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Final Exam Formula Practice/AP Macroeconomics

1. In the town of Zipperlandville, Texas (real town), 5 people are collecting unemployment,

10 people are unemployed, 11 people are discouraged workers, 30 people are employed, the

population is 100, and depreciation is $20 billion.

a. What is the labor force?

Unemployed + Employed = 10 + 30 = 40

b. What is the unemployment rate?

Unemployed/Labor Force x 100 = 10/40 x 100 = 25%

c. If the number of discouraged workers increased, what would happen to the

unemployment rate?

It would decrease.

2. Assume that the nominal interest rate is 5 percent. If the expected rate of inflation is

2 percent, the real interest rate is?

Real Interest Rate = Nominal Interest Rate minus Inflation = 5% - 2% = 3%.

3. Suppose nominal GDP in 2014 was $200 Million for the nation of Ding Dong. The GDP price index in 2014 was 110 what was Real GDP for Ding Dong in 2014?

Real GDP = Nominal GDP x 100/Price Index = $200 Million x 100/110 = $181.81

Million

4. Using your answer to question 3 above, if the population in Ding Dong was 10 Million, what was Per-Capita Real GDP for Ding Dong in 2014?

$181.81/$10 Million = $18.81

5. If Larry gets a 2% raise in 2014 from his boss, M0, and the inflation rate was 5%, is Larry better or worse off than before the raise? By how much did Larry’s real income increase or decrease?

He is worse off because his real income dropped by 3%. This is because Real

Income equals Nominal Income minus inflation. Since his nominal income went up

by 2% and inflation went up by 5%, Real Income dropped by 3%

6. The nation of Macro-Supercalifragilisticexpialidocious had the following GDP

numbers for 2014:

Consumption = $ 200 Million

Net Investment = $ 40 Million

Government Spending = $ 30 Million

Imports = $ 6 Million

Exports = $ 4 Million

Depreciation = $ 5 Million

What was GDP for Macro-Supercalifragilisticexpialidocious in 2014?

Formula for GDP = C + IG + G + Xn = $200 + $45 (Net Investment + Depreciation =

Gross Investment) + $30 – 2 (Xn = Exports – Imports = $4 - $6) = $273 Million.

7. If a bond costs $10,000 and the interest paid equals $700, what is the interest rate for this bond?

Bond Interest Rates = Interest Paid/Bond = $700/$10,000 = 7%

8. If the money supply of Macropolis stayed flat, but its velocity rose, what happened to Nominal GDP for Macropolis?

Here we use the Equation of Exchange or MV = PQ where M is the Money Supply, V = Velocity of Money (how many times a dollar is respent in a year, P = PL or inflation, and Q = Real GDP and P x Q = Nominal GDP. Since M directly affects P and V directly affects Q, then Nominal GDP will rise.

9. If the MPC is .90 and the government spends $200 Billion to close a recessionary gap, what will be the multiplied effect on AD/GDPr?

This is a Government Spending Multiplier Question:

1/1-MPC = 10; 10 x $200 = $2,000 Billion

10. If the MPC is .80 and there is a recessionary gap of $200 Billion, how much should the government spend to close this gap?

This is a Government Spending Multiplier Question, but you have to use the A x B = C

Formula, where A = The Multiplier, B = Initial Change in Taxes or Government Spending, and C = Overall Change in Real GDP or The Gap.

1/1-MPC = 5; $200/5 = $40 Billion.

11. If the MPC is .80 and the government raises taxes by $100 Billion, what would be

the multiplied effect on AD/GDPr?

This is a Tax Multiplier Question,

-MPC/1-MPC = -4; 4 x $100 Billion = $400 Billion.

12. If the MPC is .75 and there is an inflationary gap of $300 Billion, how much should

the government raise taxes to close this gap?

This is a Tax Multiplier Question, but you have to use the A x B = C

Formula, where A = The Multiplier, B = Initial Change in Taxes or Government Spending, and C = Overall Change in Real GDP or The Gap.

-MPC/1-MPC = -3; $300 Billion/-3 = $100 Billion.

13. If the government simultaneously decreases government spending by $100 Billion

and reduces taxes by $100 Billion, what is the multiplied effect on AD/GDPr? (indicate if it

is positive or negative).

This is a Balanced Budget Multiplier Question. The Balanced Budget Multplier = 1 x amount of Government Spending so the answer is $100 Billion increase in AD/GDPr.

14. If the MPC is .80 and government spending rises by $100 Billion, Exports are $20 Billion and Imports are $30 Billion, what is the overall effect on Real GDP?

