Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Nominal rigidity wikipedia , lookup
Modern Monetary Theory wikipedia , lookup
Pensions crisis wikipedia , lookup
Ragnar Nurkse's balanced growth theory wikipedia , lookup
Balance of payments wikipedia , lookup
Monetary policy wikipedia , lookup
Real bills doctrine wikipedia , lookup
Fear of floating wikipedia , lookup
Early 1980s recession wikipedia , lookup
Fiscal multiplier wikipedia , lookup
1. Assume that the U.S. economy is in a severe recession with no inflation. (a) Using a correctly labeled aggregate demand and aggregate supply graph, show each of the following for the economy. (i) Full-employment (ii) Current output level LRAS1 Price Level (iii) Current price level ------ E1 ----- P1 Q1 2003 Long Free Response Solved AD1 Real GDP SRAS1 (b) The federal government announces a major decrease in spending. Using your graph in part (a), show how the decrease in spending will affect each of the following. (i) Level of output (ii) Price level P1 ------ E1 ----- As government spending decreases this causes AD to shift to the left, causing Q and PL to go down. LRAS1 Price Level AD2 Q1 AD1 Real GDP SRAS1 (c) Explain the mechanism by which the decrease in government spending will affect unemployment rate. As government spending decreases this causes less consumption and investment in the economy shifting AD to the left, causing unemployment to rise LRAS1 Price Level ------ E1 ----- P1 AD2 Q1 AD1 Real GDP SRAS1 (d) The Federal Reserve purchases bonds through its open-market operations. (i) Using a correctly labeled graph, show the effect of this purchase on the interest rate. As interest rates fall, this increases C and I, causing AD to shift to the right. Qty and PL increase. MS MS2 Nominal Interest Rate i i2 MD QTY Money (e) Explain how the change in the interest rate you identified in part (d) will affect each of the following. (i) International value of the dollar relative to other currencies As U.S. interest rates go down relative to other countries’ interest rates, U.S. citizens would “save money” in other countries, thus increasing the supply of dollars in the foreign exchange market causing ?/$ the dollar to depreciate. Market for Dollars S S2 P P2 D Q Qty of Dollars (e) Explain how the change in the interest rate you identified in part (d) will affect each of the following. (ii) United States exports As the dollar depreciates relative to other countries’ currencies, our exports goods and services become cheaper relative to other countries’. Exports increase. (NX ↑) (e) Explain how the change in the interest rate you identified in part (d) will affect each of the following. (iii) United States imports As the dollar depreciates relative to other countries’ currencies, their goods and services become more expensive relative to the U.S.’. U.S. imports decrease.