AP Practice FRQs

1.Increased saving increases the supply of loanable funds. This causes i to fall. a.D for the US $ will fall b/c there will be a decrease in D for US financial assets; the US $ will depreciate b.US imports will fall (foreign goods more expensive) and US exports will rise (US goods less expensive)

2.a. $5000 (all of it is new $) b.i. $4500; ii. $50,000 ($4500 x 10 + $5000) c.Money supply will decrease b/c banks will loan less money d.Money supply will decrease b/c banks will have less money and will, therefore, loan less money

3.a. i. Inflation will eat away at the real value of their savings causing them to have less purchasing power when they use their money than they would have had if they’d spent it. ii.The value of the $ they repay will be less than the value they spent. They win. b.Increase taxes or cut G; c. Sell bonds d.Nominal interest rate will rise. Banks have to raise i so that $ repaid has more real value than $ lent. e.B/c P in Y is high, D for Y’s goods falls. Demand for Y’s currency falls so Y’s currency depreciates.

4. Inflation Unemployment SRPC 4% 8% 2% 5% b. i. Increase in P of oil/other production costs; increase in wages; decrease in worker productivity SRPC2 Inflation Unemployment 5% LRPC d. There is no long run relationship between inflation and unemployment.

5. Inflation Unemployment LRPC SRPC NRU a.i. An increase in G will increase AD, thus increasing P and increasing GDP. Inflation increases and unemployment decreases. SRPC doesn’t move but the point moves from 1 point to another on same SRPC. ii.Expectation that P will fall causes people to spend less now. AD falls so inflation falls and unemployment rises. Point moves from 1 point to another on same SRPC. b. Govt. is giving more money to unemployed people thus allowing them to remain unemployed longer. The NRU will increase thus shifting the LRPC to the right.

6.a. The unemployment rate will fall below the NRU. b.Unemployment rate will be unaffected b/c people are still employed. c.Govt. giving less $ to unemployed people thus forcing them back to work more quickly. NRU will fall. Inflation Unemployment LRPC1 LRPC2 NRU1 NRU2

7.a. Capital will flow out of Japan and into the US b/c US financial assets will become more valuable and Japanese financial assets will become less valuable. b. (only have to draw graph of Yen!) YenDollars QQ PP D S1 S D1 S2 D2 P1 P2 P1 P2 Supply of yen increases b/c Japanese investors have to supply more yen in order to get more $. Yen depreciates. c. Exports to Japan will fall (US goods more expensive) and imports from Japan will rise (Japanese goods less expensive.)

8.a. Getting rid of income tax has the effect of increasing income. When income rises, C rises and savings rises. b. b/c savings increases, supply of loanable funds increases; i falls and b/c i falls, I rises i Q D S1 S2 i1 i2 c. Long run economic growth will increase b/c I increases which increases the nation’s capital stock thus pushing LRAS further to the right.

9.a. Purchases of US financial assets would fall b/c money would move to Europe rather than the U.S. b.The $ would depreciate b/c the D for the $ would fall. c.US exports would increase d.US imports would decrease

10.a. Fed funds rate – the interest rate that banks charge one another on overnight loans b.Buy bonds c.$40 million ($10 – (10 x 0.2)) x 1/0.2 d.The nominal interest rate will fall e.The real rate of interest will fall b/c real interest rate = nominal interest rate – expected inflation. If nom. i goes down and inflation goes up, real i falls.

11.a. S of $ will increase and $ will depreciate. b.Value of $ will increase b/c there will be a greater D for $ b/c there’s a greater D for US financial assets ii. Q of dollars supplied will increase b/c D for $ increases

12. a. i Q Dm Sm1 Sm2 i1 i2 b.Interest-sensitive C falls b/c borrowing $ becomes more expensive. I falls b/c borrowing $ becomes more expensive. There is no change in G. P GDP AD2 AS AD1 P2 P1 GDP2 GDP1