Free Response 2009 Form B

Scoring Guidelines 2009 Form B

Question 1 (b)

  • Decrease in taxes raises disposable income and increases consumption spending

  • The effect of decrease in taxes on the Phillips curve

    SRPC UNEMPLOYMENT RATE (O/c)

Question 1 (c)

(c) Raymond advises the president to take no policy action. (i) What will happen to the short-run aggregate supply curve in the long run? Explain. (ii) Using a new correctly labeled graph of the short-run Phillips curve, show the effect of the change in the short-run aggregate supply you identified in part (c)(i).

• • • One point is earned for stating that the short-run aggregate supply curve will shift to the right. One point is earned for explaining that wages will fall, businesses will hire more workers, and output will ris One point is earned for showing a leftward shift of the short-run Phillips curve. LRPC SRPC SRPC' UNEMPLOYMENT RATE (C/o)

Question 2 (a)

  • Total change in reserves = The change of government securities

Question 2 (b)

  • Money supply is vertical, since it is controlled by the federal bank

    MS2 MS Ml MD QUANTITY OF MONEY

Question 3 (a)

3. Assume that the real interest rates in both Canada and India have been 5 percent. Now the real interest rate in India increases to 8 percent.

QUANTITY OF CANADIAN DOLLARS

  • The supply of Canadian dollars will increase, because Canadian investors will be attracted by the higher real interest rate in India and increase their purchase of Indian financial assets

    The demand for currency The demand for currencies is derived from the demand for a country's exports, and from speculators looking to make a profit on changes in currency values. The supply of currency The supply of a currency is determined by the domestic demand for imports from abroad. For example, when the UK imports cars from Japan it must pay in yen (Y), and to buy yen it must sell (supply) pounds. The more it imports the greater the supply of pounds onto the foreign exchange market. A large proportion of short-term trade in currencies is by dealers who work for financial institutions. The London foreign exchange market is the World's single largest international exchange market.

Question 3 (b)

(b) Using a correctly labeled graph of the loanable funds market in Canada, show how the increase in the real interest rate in India affects the real interest rate in Canada.

Q QUANTITY OF LOANABLE FUNDS

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