This is a Government Spending Multiplier Question, but you have to use the A x B = C

Formula, where A = The Multiplier, B = Initial Change in Taxes or Government Spending, and C = Overall Change in Real GDP or The Gap and you have to adjust for the change in Xn.

1/1-MPC = 5; 5 x ($100 Billion + Xn). Since Xn = Exports – Imports or $20 Billion - $30 Billion, Xn = -$10 Billion. So B, the initial change in Government Spending is reduced by the decrease in Xn. So 5 x ($100 Billion - $10 Billion) = 5 x $90 Billion = $450 Billion.

15. The Bank of McDaniel has actual reserves of $10, required reserves of $5, and checkable deposits of $100:

a) What is the reserve ratio for McDaniel Bank?

rr = RR/CD = $5/$100 = 5%

b) What are McDaniel Bank’s excess reserves?

ER = AR – RR = $10 - $5 = $5

c) How much can McDaniel Bank loan out?

The $5 in ER. One bank can only loan out its Excess Reserves.

d) How much could the entire banking system increase the money

supply based on the information above?

You must use the Deposit Expansion Multiplier here = 1/reserve

ratio = 1/.05 = 20; 20 x $5 = $100

16. Answer the following questions based on the bank balance sheet below for the

Bank of Mine. Assume the reserve ratio is 10%.

Assets Liabilities

Reserves $4,000 Checkable Deposits $10,000

Loans $2,000

Bonds $1,000

Land/Buildings $3,000

a) What are required reserves?

RR = rr x CD = .10 x $10,000 = $1,000

b) Based on the original $10,000 deposit, how much could Bank of

Mine loan out?

AR = $4,000 and RR = $1,000 so ER = AR – RR = $4,000 - $1,000 = $3,000

c) Based on the original $10,000 deposit, how much could the entire banking

system increase the money supply?

Use the Deposit Expansion Multiplier Here or 1/rr or 1/.10 = 10

10 x ER = $10 x $3,000 = $30,000

d) If the Fed bought the $1,000 in bonds from the bank, by how much would

the money supply initially change?

$1,000. This is because the this is all new money since it comes from the

Fed.

e) After the purchase of the $1,000 in bonds, by how much could the entire

banking system increase the money supply?

10 x $1,000 = $10,000. No need to reserve here since the bond purchase was

all bank money (not a demand deposit) and ER.

f) If Kwai Not were to deposit $1,000 in cash from his pants pocket into his

checking account at Bank of Mine, what would happen to the money supply?

No change. The composition, however, would change from cash to checking.

g) Based on Kwai Not’s $1,000 deposit, how would required and excess reserves

change?

Required would rise by $100 to $1,100 (new DD of $11,000 x .10)

Excess Reserves

Rise from $3,000 to $3,900.

Graph Quiz Practice for Fall 2017 Final Exam AP Macroeconomics

For each of the following scenarios, draw and properly label the graph or graphs involved and make the appropriate changes to each graph (shifts or movements).

1. Draw a Money Market graph at equilibrium. Then show how an increase in the money supply would affect this market. Then, draw another Money Market Graph at equilibrium and show how a decrease in Money Demand would affect this market.

[pic]

[pic]

2. Draw and properly label side-by-side graphs of the Loanable Funds Market and Investment Demand. Indicated on your graph that the supply for loanable funds has declined. Then show the change that this has on the Investment Demand graph.

[pic]

3. Draw and properly label a PPC Graph, with Capital Goods on the vertical axis and consumer goods on the horizontal axis. The curve on this graph must show increasing opportunity costs. If new and improved technology were widely utilized in the U.S. (for both the capital and consumer goods markets), show what affect this would have on the PPC. Also, draw LRAS and LRPC graphs depicting the same situation.

[pic][pic]

[pic]

4. Draw and properly label Foreign Exchange Market Graphs for the U.S. Dollar and Euro. Next, show how Euros flowing into U.S. to invest in higher real interest rates there would affect the markets for the U.S. Dollar and Euro. (so increase the supply of the Euro and increase the demand for the U.S. Dollar). The Symbol for the Euro is € and the symbol for the U.S. Dollar is $.

[pic][pic]

5. Assume that the economy has an inflationary gap and AD decreases to close the

gap. Draw an AD/AS graph depicting the original equilibrium and the change in

AD. Also, draw a Phillips Curve (both SR and LR) which depicts the same

situation.

[pic]

6. Assume that there is a recessionary gap and the government raises government

spending and lowers taxes to revive the economy. Draw the following graphs to

depict the cause and effect chain of this situation: AD/AS, Loanable Funds Market

and Investment, and Foreign Exchange for the U.S. Dollar.

[pic]

[pic]

[pic]

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