Free Response 2009

Scoring Guidelines 2009

Question 1 (d)

  • Money Supply in the graph of the money market is vertical


Question 1 (e)

  • Higher interest rate decreases investment and interest-sensitive consumption spending, and that both consumption and investment are components of aggregate demand.

Question 1 (f)

Disinflationary Monetary Policy in the Short Run and the Long Run
  Inflation Rate Long-tun Phillips curve c Natural rate of unemployment
  I. Contractionary policy moves the economy down along the short-lun
  Phillips curve .. Short-run Phillips curve with high expected
  inflation Sh01t-run Phillips curve with low expected inflation
  Unemployment Rate . but in the long run, expected 2... inflation
  falls, and the short-run Phillips curve shifts to the left.

Question 2 (b)

26-3a Supply and Demand for Loanable Funds The economy's market for
  loanable funds, like other markets in the economy, is governed by
  supply and demand. To understand how the market for loanable funds
  operates, therefore, we first look at the sources of supply and demand
  in that market. The supply of loanable funds comes from people who
  have some extra income they want to save and lend out. This lending
  can occur directly, such as when a household buys a bond from a firm,
  or it can occur indirectly, such as when a household makes a deposit
  in a bank, which in turn uses the funds to make loans. In both cases,
  saving is the source of the supply of loanablefunds. The demand for
  loanable funds comes from households and firms who wish to borrow to
  make investments. This demand includes families taking out mortgages
  to buy new homes. It also includes firms borrowing to buy new
  equipment or build factories. In both cases, investment is the source
  of the demand for loanable funds.

Question 3 (a)

Assume that the reserve requirement is 20 percent and banks hold no
  excess reserves. (a) Assume that Kim deposits $100 of cash from her
  pocket into her checking account. Calculate each of the following. (i)
  The maximum dollar amount the commercial bank can initially lend (ii)
  The maximum total change in demand deposits in the banking system
  (iii) The maximum change in the money supply

maximum dollar amount the bank can initially lend is $80. maximum
  change in demand deposits is $500. maximum change in the money supply
  is $400.

  • Maximum change in money supply = Initial deposit / RRR - Initial deposit

Question 3 (c)

  • Inflation will decrease the value of real wages.

    Inflation Effects of Inflation — Decrease purchasing Power of a
Dollar — Decrease Value of Real Wages — Increased Interest Rates —
Decreased Saving and Investing — Increased Production Costs

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