1. COMMON MISTAKES ON THE AP MACRO EXAM BY: Mr. Veit

2. The difference between a change in demand and the resultant movement along a demand curve vs. Shifting of the demand curve

3. GRAPHING DEMAND What if Demand Increases? P QD $5 4 3 2 1 10 20 35 55
Price of Corn
What if
Demand
Increases? P $5 4 3 2 1
CORN P QD $5 4 3 2 1 10 20 35 55 80 D o Q
Quantity of Corn

4. GRAPHING DEMAND Increase in Quantity Demanded P QD $5 4 3 2 1 10 20 35
Price of Corn P
Increase
in Quantity
Demanded $5 4 3 2 1
CORN P QD $5 4 3 2 1 10 20 35 55 80 30 40 60 80 +
Increase in
Demand D’ D o Q
Quantity of Corn

5. The difference between a change in supply and the resultant movement along a supply curve vs. Shifting of the supply curve

6. GRAPHING SUPPLY What if Supply Increases? P QS $5 4 3 2 1 60 50 35 20
Price of Corn
What if
Supply
Increases? P S $5 4 3 2 1
CORN P QS $5 4 3 2 1 60 50 35 20 5 o Q
Quantity of Corn

7. GRAPHING SUPPLY Increase in Supply P QS $5 4 3 2 1 60 50 35 20 5 80 70
Price of Corn P
Increase in
Supply S’ S $5 4 3 2 1
CORN P QS $5 4 3 2 1 60 50 35 20 5 80 70 60 45 30
Increase
in Quantity
Supplied o Q
Quantity of Corn

8. Mislabeling or NOT labeling graphs correctly

9. EQUILIBRIUM: REAL OUTPUT
AND THE PRICE LEVEL P AS
Equilibrium in the
Intermediate Range
Price Level Pe P1 AD Q Q1 Qe Q2
Real Domestic Output, GDP

10. GROWTH IN THE AD-AS MODEL
ASLR1
ASLR2 C A
Price Level
Capital Goods B D Q1 Q2
Consumer Goods
Real GDP

11. ECONOMIC GROWTH IN THE EXTENDED AD – AS MODEL
ASLR1
ASLR2
AS2
AS1
Price Level P2 P1
AD2
AD1 o Q1 Q2
Real GDP

12. Rate of interest, i (percent) Amount of money demanded
THE MONEY MARKET
Sm1 Sm 10
7.5 5
2.5
A temporary shortage
of money will require
the sale of some assets
to meet the need. ie
Rate of interest, i (percent) Dm
Amount of money demanded
(billions of dollars)

13. Net effects of Monetary Policy and/or Fiscal Policy on Interest Rate (I%)

14. FISCAL POLICY, AGGREGATE SUPPLY AND INFLATIONAS
Fiscal Policy
And Inflation
Price level P1
AD1
AD2
$495
$505
$515
Real GDP (billions)

15. Expansionary Fiscal Policy >> Interest Rate INCREASE
Draw Money Market
Increase Spending (AD)>>Increase Demand for Money>>Increase Interest Rate
Higher Price Level>>Increase Demand for Money>>Increase Interest Rate

16. Expansionary Monetary Policy>> Interest Rate DECREASE

17. Quantity of money demanded and supplied
MONETARY POLICY AND EQUILIBRIUM GDP
Sm1
Sm2
Investment
Demand 10 8 6 10 8 6
Real rate of interest, i Dm
Quantity of money demanded and supplied
Amount of investment, i
If the money
supply increases
to stimulate the
economy... AS
Money Supply Increases
Interest Rate Decreases
Price level
Investment Increases P2 P1
AD & GDP Increases
with slight inflation
AD1
AD2
Real domestic output, GDP

18. Quantity of money demanded and supplied
MONETARY POLICY AND EQUILIBRIUM GDP
Sm1
Sm2
Sm3
Investment
Demand 10 8 6 10 8 6
Real rate of interest, i Dm
Quantity of money demanded and supplied
Amount of investment, i
If the money
supply increases
again… AS
More Money Supply P3
Lower Interest Rates
Price level
More Investment P2 P1
Still higher AD & GDP
with significant inflation
AD1
AD2
AD3
Real domestic output, GDP

19. MULTIPLIER(S) CONFUSION

20. Income (Spending) Multiplier
Multiplier = 1/ 1 – MPC or 1/ MPS
Initial Change in Spending X MULTIPLIER = Change in Output

21. MONEY MULTIPLIER 1 / Required Reserve Ratio
Maximum Multiple $$$ Money Expansion

22. MULTIPLE DEPOSIT EXPANSION PROCESS
Bank
Acquired reserves
and deposits
Required
reserves
Excess
Amount bank
can lend - New
money created A B C D E F G H I J K L M N
Other banks
$100.00
80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
21.97
$20.00
16.00
12.80
10.24
8.19
6.55
5.24
4.20
3.36
2.68
2.15
1.72
1.37
1.10
4.40
$80.00
17.57
Total amount of money created by the banking system
$400.00

