The structure of the exam

 

Part I: Multiple Choice Question

    60 questions – 70 minutes (account for 2/3 of your final score)

    Beginning with the May 2011 AP Exam administration, points will no longer be deducted for incorrect answers.

    Part II. Free Response Questions (FRQ)

     3  questions -  10 minutes planning, 50 minutes writing answers on answering booklets (account for 1/3 of your final score)

 

AP Macroeconomics Scoring Worksheet

Section 1: Multiple Choice

   (_____ ) *     1                =  ______

    No.                                Multiple-choice

    Correct                          Score

 (Out of 60)

 Section II: Free Response

  Q1 _____   *  1.1538 = ________

 ( out of 13)

  Q2______ *   0.9375=  ________

 ( out of 8)

  Q3_____   *  1.2500=  ________

 ( out of 6)

----------------------------------------------------------

              Total Raw Score: (    ) of 90

 

Raw score	AP score
75-90	5
62-74	4
50-61	3
39-49	2
0-38	1

 

The Content of AP macroeconomics

Basic Economic Concepts

Scarcity, choice, and opportunity cost

Production possibility curve

Comparative advantage, absolute advantage, specialization and exchange

Demand, supply and Market equilibrum

Macroeconomic issues: Business cycle, unemployment, inflation, growth

Measurement of Economic Performance

- National Income Accounts( GDP)

Inflation mesurement and adjustment (Price index)

Unemployment

National Income and Price Determination

Aggregate demand and Aggregate supply，Macroeconomic equilibrum

Financial sector :Money, banking, financial market, money supply

Inflation, Unemplyment and stabilization Policies

Economic Growth and Productivity

Open Economy: International trade and Balance of payments accounts

 

For an economy as a whole, income must equal expenditure because:

Every transaction has a buyer and a seller.

Every dollar of spending by some buyer is a dollar of income for some seller.

“GDP is the Market Value . . .”

Output is valued at market prices.

“. . . Of All Final . . .”

It records only the value of final goods, not intermediate goods (the value is counted only once).

“. . . Goods and Services . . . “

It includes both tangible goods (food, clothing, cars) and intangible services (haircuts, housecleaning, doctor visits).

“. . . Produced . . .”

It includes goods and services currently produced, not transactions involving goods produced in the past.

“ . . . Within a Country . . .”

It measures the value of production within the geographic confines of a country.

“. . . In a Given Period of Time.”

It measures the value of production that takes place within a specific interval of time, usually a year or a quarter (three months).

Exclude financial transactions

Public transfer payments( e.g. Social security payments, welfare payments etc)

Private transfer payments(e.g. Parents give children, the cash gifts given at christmas

Stock (and bond) market transactions ( However, payments for services provided by stockbroker are included.)

Exclude Second hand sales

Sell used car to a friend

Expenditure approach

GDP (Y) is the sum of the following:

Consumption (C)

 Investment (Ig)

 Government Purchases (G)

 Net Exports (NX)

Y = C + Ig + G + NX

Changes in inventories. (positive change—increase investment, negative change- decrease investment.)

Investment has to do with creation of new capital asset

Non investment transactions is not included because they merely transfer the ownership.( it doesn’t include transfer of paper assets(stocks, bonds) or resale of tangible assets(houses, jewelry, boats)

 

The income approach

Compensation of employees(wage and salary supplement)

Rents(received by the households and business that supply the property resources)

Interest (money paid to supplier of loans, interest on savings etc.)

Proprietor’s income (net income of sole proprietorships, partnerships and other unincorporated business)

Corporate profit (1)Corporate income taxes(to government) (2) Dividends(to stockholders)  (3) Undistributed corporate profits(after tax not distributed to)

Taxes on Production and Imports

National income (NI) includes all income earned through the use of American-owned resources, whether they are located at home or abroad.

