Free Response 2008

Scoring Guidelines 2008

Question 1 (a)

  • The effect of the decrease in consumption spending

    IR2 IRI SRPC UNEMPLOYMENT RATE

Question 1 (e)

  • As a result of the increase in interest rate, the growth rate will fall.

  • The investment spending decreases and, as a result, capital formation will decrease.

Question 2 (a)

  • Current account record:

    • A United States resident buys chocolate from Belgium

    • A United States manufacturer buys computer equipment from Japan.

Question 2 (b)

  • Increase in income causes imports to increase, therefore the current account balance will decrease or move toward a deficit.

Question 2 (c)

  • The effect of an increase in United States firm's direct investment in India

    • X-axis: Quantity of US Dollars

    • Y-axis: Rupee per US Dollar

    QUANTITY OF U.S. DOLLARS

    The Demand and Supply Line-ups in Foreign Exchange Markets Demand for the U.S. Dollar Comes from... A U.S. exporting firm that earned foreign currency and is trying to pay U.S. -based expenses Foreign tourists visiting the United States Foreign investors who wish to make direct investments in the U.S. economy Foreign investors who wish to make portfolio investments in the U.S. economy Supply of the U.S. Dollar Comes from... A foreign firm that has sold imported goods in the United States, earned U.S. dollars, and is trying to pay expenses incurred in its home country U.S. tourists leaving to visit other countries U.S. investors who want to make foreign direct investments in other countries U.S. investors who want to make portfolio investments in other countries

    When the U.S. government imposes a quota on the import of Japanese cars, nothing happens in the market for loanable funds in panel (a) or to net capital outflow in panel (b). The only effect is a rise in net exports (exports minus imports) for any given real exchange rate. As a result, the demand for dollars in the market for foreign-currency exchange rises, as shown by the shift from DI to in panel (c). This increase in the demand for dollars causes the value of the dollar to appreciate from El to E2. This appreciation of the dollar tends to reduce net exports, offsetting the direct effect of the import quota on the trade balance. FIGURE 6 The Effects of an Import Quota Real Interest Rate r, (a) The Market for Loanable Funds Supply Quantity of Loanable Funds causes the real exchange rate to appreciate. (b) Net Capital Outflow Real Interest Rate 3. Net exports, however, remain the sa Real Exchange Rate Net Capital Outflow Supply n. An Import quota increases the demand for ollars D, Quantity of Dollars (c) The Market for Foreign-currency Exchange

results matching ""

    No results matching ""