero

Full employment does not mean zero unemployment. The natural rate of unemployment is the sum of frictional unemployment (people between jobs or just entering the labor force) and structural unemployment (a mismatch between workers' skills or location and the jobs available). Cyclical unemployment is the part caused by a downturn, and it is zero when output is at potential. Cyclical unemployment shows up when real GDP is below potential, and it goes negative when output is above it.

A market basket costs $200 in the base year and $230 this year. The price index this year is _____, so the inflation rate over the period is _____.

Alternativer for luke 1: 87, 115, 130, 230

Alternativer for luke 2: 15 percent, 13 percent, 30 percent, 115 percent

Svar: 115, 15 percent

A price index is the cost of the basket this year divided by its cost in the base year, times 100: 230 / 200 x 100 = 115. The inflation rate is the percent change in the index, (115 - 100) / 100 = 15 percent. The value 13 percent divides the $30 increase by the new price instead of the old one, 87 flips the ratio upside down, and 115 percent confuses the index level with the rate of change.

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• A. A fall in the price level
• B. A rise in consumer confidence
• C. A rise in government purchases
• D. A depreciation of the dollar that raises net exports
• E. A rise in the price of oil

Svar: B. A rise in consumer confidence, C. A rise in government purchases, D. A depreciation of the dollar that raises net exports

Aggregate demand is consumption plus investment plus government purchases plus net exports at each price level. Higher consumer confidence raises consumption, more government purchases add directly, and a cheaper dollar makes exports more attractive and imports less so, which raises net exports. A fall in the price level is a movement along the same AD curve, not a shift. A higher oil price raises production costs and shifts short-run aggregate supply to the left, which is a different curve entirely.

• A. The price level rises and real GDP falls
• B. The price level falls and real GDP rises
• C. The price level and real GDP both rise
• D. The price level rises and real GDP is unchanged

Svar: A. The price level rises and real GDP falls

Higher input costs shift short-run aggregate supply to the left. Along an unchanged downward-sloping AD curve, the new intersection has a higher price level and a lower real GDP, which means unemployment rises while prices rise. This combination of falling output and rising prices is called stagflation. A demand-side change cannot produce it, because a shift of AD moves the price level and output in the same direction.

• A. $40 billion
• B. $62.5 billion
• C. $200 billion
• D. $250 billion

Svar: D. $250 billion

The spending multiplier is 1 / (1 - MPC) = 1 / 0.2 = 5, so the $50 billion increase can raise real GDP by up to 5 x 50 = $250 billion. It is a maximum because the calculation ignores things that shrink the effect, such as taxes, imports and crowding out. The value $40 billion is just 0.8 x 50, the first round of induced spending. The value $62.5 billion divides by the MPC instead of multiplying by the multiplier, and $200 billion uses the MPC / (1 - MPC) figure that applies to a tax change.

• A. It rises, because savers want to hold more money when rates are high
• B. It is unchanged, because money demand depends only on income
• C. It falls, because holding money costs more in forgone interest
• D. It falls, because the central bank has reduced the money supply

Svar: C. It falls, because holding money costs more in forgone interest

The interest rate is the opportunity cost of holding money: cash and checking balances earn little or nothing, while bonds earn the market rate. A higher rate makes money more costly to hold, so people hold less of it, and the quantity demanded falls along a downward-sloping demand curve. A change in income or the price level would shift the curve instead. The money supply is a separate curve, and a move along demand does not need it to change.

• A. Bank reserves fall, the interest rate rises, investment falls and AD shifts left
• B. Bank reserves rise, the nominal interest rate falls, investment rises and AD shifts right
• C. Bank reserves rise, the interest rate rises, investment rises and AD shifts right
• D. The money supply falls, the interest rate rises, and the price level falls

Svar: B. Bank reserves rise, the nominal interest rate falls, investment rises and AD shifts right

The central bank pays for the bonds with new reserves, so banks have more to lend and the money supply grows. In the money market graph, the supply curve shifts right and the nominal interest rate falls. Cheaper borrowing raises investment and interest-sensitive consumption, which shifts aggregate demand to the right and raises real GDP and the price level. The first and last options describe contractionary policy, which is what a bond sale does.

With a required reserve ratio of 10 percent, the simple money multiplier is _____, so a bank holding $500 in excess reserves can support a maximum increase in the money supply of _____.

Alternativer for luke 1: 5, 10, 20, 0.1

Alternativer for luke 2: $50, $500, $5,000, $50,000

Svar: 10, $5,000

The simple money multiplier is 1 divided by the reserve ratio: 1 / 0.10 = 10. Excess reserves of $500 can therefore support up to 500 x 10 = $5,000 of new money, as loans are made, spent and redeposited and each bank keeps 10 percent. The number 0.1 is the reserve ratio itself, not its reciprocal. It is a maximum because in practice banks may hold extra reserves and people may hold cash instead of depositing it.

• A. The real interest rate rises, which reduces private investment
• B. The real interest rate falls, which raises private investment
• C. Private saving rises enough to offset the deficit without any change in interest rates
• D. The money supply falls, which lowers the price level

Svar: A. The real interest rate rises, which reduces private investment

More government borrowing raises the demand for loanable funds. With the supply of saving unchanged, the real interest rate rises, and some firms drop investment projects that no longer pay off. That reduction in private investment is the crowding out. It is also why a deficit can weaken long-run growth, since less investment means a smaller capital stock over time. The money supply is a different market and plays no part in this story.

• A. The economy slides down the same curve to lower inflation and lower unemployment
• B. The long-run Phillips curve shifts to the right
• C. Unemployment stays below the natural rate as long as inflation stays steady
• D. The short-run Phillips curve shifts up, and unemployment returns to the natural rate at a higher inflation rate

Svar: D. The short-run Phillips curve shifts up, and unemployment returns to the natural rate at a higher inflation rate

The short-run Phillips curve is drawn for a given level of expected inflation. When expectations catch up, nominal wages and prices adjust, the curve shifts up, and unemployment drifts back to the natural rate while inflation stays higher. That is why the long-run Phillips curve is vertical at the natural rate: there is no lasting trade-off between inflation and unemployment. The long-run curve moves only when the natural rate itself changes.

If US real interest rates rise relative to the rest of the world, financial capital flows into the US, the dollar _____, and US net exports _____.

Alternativer for luke 1: appreciates, depreciates, is unaffected, is devalued

Alternativer for luke 2: rise, fall, stay the same, cannot be determined

Svar: appreciates, fall

Higher US returns attract foreign investors, who must buy dollars to invest, so the demand for dollars rises and the dollar appreciates. A stronger dollar makes US goods more expensive abroad and foreign goods cheaper at home, so exports fall, imports rise and net exports fall. Devaluation is a word for a deliberate cut in a fixed exchange rate, not for a market-driven change in a floating one.

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• A. US goods become more expensive for buyers in the euro area
• B. European goods become cheaper for US buyers
• C. US net exports tend to fall
• D. US net exports tend to rise
• E. It takes more dollars to buy one euro

Svar: A. US goods become more expensive for buyers in the euro area, B. European goods become cheaper for US buyers, C. US net exports tend to fall

When the dollar appreciates, each dollar buys more euros. A US product with an unchanged dollar price now costs euro-area buyers more euros, so they buy fewer. A European product with an unchanged euro price now costs US buyers fewer dollars, so they buy more. Exports fall and imports rise, so net exports fall. It takes fewer dollars, not more, to buy one euro, which is the same fact seen from the other side.