Learn Extracted exam questions AP Macroeconomics 2019 Free Response · Set 2
2019 Free Response · Set 2
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Assume the economy of Artland is currently operating above full employment.
Draw a correctly labeled graph of the short-run aggregate supply, long-run aggregate supply, and aggregate demand curves, and show each of the following.
(i) The current equilibrium real output and price level, labeled as $Y_1$ and $PL_1$, respectively
(ii) The full-employment output, labeled as $Y_f$
Assume the central bank and the government do not take any policy actions to close the output gap.
(i) On your graph in part (a), show how the economy automatically adjusts in the long run and label the new equilibrium price level $PL_2$.
(ii) Explain the cause of the adjustment shown in part (b)(i).
Alternatively, suppose the government wants to close the output gap using fiscal policy.
(i) Identify a fiscal policy action the government could implement to close the output gap.
(ii) How will the fiscal policy action identified in part (c)(i) affect the following?
- The unemployment rate
- The natural rate of unemployment
(iii) In closing the output gap, will the automatic adjustment identified in part (b)(i) produce a higher, a lower, or the same price level compared to the fiscal policy identified in part (c)(i)?
Draw a correctly labeled graph of the market for loanable funds. Show the effect of the fiscal policy action identified in part (c)(i) on the equilibrium real interest rate.
Given the interest rate change identified in part (d), will the long-run aggregate supply curve shift to the right, shift to the left, or remain the same in the long run? Explain.
The European Union and the United States are trading partners.
If the current account balance is zero, will an increase in United States real income result in a current account surplus, deficit, or no change? Explain.
Draw a correctly labeled graph of the foreign exchange market for the euro. On your graph, show the effect of the increase in United States real income on the value of the euro relative to the United States dollar.
Now assume interest rates increase in the European Union.
What is the effect of the increase in interest rates in the European Union on the demand for the United States dollar? Explain.
Based on your answer to part (c)(i), what is the effect on the value of the United States dollar relative to the euro?
Sweden and Norway use equal quantities of resources to produce food and capital goods. The table below shows the maximum possible production of food OR capital goods for each country.
| Country | Food | Capital Goods |
|---|---|---|
| Sweden | 50 | 100 |
| Norway | 30 | 120 |
Draw a correctly labeled graph of the production possibilities curve for Sweden. Place food on the horizontal axis and capital goods on the vertical axis. Plot the relevant numerical values on the graph.
On your graph in part (a), indicate the following.
A point that represents an efficient level of production, labeled E
A point that represents an inefficient level of production, labeled I
A point that represents an unattainable level of production, labeled U
Assume Sweden moves from producing 20 units of food and 60 units of capital goods to producing 30 units of food and 40 units of capital goods. What will happen to economic growth in Sweden in the future?
Which country has the comparative advantage in the production of capital goods? Explain.
Based on the table above, identify a specific number of units of capital goods that could be traded for 10 units of food and be mutually beneficial.