Martha Rush 1997-today ~ Mounds View High School; AP Macro, AP Micro, 9th grade Econ, AP Psych, Journalism ~ AP Macro reader (Mac 2) 2012 ~ 3M Economic Educator of Excellence, Junior Achievement Capstone Teacher National Economics Challenge (2011, 2012, 2013) Teacher Fellowships to Beijing (2005), St. Petersburg (2006), South Africa (2010), & Germany (2013)
Ann E. Scharfenberg 1994-today ~ New Richmond High School; AP Micro, AP Macro, Intro to Econ, K-12 Department Chair, SS ~ AP Economics reader, table leader 2009 ~ WI SS High School Teacher of the Year 2006, 2008, 2010, 2012 ~ Traveled abroad with students (Europe) Teacher Fellowships to Russia (2007), Romania (2008), Japan (2011), & Germany (2012)
Introduce yourself Your Name & Current School Econ classes for the upcoming school year. What would you like to get out of this session? One fun thing about you... OR One summer adventure, favorite way to spend time
AP Macroeconomics I. Basic Concepts (8-12%) II. Measurement of Economic Performance (12-16% III. AD and AS; SR & LR (10-15%) IV. Financial Sector (10- 20%) V. Stabilization Policies (20-30%) VI. Economic Growth (5- 10%) VII. International Trade & Finance (10-15%)
I. Basic Economic Concepts Scarcity & choice Opportunity cost Trade-off Production Possibilities Graph Comparative Advantage Calculation of opportunity cost & terms of trade Economic Systems Circular flow
Graph #1 Production Possibilities Curve (Frontier) Scarcity & trade- off Increasing opportunity cost Concave shape Quantities not Value or $ Assumptions Fixed resources Fixed technology 2 goods only Economic Growth
Absolute Advantage Comparative Advantage The ability to produce more units of a good or service than another, using the same quantity of resources The ability to produce a good or service more efficiently, using fewer resources. David Ricardo ~ economic principle for trade The ability to produce a good or service at a lower opportunity cost than another. Specialization & Trade Microwaves & Cell Phones
Which country has the absolute advantage in cell phones? Which country has the absolute advantage in microwaves? What does this tell you?
Which country has the comparative advantage in producing cell phones? Which country has the comparative advantage in producing microwaves? What does this tell you?
Terms of Trade
I. Basics continued Demand ~ Consumers Q d v. D Supply ~ Producers Q s v. S Market for individual product determines price & quantity bought/sold graph D2D2 S2S2 S1S1 S1S1 D1D1 D1D1
Understanding Economic Meaning…
II. Economic Performance Business Cycle Diagram Circular Flow Diagram Intro to Indicators GDP measurement Counted or not Income v. expenditures Calculation; real & nominal Unemployment Types Calculation; NRU; Okun’s law Link to GDP Inflation CPI GDP deflator
Build a Circular Flow Diagram
Visual of GDP Circular Flow of Mixed Economy
III. National Income & Price Determination
What do students need to know about the Keynesian Cross? Consumption is a function of income MPC, MPS, & multiplier Disposable Income ConsumptionSavingMPCMPS $12,000$12,100-$100-- $13,000 0 $14,000$13,800$200 $15,000$14,500$500 $16,000$15,100$900 $17,000$18,800$1400
Aggregate demand (AD) wealth effect real interest rate effect foreign purchases effect Shifts in AD C Δ Income; Δ taxes or transfer payments ΔDI I Level of optimism; Interest rates (inverse) G Discretionary G spending X n Foreign income Consumer tastes Δ Exchange rate SR Aggregate supply (SRAS) Upward sloping Shifts Input prices (cost of resources) Tax policy Regulation LR Aggregate supply (LRAS) Vertical Shifts Availability of resources) Technology & productivity Same as PPC WAGE & RESOURCES PRICES DO NOT SHIFT LRAS Graph #3 AD & AS
Vertical LR AS PPC LRAS & PPC (recessionary gap)
IV. Financial Sector
Graph #3 Money Market Federal Reserve changes money supply Reserve Requirements Discount rate OMO Buy bonds = bigger MS Sell bonds = smaller MS Bonds & interest rates
Graph #4 Loanable Funds Banks & customers S lf ~ savings, capital flows D lf ~ private consumers & businesses Crowding out Foreign Investment
11:45 – 12:30
V. Stabilization Policies
The Perfect World PL LRAS SRAS AD Real GDP
The Recession PL LRAS SRAS AD Real GDP AD1
AD Inflation PL LRAS SRAS AD Real GDP AD1
Stagflation PL LRAS SRAS AD Real GDP SRAS1
Graph #5 Phillips Curve SR Phillips Curve illustrates trade-off between inflation & unemployment rate Move along SR PC when AD shifts Shift SR PC when expected inflation rate changes Vertical LR natural rate of UE
VII. Open Economy
US Dollars Euros Graph #6 ~ Foreign Exchange Market Euros/Dollar Dollars/Euro Q USD Q Euros SS DD
Current Account Exports and imports Tourism Net investment income Net transfers Financial Account Purchases of real assets abroad (hotels, factories Purchases of financial assets abroad (stocks, bonds) Balance of Payments
Current account + financial account = 0 If it doesn’t, there is a change in government reserves A foreign transaction counts as a “credit” for the U.S. if the USD is used (who gets paid? A foreign transaction counts as a “debit” for the U.S. if a foreign currency is used (Who gets paid?)
