AP Review #1 – AD and AS

Draw a correctly labeled Aggregate Supply and

Aggregate Demand graph that shows that the economy is

currently experiencing a recession. Be sure to label the current price and output levels.

In order to combat a recession, the FED uses the appropriate monetary policy to solve the problem. What is the name for this policy? What

are its policy options? Draw a graph showing this policy’s impact

on the money market.

Draw the effect of the interest rate change on your AD/AS graph. What happens to AD

as a result? Why? How does this affect P, GDP, and

unemployment?

How does the interest rate change affect the value of the dollar in the foreign exchange

market? Why is this true? How does this impact the flow of

financial capital from Japan?

Draw correctly labeled graphs of the foreign exchange market for

the U.S. $ and the Japanese yen showing the effect of the interest rate change on the value of the dollar and the

Japanese yen.

How do the currency exchange rate changes affect American

imports of Japanese products? Why?

The economy is in recession. Assume instead of the monetary

policy change, the FED does nothing. What happens to short

run aggregate supply as the economy moves toward long run equilibrium? Draw the changes on a new AD/AS

graph.

The economy is in recession. Instead of the monetary policy change indicated earlier, the government decides to utilize

fiscal policy to correct the problem. What is this policy

called? What are the government’s options? Draw an AD/AS graph showing how this

affects P and GDP.

What will happen to the government’s budget as a result of

their policy change? Draw a correctly labeled graph of the

loanable funds market that shows how the policy change impacts the real interest rate. What happens to

the real interest rate?

How will the interest rate change affect AD? Why?

How will it affect the value of the dollar in the foreign

exchange market? Draw a graph of the market for dollars

in the foreign exchange market showing this impact.

How will the change in the value of the dollar affect

imports and exports? How will that affect AD, P, GDP, and

unemployment?