J M Keynes The long run is a

J. M. Keynes “The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us when the storm is long past, the ocean will be flat. ” The General Theory of Employment, Interest and Money

Q How does each of the following changes affect the real gross domestic product and price level of an open economy in the short run? Explain each. (4 pts. ) a) An increase in the price of crude oil, an important natural resource b) A technological change that increases the productivity of labor c) An increase in spending by consumers d) The depreciation of the country’s currency in the foreign exchange market A a) Explaining that real GDP will fall and the price level will rise because the increase in the price of oil raises input costs and causes SRAS curve to shift to the left = 1 pt. b) Explaining that real GDP will rise and the price level will fall, because the increase in labor productivity reduces unit input costs and causes the SRAS curve to shift to the right = 1 pt. c) Explaining that real GDP will rise and the price level will rise, because the increase in spending causes the AD curve to shift to the right = 1 pt. d) Explaining that real GDP will rise and the price level will rise, because the depreciation of the currency will cause net exports to rise and the AD curve to shift to the right = 1 pt. From 2010(b) AP Exam FRQ – Q 3

Q A country’s economy is in a short-run equilibrium with an output level less than the fullemployment output level. Assume an upward-sloping aggregate supply curve. (6 pts. ) a) Using a correctly labeled aggregate demand aggregate supply graph, show the following. i. ii. Full-employment output, labeled as YF Equilibrium real output and price level, labeled as YE and PLE, respectively a) Assume that the country’s government increases domestic military expenditures. On the graph from part (a), show the increased military expenditures affect the following in the short run. i. ii. Aggregate demand. Equilibrium real output and price level, labeled as Y 2 and PL 2, respectively. b) Assume that the economy produces only two goods: military goods and civilian goods. Using a correctly labeled production possibilities curve, show the effect of the increase in military expenditures from part b), labeling the initial point as C and the new point as D. From 2010(b) AP Exam FRQ - Q 1

A a) i. ii. b) i. ii. c) i. ii. Drawing a correctly labeled AD/AS graph with vertical LRAS at YF = 1 pt. Showing equilibrium output and price level to the left of YF = 1 pt. Showing rightward shift of AD curve = 1 pt. Showing the new equilibrium output and price level = 1 pt. Drawing a correctly labeled PPC = 1 pt. Labeling points C and D, showing a movement toward the curve and an increase in military goods = 1 pt. From 2010(b) AP Exam FRQ - Q 1

Q Assume that the United States economy is currently in long-run equilibrium. (6 pts. ) a) Draw a correctly labeled graph of aggregate demand aggregate supply and show each of the following. i. ii. The long-run aggregate supply curve The current equilibrium output and price levels, labeled as YE and PLE, respectively a) Assume that the government increases spending on national defense without raising taxes. i. ii. On your graph in part (a), show the government action affects aggregate demand. How will this government action affect the unemployment rate in the short run? Explain. b) Assume that the economy adjusts to a new long-run equilibrium after the increase in government spending. i. ii. How will the short-run aggregate supply curve in the new long-run equilibrium compare with that in the initial long-run equilibrium in part (a) ? Explain. On your graph in part (a), label the new long-run equilibrium price level as PL 2. From 2010 AP Exam FRQ - Q 1

A a) i. ii. b) i. ii. c) i. ii. Correctly labeled graph with downward-sloping AD curve, upward sloping SRAS curve, and points PLE and YE on vertical and horizontal axes = 1 pt. Showing vertical LRAS curve at YE = 1 pt. Showing rightward shift of AD curve on graph in part (a) = 1 pt. Stating that unemployment rate falls; explaining that this is due to real output increase = 1 pt. Stating that SRAS curve will shift left and showing PL 2 correctly on graph = 1 pt. Explaining that wages and commodity prices adjust to higher price level, causing SRAS curve to shift left = 1 pt. From 2010 AP Exam FRQ - Q 1

Q Assume the economy of Andersonland is in a long-run equilibrium with full employment. In the short run, nominal wages are fixed. (6 pts. ) a) Draw a correctly labeled graph of short-run aggregate supply, long-run aggregate supply, and aggregate demand. Show each of the following. i. ii. Equilibrium output, labeled Y 1 Equilibrium price level, labeled PL 1 a) Assume that there is an increase in exports from Andersonland. On your graph in part (a), show the effect of higher exports on the equilibrium in the short run, labeling the new equilibrium output and price level Y 2 and PL 2, respectively. b) Based on your answer in part (b), what is the impact of higher exports on real wages in the short run? Explain. c) As a result of the increase in exports, export-oriented industries in Andersonland increase expenditures on new container ships and equipment. i. ii. What component of aggregate demand will change? What is the impact on the long-run aggregate supply? Explain. From 2012 AP Exam FRQ – Q 3

A a) b) Showing a rightward shift of the aggregate demand curve and showing Y 2 and PL 2 = 1 pt. c) Stating that real wages will fall because the price level has increased and the nominal wages are fixed in the short run = 1 pt. i. Stating that the investment component of AD will change. ii. Stating that the long-run aggregate supply curve will shift to the right because the capital stock has increased d) i. ii. Drawing a correctly labeled graph and showing the AD and SRAS curves and PL 1 = 1 pt. Showing a vertical LRAS curve at the output Y 1 through the intersection of the SRAS and AD curves = 1 pt. From 2012 AP Exam FRQ – Q 3