GDP: domestic output=

   National income – net foreign factor income

+Consumption of fixed capital(Depreciation) -Statistical discrepancy

Net domestic product (NDP)= GDP-Consumption of fixed Captial(depreciation)

GNP=National income + Depreciation

Personal income (PI)= National income-Taxes on production and imports -Social Security contributions-Corporate income taxes - Undistributed corporate Profit+ Transfer payment(social security payments, unemployment compensation etc)

Disposable income= PI-Personal taxes

Disposable income (DI)= Consumption(C) + Saving(S)

Nominal GDP:values the production of goods and services at current prices.

Real GDP:values the production of goods and services at constant prices.

Price Index(in hundred)  = Nominal GDP/ Real GDP

GDP is the best single measure of the economic well-being of a society.

GDP per person tells us the income and expenditure of the average person in the economy.

Some things that contribute to well-being are not included in GDP.

The value of leisure.

The value of a clean environment.

The value of almost all activity that takes place outside of markets, such as the value of the time parents spend with their children and the value of volunteer work.

 

Economic Growth: Increase in real GDP or real GDP per capita over some time period

Unless specified otherwise, growth rates reported in the news and by international agencies using real GDP definition of Economic growth, while  for comparing living standards, real GDP per capital is better

Approximate number of years required to double real GDP=70/annual percentage rate of growth

National Income and Product Accounts Gross Domestic Product, 3rd quarter 2010 :Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.0 percent in the third quarter of 2010

Ingredients of Growth:

Supply factors

Increases in quantity and quality of natural resources

Increases in quality and quantity of human resources

Increases in the supply (or stock) of capital goods

Improvements in technology

Demand factor

Households, businesses, and government must purchase the economy’s expanding output

Efficiency factor

Must achieve economic efficiency( productive efficiency: use resources in the least costly way and allocative efficiency :maximize people’s well-being)  and full employment

The Business Cycle

At peak, business activities has reached a temporary maximum.The economy is near or at full employment and the level of real output is at or very close to the economy’s capacity.

A recession is a period of decline in total output, income and employment.

In the trough of the recession or depression, output and employment “bottom out” at their lowest levels.

A recession is usually followed by a recovery and expansion, a period in which real GDP, income and employment rise.

Economics are exposed to both demand shocks and supply shocks. E.g. a positive demand shock refers to a situation in which demand turns out to be higher than expected, while negative demand shock refers to a situation in which demand turns out to be lower than expected.

Why can’t firms deal with the demand shocks on their own? The answer is that the prices are inflexible( slow to change, or sticky ) in short run. prices are inflexible. the economy is forced to respond in the short run to demand shocks primarily through changes in output and employment rather than through changes in prices.

 Frictional unemployment refers to the unemployment that results from the time that it takes to match workers with jobs

Structural unemployment is the unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one.

Cyclical unemployment refers to the year-to-year fluctuations in unemployment around its natural rate.

Full employment defined

No cyclical unemployment

Full employment rate of unemplyment = Natural rate of unemployment = fictional unemployment+ structural unemployment

Unemployment rate= number employed/ labor force

Labor partipation rate= Labor force/Adult population

Okun’s Law: Each 1% above Natural Rate of Unemployment creates negative 2% output gap

CPI=Price of the Most Recent Market Basket in the Particular Year/Price estimate of the Market Basket in 1982-1984 x100

Demand Pull Inflation: Caused by consumers spending beyond economy’s capacity to produce.

Cost-Push Inflation: Inflation caused by supply side of economy. “Supply shocks”, abrupt increases in factor costs, push prices up.

The price level increased even though total spending was not excessive. These were periods when output and employment were both declining.( rise of wage and supply shock)

Who is Hurt by Inflation? Fixed-Income Receivers, Savers, Creditors (Lenders), Dollars they lend are worth less than dollars they get back.

Who is Unaffected by Inflation? Flexible-Income Receivers, Debtors (Borrowers)

Nominal Interest Rate- Inflation Premium= Real Interest Rate

Hyperinflation: extraordinarily rapid inflation, can have a devastating impact on real output and employment.

