Transcript 3 Practice Free Response Answers

3 Practice Free Response
Questions
Have Fun!
Cars
Practice Problem #1
BRAZIL
Cars
400,000
Absolute Advantage in Cars:
MEXICO
Mexico
Equally efficient at Computers
100,000
Opportunity Cost Table
Computers
400,000
Computers
BRAZIL
(give-up)
400,000
MEXICO
(gain)
4 Computer
1 Car = ____
1 Computer =
1/4 Car
____
Comparative Advantage Computers:
Comparative Advantage Cars:
1 Computer
1 Car = _____
1 Computer
1 Car
____
Brazil: Cost of computer = 1/4 car vs. 1 car
Mexico: Cost of car = 1 computer vs. 4 computers
Ranges for Efficient Trade
(Terms of Trade)
BRAZIL
(give-up)
MEXICO
(gain)
4 Computer
1 Car = ____
1 Computer =
1/4 Car
____
1 Computer
1 Car = _____
1 Computer
1 Car
____
Brazil must buy cars at a ratio above 1/4 car per computer
Mexico must sell cars at a ratio below 1 computer per car
Terms of Trade: > ¼ & less than 1 car per computer
or
> 1 & less than 4 computers per car
Practice Problem #2
American Economy
Price
Level
LRAS1
P1
-----------------------------------
Y1
E1
-------------------
P2
SRAS1
Event: Japanese Economy booms
E2
AD2
AD1
Y2 Real
GDP
Japanese economy booms => Japanese buy more imports (some from USA)
USA exports more (NX ↑) => AD ↑ => GDP ↑ & Price Level ↑
Practice Problem #2
House of
Money
Market for Dollars
Market for Yen
S1
Yen Price
of a dollar
S1
Dollar Price
of a Yen
-------------------
Q1
P1
--------------------
D2
D1
---------------------
----------------------
P1
S2
Dollar
Appreciates
Yen
Depreciates
D1
Qty of Dollars
Q1
Qty of Yen
Japanese disposable income rises => buy more imports from USA:
=> Japanese must exchange Yen for dollars: They demand dollars & they supply Yen
skip question #2 part d => not on Final Exam
Practice Problem #3
a) The Federal Funds rate is the interest rate Banks can lend or
borrow money from each other
b) The Fed would use purchase Treasury bonds/securities in the
open-market. This would inject money into the financial system,
thereby increasing MS ↑. An increase in MS would shift MS to
the right which leads to a lower nominal interest rates
Practice Problem #3 continued
c) The multiplier is 1/r.r. so 1/.20 = 5 multiplier.
-Therefore, a 10 million purchase of bonds would lead to a 50
million ↑ MS.
-However, only 8 million could be loaned out….Therefore, Loans
could increase by $40 million
d) Nominal Interest rates = Real Interest Rates + Expected Inflation
If inflation rises and is expected to be permanent then inflation expectations
nominal interest rates ( think long term) would rise.
Real interest rates would remain unchanged based on rising inflation
expectations and the equation above