2008 Q2 FRQ Balance of payments accounts record all of a country’s international transactions during a year. a) Two major subaccounts in the balance of payment are the current account and the capital financial account. In which of these subaccounts will each of the following transaction be recorded? i) a U.S. resident buys chocolate from Belgium ii) a U.S. manufacturer buys computer equipment from Japan. b) How would an increase in the real income in the U.S. affect the U.S. current account balance. Explain
2008 Q2 FRQ Balance of payments accounts record all of a country’s international transactions during a year. c) Using a correctly labeled graph of the foreign exchange market for the United States dollar, show how an increase in the United States firms’ direct investment in India will affect the value of the United States dollar relative to the Indian rupee.
46 The AP Macroeconomics Exam:Expectations Preliminary Rubric Expected Response When answering the Macroeconomics or Microeconomics free response questions, a student should respond clearly and concisely. Including paragraphs or even full-sentence responses is not always necessary; however, it is important to address the verb prompts appropriately (see next slide). A written response that presents conflicting answers is likely to lead to the loss of points.
47 The AP Macroeconomics Exam: Expectations – Cont’d Verb Prompts “Show” means to use a diagram to illustrate your answer. Correct labeling of all elements including the axes of the diagram is necessary to receive full credit. “Explain” means to take the reader through all of the steps or linkages in the line of economic reasoning. Graphs and symbols are acceptable as part of the explanation. “Identify” means to provide a specific answer that might be a list or a label on a graph, without any explanation or elaboration. “Calculate” means to use mathematical operations to determine a specific numerical response, along with providing your work.
52 Error Number 9 Question 1 (b) Question: Assume that personal savings in the United States increase. Using a correctly labeled graph of the loanable funds Market, show the impact of the increase in personal savings on the real interest rate. Questions is worth two points: One point for proper labeling of graph and the S and D curves; one point for showing shift of S and change in real interest rate. Error number 9 applies to the second point.
53 Error Number 9 Question 1 (b) Real Interest Rate Quantity of Loanable Funds S LF D LF S’ LF r1r1 r2r2
54 Error Number 1 Question 1 (c)(ii) Question: (c) Based on the real interest rate change identified in part (b), (i) will interest-sensitive expenditures increase, decrease, or remain unchanged? (ii) what will happen to the rate of economic growth? Explain. (From part (b), the real interest rate decreased.) Increase because the capital stock increases.
56 Error Number 8 Question 1 (d) Question: Assume that the real interest rate of the euro zone increases relative to the real interest rate of the United States. Draw a correctly labeled graph of the foreign exchange market for the euro and show the impact of the change in the real interest rate in the euro zone on each of the following. (i) Demand for the euro. Explain. (ii) Value of the euro relative to the United States dollar Question is worth three points: One point for proper labeling of graph and the S and D curves; one point for showing shift of D and change in value of euro; and one point for the “Explain.” Error number 8 applies to the second point.
57 Error Number 8 Question 1 (d) e=Dollars per euro Quantity of euros S of euros D for euros D’ for euros e1 e2
58 Error Number 3 Question 1(d) Question: Assume that the real interest rate of the euro zone increases relative to the real interest rate of the United States. Draw a correctly labeled graph of the foreign exchange market for the euro and show the impact of the change in the real interest rate in the euro zone on each of the following. (i) Demand for the euro. Explain. (ii) Value of the euro relative to the United States dollar Question is worth three points: One point for proper labeling of graph and the S and D curves; one point for showing shift of D and change in value of euro; and one point for the “Explain.” Error number 3 applies to the third point.
59 Error Number 3 Question 1(d) The demand for the euro increases because investors buy euros in order to purchase financial assets with higher return in the eurozone.
60 Error Number 5 Question 1 (e) Question: (e) Assume that the United States current account balance is zero. Based on the change in the value of the euro identified in part (d)(ii), will the United States current account balance now be in surplus, be in deficit, or remain at zero? (In part (d)(ii), the euro appreciated, so the dollar depreciated.) Surplus
63 Error Number 2 Question 2 (e) Question: (e) Assume instead that no discretionary policy actions are taken. Will short-run aggregate supply increase, decrease,or remain the same in the long run? Explain. (A recession had previously been assumed in the question.) Increase because wages will fall in a recession. (Alternatively, input prices and/or inflationary expectations fall.)
66 Error Number 4 Question 3 (b) Question: (a) Draw a correctly labeled graph of a short- run Phillips curve. (b) Using your graph in part (a), show the effect of an increase in the expected rate of inflation. Inflation Unemployment SRPC SRPC’
67 Error Number 7 Question 3 (c) Question: What is the effect of the increase in the expected rate of inflation on the long-run Phillips curve? No Change
68 Error Number 6 Question 3 (d) (ii) Question: (d) Given the increase in the expected rate of inflation from part (b), (i) will the nominal interest rate on new loans increase, decrease, or remain unchanged? (ii) will the real interest rate on new loans increase, decrease, or remain unchanged? Remain Unchanged
69 Error Number 10 Question 3, part (e) Question: Assume that the nominal interest rate is 8 percent. Borrowers and lenders expect the rate of inflation to be 3 percent, and the growth rate of real gross domestic product is 4 percent. Calculate the real interest rate. 5 percent
70 Top Ten Errors on the 2013 AP Macro Exam Range of Error Rates on Individual Points (Sample of n≈1000) FRQ Question Averages (Population) Question 1: 4.88/10 (48.8%) Question 2: 3.45/5 (68.9%) Question 3: 2.85/6 (47.5%)