Average propensity to consume (APC)= Consumption/income

Average propensity to save (APS)=Saving/income

Marginal propensity to consume (MPC)= Change in Consumption/Change in Income

Marginal propensity(trendency) to save (MPS) =Change in Saving/Change in Income

Non-income determinants of consumption and saving: Wealth,Borrowing,Expectations,Real interest rates

invest up to the point where expected rate of return = real interest rate,

Multiplier =Change in Real GDP/Initial Change in Spending:Dollars spent are received as income, Income received is spent (MPC), Initial changes in spending cause a spending chain

Multiplier =1/1-MPC  OR = 1/MPS

Aggregate demand is a schedule or curve that shows the amounts of real output(read GDP)that buyers collectively desire to purchase at each possible price

Why the Downward Slope? “Wealth Effect”, Interest-Rate Effect, Foreign Purchases Effect

GDP /AD  = C + I + G + (X - M)   Real Domestic Output, GDP

 AS: AS is a schedule or curve showing the relationship between the price level and amount of real domestic output that firms in the economy produce

Immediate short run: Input and output prices fixed by contractual agreement

Short Run Aggregate Supply (SRAS): output prices are flexible, input prices are either  totally fixed or highly inflexible.

Long Run Aggregate Supply (LRAS): Vertical at economy’s full employment output (potential GDP).

Determinants of  aggregate supply: Note: others factor are not change. Change in input price, Change in productivity, Change in legal-institutional environment.

The Phillips Curve: Demonstrates tradeoff between inflation and unemployment

Fiscal Policy: Changes in government purchases and tax collections designed to achieve full employment and non-inflationary domestic output.

Discretionary fiscal policy: Active, Eliminate recessionary or inflationary gap, Countercyclical

Nondiscretionary fiscal policy(Automatic Stabilizers): Government tax revenue change automatically over the course of the business cycle

Expansionary Policy: Used to fix recession, increase aggregate demand and real output. Increase Government Purchases,Cut Taxes,Some Combination of the Two. Budget deficit

Contractionary Policy: Used to curb inflation, decrease aggregate demand and real output. Decrease Government Purchases,Raise Taxes,Some Combination of the Two,Budget surplus

Crowding-out effect: An expansionary fiscal policy (deficit spending) may increase the interest rate and reduce investment spending, thereby weaking or canceling the stimulus of the expansionary policy.

Currency: M1: Currency(Coin+Paper) +Checkable deposits

M2= M1+ Near money ( Small time deposits(e.g.Certificate of deposits) +Money Market mutual funds held by individuals+ Saving deposits(including money market deposit account)

Federal Reserve system

Fractional Reserve Banking System:Only part (a fraction) of checkable deposits are backed up by cash in bank vaults or in bank’s accounts at the Fed. Size of the “fraction” held in reserves is regulated by Fed. Banks Create Money Through Lending

Actual Reserves- Required reserves= excess reserves

Monetary multiplier=1/ Required reserve ration =1/R  The money-creating ability of the banking system will be less than the maximum amount indicated by the money multiplier when people hold a portion of their money in the form of currency.

Three Tools of Monetary Policy: 1.Open Market Operations:

Buying and Selling government bonds (securities)  2Reserve Reserve:  The Feb manipulate the reserve ratio in order to influence the ability of commercial banks to lend. 3Discount Rate: Discount rate = interest rate paid by banks for borrowing money from the Fed.

Expansionary Policy (fix recessionary gap)

Buy bonds,Cut reserve requirement,Cut discount rate

Impact:Increased money supply,Lower interest rates,Increased C and I,Increased real GDP,Increased aggregate demand (shift to right)

Contractionary Policy (fix inflationary gap)

Sell bonds,Raise reserve requirement,Raise discount rate

Impact:Decreased money supply,HIgher interest rates,Decreased C and I,Decreased GDP,Decreased aggregate demand(shift to left)

Federal Funds Rate:Interest rate banks charge each other for overnight loans to cover reserve shortfalls.

