AP Macro Rules

If I increased interest rates, what would happen to aggregate demand? Then, what happened to the Phillips Curve? How about internationally?

Increasing interest rates typically decreases aggregate demand as it raises the cost of borrowing, discouraging consumer spending and business investment.

If we’re in a recession, what would we do to go into full employment and to go to expansionary?

We would implement expansionary fiscal or monetary policy, such as increasing government spending or lowering interest rates, to stimulate economic activity and boost aggregate demand.

If we were in an expansionary, what could we do with inflation?

We could implement contractionary monetary policy, such as increasing interest rates, to reduce inflationary pressures and stabilize prices.

Which Phillps Curve is inverse to aggregate demand?

The short-run Phillips Curve, which shows the inverse relationship between inflation and unemployment, indicating that lower unemployment is associated with higher inflation.

If I changed fiscal policy, which curve on my graph would this affect? Monetary policy?

Changes in fiscal policy would affect the Aggregate Demand curve, while changes in monetary policy would also primarily impact the Aggregate Demand curve.

When do I change my short run aggregate supply curve?

You would change the short-run aggregate supply curve in response to changes in production costs, such as wages and raw material prices, or due to supply shocks that affect overall production capabilities.

If we bought bonds, what happens to our money supply graph? Would this change SRAS or AD and how?

Buying bonds increases the money supply, which shifts the Aggregate Demand curve to the right, indicating higher demand for goods and services.

If we sold bonds, what happens to our money supply graph? Would this change SRAS or AD and how?

Selling bonds decreases the money supply, which shifts the Aggregate Demand curve to the left, indicating lower demand for goods and services.

If we increased open market operations, what happens to our money supply graph? Would this change SRAS or AD and how?

Increasing open market operations leads to the purchase of bonds by the central bank, which increases the money supply. This action shifts the Aggregate Demand curve to the right, reflecting an increase in the demand for goods and services.

If we decreased open market operations, what happens to our money supply graph? Would this change SRAS or AD and how?

Decreasing open market operations results in the sale of bonds by the central bank, which decreases the money supply. This action shifts the Aggregate Demand curve to the left, indicating lower demand for goods and services.

If we increased discount rate, what happens to our money supply graph? Would this change SRAS or AD and how? What if we decreased it?

Increasing the discount rate decreases the money supply by making loans more expensive for banks, thus reducing the amount of money available in the economy. This action shifts the Aggregate Demand curve to the left, indicating a decrease in demand for goods and services.

If we increased interest on reserves, what happens to our money supply graph? Would this change SRAS or AD and how? Decrease?

Increasing interest on reserves incentivizes banks to hold onto their reserves rather than lending them out. This decreases the money supply and shifts the Aggregate Demand curve to the left, indicating a decline in demand for goods and services.

What are some monetary policies and what does it mean? What are some fiscal policies and what does it mean? How can you differentiate them?

Monetary policies are actions taken by a central bank to manage the money supply and interest rates to influence economic activity. Fiscal policies involve government spending and taxation decisions aimed at impacting the economy, and they can be differentiated by the entity implementing them: central banks manage monetary policy, while governments manage fiscal policy.

If we’re in a recession, what would the government take to remove ourselves from recession and what would that action do? What could be some advantages and disadvantages to that solution? Please mention how could this affect things like interest rates, inflation, etc…

To combat a recession, the government might implement expansionary fiscal policy, increasing spending or cutting taxes to stimulate demand. This action could lower unemployment and boost consumer spending but may lead to higher inflation and increased budget deficits.

If we’re in an expansionary, what would the government take to calm the expansion and what would that action do? What could be some advantages and disadvantages to that solution? Please mention how could this affect things like interest rates, inflation, etc…

To manage an expansionary period, the government may adopt contractionary fiscal policy, decreasing spending or increasing taxes to reduce demand. This action could help control inflation and stabilize the economy but might also lead to higher unemployment and decreased consumer spending.

Let’s say Chicken Land exchange rate to Pasta Land is 1 chicken = 3 pastas. If Pasta lowers it to 1 chicken = 1 pasta, what does that say about Chicken Land versus Pasta Land?

This indicates that Chicken Land's currency has appreciated relative to Pasta Land's currency, making Chicken Land's goods more expensive for Pasta Land while Pasta Land's goods become cheaper for Chicken Land.

Let’s say Chicken Land exchange rate to Pasta Land is 2 chicken = 4 pastas. If Chicken Land lowers it to 2 chicken = 3 pasta, what does that say about Chicken Land versus Pasta Land?

This indicates that Chicken Land's currency has depreciated relative to Pasta Land's currency, making Chicken Land's goods cheaper for Pasta Land while Pasta Land's goods become more expensive for Chicken Land.

How can you decrease money supply with reserve ratio? What about increasing the money supply?

Decreasing the money supply can be achieved by increasing the reserve ratio, requiring banks to hold a larger percentage of deposits in reserve, thus reducing the amount available for lending. Conversely, decreasing the reserve ratio allows banks to lend more of their deposits, increasing the money supply.

What will cause M1 to increase? What about decrease? What about unchanged? What will cause M2 to increase? What about decrease? What about unchanged?

M1 may increase due to greater demand for money, such as from fiscal stimulus or lower interest rates. It can decrease when individuals and businesses hold less cash or convert money into non-liquid assets. M1 remains unchanged with stable transaction demand. M2 increases with savings inflow and M1 growth, and decreases if savings are withdrawn into cash/forms outside of M2. M2 remains largely unchanged when liquidity preferences stabilize and economic conditions are steady.

If we transfer $1000 from a checking account to a certificate of deposits, how does that affect M1 versus M2?

Transferring $1000 from a checking account to a certificate of deposit decreases M1, as checking accounts are part of M1 while CDs are part of M2. However, M2 remains unchanged since the total amount of liquid assets has not changed.

What are travelers checks?

Traveler's checks are pre-paid, fixed-amount checks that can be used like cash while traveling, providing a secure way to carry funds. They are accepted at many places and can be replaced if lost or stolen.