1. AP Review #1 – AD and AS

2. Draw a correctly labeled Aggregate Supply and Aggregate Demand graph that shows that the economy is currently experiencing a recession. Be sure to label the current price and output levels.

3. In order to combat a recession, the FED uses the appropriate monetary policy to solve the problem. What is the name for this policy? What are its policy options? Draw a graph showing this policy’s impact on the money market.

4. Draw the effect of the interest rate change on your AD/AS graph. What happens to AD as a result? Why? How does this affect P, GDP, and unemployment?

5. How does the interest rate change affect the value of the dollar in the foreign exchange market? Why is this true? How does this impact the flow of financial capital from Japan?

6. Draw correctly labeled graphs of the foreign exchange market for the U.S. $ and the Japanese yen showing the effect of the interest rate change on the value of the dollar and the Japanese yen.

7. How do the currency exchange rate changes affect American imports of Japanese products? Why?

8. The economy is in recession. Assume instead of the monetary policy change, the FED does nothing. What happens to short run aggregate supply as the economy moves toward long run equilibrium? Draw the changes on a new AD/AS graph.

9. The economy is in recession. Instead of the monetary policy change indicated earlier, the government decides to utilize fiscal policy to correct the problem. What is this policy called? What are the government’s options? Draw an AD/AS graph showing how this affects P and GDP.

10. What will happen to the government’s budget as a result of their policy change? Draw a correctly labeled graph of the loanable funds market that shows how the policy change impacts the real interest rate. What happens to the real interest rate?

11. How will the interest rate change affect AD? Why? How will it affect the value of the dollar in the foreign exchange market? Draw a graph of the market for dollars in the foreign exchange market showing this impact.

12. How will the change in the value of the dollar affect imports and exports? How will that affect AD, P, GDP, and unemployment?