Prime interest rate is the benchmark interest used by banks as a reference point for a wide range of interest rates charged on loans to businesses and idividuals.The Prime interest rate is higher than the Federal funds rate because the prime rate invollves longer, more risky loans than overnight loans between banks

Classical Analysis: Supply creates its own demand. The government does not need to concern itself with policies that maintain demand at a desirable level.Vertical Aggregate Supply Curve because increase in price level have no effect on real GDP. a market econony is self-correcting and thus will not remain in a recession indefinitely.

Keynesian Analysis: AS curve is horizontal until the full-employment level of output, where it becomes vertical.Horizontal “depression range” of AS where excess capacity and unemployment allow increases in output and income without forcing the price level to increase.“sticky”wages cannot adjust to match changes in price levels, deviation from full employment output might persist until government steps in with monetary policy or fiscal policy to bolster or tame the economy.

Monetarist view: Equation of exchange MV = PQ Stable velocity:factors altering velocity change gradually and predicably and that changes in velocity from one year to the next can be readily anticipated.

A country has a comparative advantage in producing a good if it can produce that good at a lower opportunity cost than any other country. The basis for comparative trade is differentials in opportunity costs between countries (and individuals).

Balance of payment: Current account(goods and services) + Captial account(international borrowing and investment)

综合题：6个图：PPC, AS/AD(SRAS,LRAS), Loanable fund market, foreign exchange market, philip curve, money market

1. crowd out = interest rate increase

2. a large increase in labor productivity ===> RDGP increase, price level decrease

3. bank can create money by lending excess reserve to customers

4. If public increases holding money as currency ===> interest rate increase

If public increases holding money as currency ====> Bank less able to expand credit

5. Keep other factors constant, an increase in United states imports ====> dollar depreciate because the world supply of dollars will rise

6. Supply shocks tend to change both relative prices and the general price level

7. An increase in the labor force participation rate will make it more difficult to reduce unemployment

8. If a large increase in total spending has no effect on RGDP, it must be ture that the price level is rising.

9. Based on Keynesian theory, the most important determinant of saving and consumption is the level of income.

10. An increase in money supply will have the greatest effect on RGDP if the quantity of money demanded is not very sensitive to interest rate

supply of loanalbe funds come from: private savng + public saving

private saving-- the income that households have left after paying for taxes and consumption to save

public saving -- the tax revenue that the government has left after paying for its spending

demand for loanable funds come from households and firms for investments

A budget defict is an excess of government spending over tax revenue. Normally, goverenment finances budget deficit by borrowing in the bond market.

When the goverment runs a budget deficit, public saving is negative, and this reduces supply of loanable funds, thus, increases interest rate. Househould and firm would invest less. The fall in investment because of government borrowing  is called crowding out.

Investment is important for long run economic growth, so goverment budget deficit reduces the economy's growth rate.

 Saving is an important long run determinant of a nation's productivity.

P259页的1,2这两道题我都不太明白。

 positive and normative, 我在课上没讲过，postive statement 主要是客观描述性的，而normative 则是指明应该是怎样的。所以normative statement 常用的词是should be.... 

第二题是讲过的，在PPC里，要是既增加A又增加B，那么一定curve shifs rightward.

P260页的6,7这两道题我也不太懂，就是有关菲利普斯曲线移动的。when AD inceases, price level goes up, unemploymen goes down, so there is a move up along the short-run phillips curve. When AS increases, price level goes down, unemployment goes down at the same time, so short run phillips curve shifts leftward.

P261页这个第11,12题的图我也没看懂，准确的说是money market和loanable funds market没分清楚

 你硬记住吧，money market 里把money supply 画成一条垂直线，纵坐标是nominal interest rate；the loanable fund market 里，supply of loanable fund 不是直线，而且纵坐标是real interst rate.