Transcript Macro practice FRQs

FED buys bonds from the public
Draw graph showing effect on
interest rate. What happens to
value of $ in foreign exchange
market?
i
Sm1
Sm2
Money
Market
i1
i2
Dm
Q1
Q2
Q
Draw graph showing effect on the
interest rate from increased
saving in the U.S. What happens
to nation’s capital stock?
i
Loanable
Funds
Market
SLF1
SLF2
i1
i2
DLF
Q1
Q2
Q
Effect on P and GDP when $
depreciates
P
ASLR
AS
AD/AS
P2
P1
AD2
AD1
Qf Q2
GDP
FED sells bonds. Draw graph
showing effect on interest rate.
What happens to the value of the
$ in the foreign exchange
market?
i
Sm2
Sm1
Money
Market
i2
i1
Dm
Q2
Q1
Q
Government & FED do nothing in
response to short-run recession
ASLR
P
ASSR1
ASSR2 AD/AS
P1
P2
AD
Q1
Qf
GDP
Effect on interest rate when
government runs a budget deficit
Loanable
Funds
Market
SLF
i
i2
i1
DLF2
DLF1
Q1
Q2
Q
Value of U.S. $ and Japanese
yen when U.S. interest rates
increase. What happens to
American imports and exports?
Foreign Exchange Market
P ($)
SYen1 P (Yen)
S$
SYen2
P2
P1
P1
D$2
P2
DYen
Q1 Q2
Yen
Q
D$1
Q1 Q2
Dollars
Q
Effect on P, GDP when $
appreciates
P
ASLR
AS
AD/AS
P1
P2
AD1
AD2
Qf Q2
GDP
Effect on AD of FED’s bond
sales during inflation
P
ASLR
AS
AD/AS
P1
AD1
P2
AD2
Qf
Q1
GDP
Government and FED do nothing
in response to short-run inflation
ASSR2
P
ASLR
ASSR1
AD/AS
P2
P1
AD
Qf
Q1
GDP
Effect on AS and SRPC when
price of oil increases dramatically
P
Inflation
rate
AS2
AS1
P2
P1
SRPC2
AD
GDP2
GDP1
P goes up
Unemployment rises
GDP
SRPC1
Unemployment rate
Expansionary fiscal policy
during a recession
ASLR
P
AS
AD/AS
P2
P1
AD2
AD1
Q1
Qf
GDP
Effect on ASLR and LRPC when
U.S. capital stock increases
P
Effect on AS
ASLR1
ASLR2
Qf1
Qf2
Inflation
GDP
LRPC2 LRPC1
NRU2 NRU1 Unem
The FED and Monetary policy
• Always affects the money market
• Money market has vertical supply curve
• Increase in money supply lowers interest
rates – increases investment and
consumption and AD
• Lower interest rates cause $ to depreciate
– exports increase, imports decrease
• Decrease in money supply has opposite
effect
Loanable funds market
• S affected by savings; D affected by
increased budget deficit (increasing G or
decreasing taxes)
• Upward sloping S curve
• Increase in budget deficit raises interest
rates (decreases I and C – crowding out)
• Increase in savings lowers interest rates
• Changes in income affect BOTH savings
and consumption in the same direction
Short run vs. long run
• If unemployment rises in the short run,
wages fall
• Falling wages increases AS (shifts to right)
• If unemployment falls in the short run, wages
rise
• Rising wages decreases AS (shifts to left)
• Long run equilibrium is at the NRU
Capital Flows
• Money coming into a country increases D for
that currency and increases S of other currency
• Increasing D for a currency causes it to
appreciate; increasing S for a currency causes
it to depreciate
• Higher interest rates in a country increases D
for its currency b/c it increases the D for that
country’s financial assets
• A higher P in a country decreases D for its
currency b/c people will buy another country’s
goods instead