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Macroeconomics Workshop
AUGUST 12, 2013
MARTHA RUSH &
ANN E. SCHARFENBERG
Workshop Agenda
8:30-10:15 Intros; AP Macro outline, Basics
10:15-10:30 Break
10:30-11:45 AD/AS & Financial Sector
11:45-12:30 Lunch
12:30-1:15 Stabilization, Phillips Curve, Econ Growth
1:15-2:00 Open Econ, Trade, Balance of Payments
2:00-2:15 Break
2:15-3:00 AP Macro 2013 Free Response
3:00-4:00 Macroeconomic Resources
What did you sign up for…
Martha Rush
 1997-today ~ Mounds View High School; AP Macro,
 AP Micro, 9th grade Econ, AP Psych, Journalism
 2007-2013 ~ 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
2006-2013 ~ 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
Macroeconomics
AP Macroeconomics
I.
II.
III.
IV.
V.
VI.
VII.
Basic Concepts (8-12%)
Measurement of
Economic Performance
(12-16%
AD and AS; SR & LR
(10-15%)
Financial Sector (1020%)
Stabilization Policies
(20-30%)
Economic Growth (510%)
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
Scarcity & trade-
off
Increasing
opportunity cost
Concave shape
Quantities not
Value or $
Assumptions



Fixed resources
Fixed
technology
2 goods only
Economic
Growth
Graph #1
Production Possibilities Curve
(Frontier)
Microwaves & Cell Phones
Absolute Advantage
Comparative Advantage
 The ability to produce
 David Ricardo ~
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.
economic principle for
trade
 The ability to produce a
good or service at a
lower opportunity cost
than another.
 Specialization & Trade
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
1
2
3
4
Carrots
1
2
3
4
5 6
7
8
9 10
11
Apples
I. Basics continued
Demand ~ Consumers
Qd v. D
S1
Supply ~ Producers
Qs v. S
Market for individual
product determines price &
quantity bought/sold
graph
D2
D1
S2
S1
D1
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
Consumption Saving
MPC
MPS
$12,000
$12,100
-$100
--
--
$13,000
$13,000
0
$14,000
$13,800
$200
$15,000
$14,500
$500
$16,000
$15,100
$900
$17,000
$18,800
$1400
Multipliers
 Simple Spending Multiplier

1
MPS
 Tax Multiplier
 - MPC
MPS
 Balanced Budget Multiplier
 Equals 1
10:15 – 10:30
Graph #3
AD & AS
Graph #3
AD & AS
 Aggregate demand (AD)



wealth effect
real interest rate effect
foreign purchases effect
 SR Aggregate supply (SRAS)

 Shifts


 Shifts in AD

Level of optimism; Interest rates
(inverse)
G


Δ Income; Δ taxes or transfer
payments  ΔDI
I



Input prices (cost of resources)
Tax policy
Regulation
C


Upward sloping
Xn



 LR Aggregate supply (LRAS)

Vertical
 Shifts


Discretionary G spending

Foreign income
Consumer tastes
Δ Exchange rate

Availability of resources)
Technology & productivity
Same as PPC
WAGE & RESOURCES PRICES
DO NOT SHIFT LRAS
LRAS & PPC (recessionary gap)
Vertical LR AS
PPC
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
Slf ~ savings,
capital flows
Dlf ~ 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
AD1
AD
Real GDP
AD Inflation
PL
LRAS
SRAS
AD1
AD
Real GDP
Stagflation
PL
LRAS
SRAS1
SRAS
AD
Real GDP
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 PC @
natural rate of UE
Graph #5
Phillips Curve
VII. Open Economy
Graph #6 ~ Foreign Exchange Market
Euros
S
Dollars/Euro
Euros/Dollar
US Dollars
S
D
QUSD
D
QEuros
Balance of Payments
 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.
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?
a)
i)
ii)
a U.S. resident buys chocolate from Belgium
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.
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 paragraph
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.
46
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.
47
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.
52
Error Number 9
Question 1 (b)
Real
Interest
Rate
SLF
S’LF
r1
r2
DLF
53
Quantity of
Loanable Funds
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.
54
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.
56
Error Number 8
Question 1 (d)
e=Dollars
per
euro
S of euros
e2
e1
D’ for euros
D for euros
Quantity of
euros
57
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.
58
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.
59
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
60
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.)
63
Error Number 4
Question 3 (b)
Question: (a) Draw a correctly labeled graph of a shortrun Phillips curve.
(b) Using your graph in part (a), show the effect of an
increase in the expected rate of inflation.
Inflation
SRPC’
SRPC
66
Unemployment
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
67
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
68
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
69
Top Ten Errors on the
2013 AP Macro Exam
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%)
Range of Error Rates on Individual Points
(Sample of n≈1000)
54.04-89.4
70
2:00 – 2:15
Macro Resources
HTTP://APCENTRAL.COLLEGEBOARD.COM/APC/MEMBERS/
EXAM/EXAM_QUESTIONS/2083.HTML
HTTP://WWW.COUNCILFORECONED.ORG/RESOURCE/ADVA
NCED-PLACEMENT-ECONOMICS-4TH-EDITION/
HTTP://WWW.REFFONOMICS.COM/TRB/INPROGRESS/MAC
ROECONOMICS
HTTP://WWW.YOUTUBE.COM/USER/ACDCLEADERSHIP
HTTP://WWW.APLIA.COM/
HTTP://WWW.YOUTUBE.COM/WATCH?V=D0NERTFO -SK
HTTP://WWW.YOUTUBE.COM/WATCH?V=GTQNARZMTOC
Extensions
ECONOMICS CHALLENGE
PERSONAL FINANCE DECATHLON
FEDERAL RESERVE ESSAY CONTEST
GREAT RECESSION LESSON
ECONOMIC DEVELOPMENT PROJECT
Share take aways…
Provide an example of when or how
.
QUESTIONS?
Ann E. Scharfenberg
New Richmond High
School
715-243-1733
anns@newrichmond.k12
.wi.us
THANK YOU
Take time to enjoy the summer