23. Balanced Budget Multiplier = 1 (Net Result on GDP)

24. Remembering the difference between the Amount of Money Created and the Change in the Money Supply when dealing with the Money Multiplier and Money Creation

25. FEDERAL RESERVE PURCHASE OF BONDS
New reserves
$200
Required
reserves
Purchase of a
$1000 bond
from a bank...
$800
Excess
Reserves
$4000
Bank System Lending
$1000
Initial
Deposit
Total Increase in Money Supply ($5000)

26. Confusing Comparative Advanatge Calculations

27. Remembering the difference between Real and Nominal

28. Nominal: with Inflation Real: without Inflation

29. GDP
Nominal GDP: GDP measured in terms of current Price Level at the time of measurement. (Unadjusted for inflation)
Real GDP: GDP adjusted for inflation; GDP in a year divided by a GDP deflator (Price Index) for that year

30. INCOME
NOMINAL INCOME: number of dollars received by an individual or group for its resources during some period of time
REAL INCOME: amount of goods and services which can be purchased with nominal income during some period of time; nominal income adjusted for inflation

31. INTEREST RATE (I%)
NOMINAL I%: interest rate expressed in terms of annual amounts currently charged for interest; not adjusted for inflation
REAL I%: interest rate expressed in dollars of constant value (adjusted for Inflation) and equal to the NOMINAL I% minus the EXPECTED RATE OF INFLATION

32. ANTICIPATED INFLATION
11% 6% = + 5%
Inflation
Premium
Nominal
Interest
Rate
Real
Interest
Rate

33. WAGES
NOMINAL WAGES: amount of money received by a worker per unit of time (hour, day, etc.);
Money Wage
REAL WAGES: amount of goods and sevices a worker can purchase with their NOMINAL WAGE; purchasing power of the nominal wage.
(Real = Nominal – Inflation rate)

34. NONIMAL/REAL TIPs
If nominal rates INCREASE and Price Level INCREASE, the CHANGE in Real is “indeterminable.”
If nominal Wage rates do NOT change and Price Level fall. REAL WAGES increase.
NOMINAL RATES “PIGGY-BACK” REAL RATES & NOT VICE VERSA.

35. Confusing calculations using MPC / MPS to determine changes necessary to correct Recessionary and Inflationary Gaps

36. FULL-EMPLOYMENT GDP Recessionary Gap Recessionary Gap = $5 Billion
AE0
530
510
490
AE1
Recessionary Gap
= $5 Billion
Aggregate Expenditures (billions of dollars)
Full Employment 45 o o
Real domestic product, GDP (billions of dollars)

37. FULL-EMPLOYMENT GDP Inflationary Gap Inflationary Gap = $5 Billion
AE2
Inflationary Gap
= $5 Billion
AE0
530
510
490
Aggregate Expenditures (billions of dollars)
Full Employment 45 o o
Real domestic product, GDP (billions of dollars)

38. Demand-Pull Inflation vs. Cost-Push Inflation

39. DEMAND-PULL INFLATION
ASLR
AS2
AS1 c P3
Price Level P2 b P1 a
AD2
AD1 o Q1
Real domestic output

40. COST-PUSH INFLATION Occurs when short-run AS shifts left Price Level o
ASLR
AS2
AS1
Price Level P2 b P1 a
AD1 o Q2 Q1
Real domestic output

41. COST-PUSH INFLATION Even higher price levels
Government response with increased AD
ASLR
AS2
AS1
Even
higher
price
levels c P3
Price Level P2 b P1 a
AD2
AD1 o Q2 Q1
Real domestic output

42. COST-PUSH INFLATION If government allows a recession to occur
ASLR
AS2
AS1
Price Level P2 b P1 a
AD1 o Q2 Q1
Real domestic output

43. COST-PUSH INFLATION If government allows a recession to occur Nominal
ASLR
AS2
AS1
Nominal
wages fall &
AS returns
to its original
location
Price Level P2 b P1 a
AD1 o Q2 Q1
Real domestic output

44. Phillips Curve vs. Laffer Curve

45. Annual rate of inflation Unemployment rate (percent)
THE PHILLIPS CURVE CONCEPT 7 6 5 4 3 2 1
As inflation declines...
Unemployment
increases
Annual rate of inflation
(percent)
Unemployment rate (percent)

46. THE LAFFER CURVE
100
Tax rate (percent) l
Tax revenue (dollars)

47. THE LAFFER CURVE
100
Tax rate (percent) m l
Tax revenue (dollars)

48. THE LAFFER CURVE
100 n
Tax rate (percent) m l
Tax revenue (dollars)

49. THE LAFFER CURVE Maximum Tax Revenue Tax rate (percent)
100 n
Tax rate (percent) m m
Maximum
Tax
Revenue l
Tax revenue (dollars)

50. Quantity of Loanable Funds
THEORY OF INTEREST S
i = 8%
Interest Rate, (percent) D F0
Quantity of Loanable Funds