Free Response 2012

Question 1 (a)

Question 1 (b)

• Label the x-axis as "Quantity of Money"

• Use MS, MD instead of S, D to represent money supply and money demand

• MD could be a straight line or a inside-curved line

• Label r1, r2 and M1, M2

  

• Real interest rate = nominal interest rate - inflation

• No change to the price level --> inflation = 0

  

Question 1 (c)

• Current Account

  • Balance of payments on goods and services plus net international transfer payments and factor income

  • Sales and purchases of goods and services

    • Payments from foreigners: $2,000,000

    • Payments to foreigners: $2,500,000

    • Net: -$500,000

  • Factor Income

    • Payments from foreigners: $800,000

    • Payments to foreigners: $600,000

    • Net: $200,000

  • International Transfers

    • funds sent by residents of one country to residents of another

    • Net: -$100,000

  • Current Account (CA) = Net foreign sales of goods and services + net factor income + net international transfer = -500,000 + 200,000 - 100,000 = -400,000

  • Current account deficit: CA < 0

  • Current account surplus: CA > 0

  • Another Example

  

Question 2 (b)

• M1 = Currency + Checkable deposits

  

• Assets = Liabilities

• Withdrawal will change the required reserves, thus changing the excess reserves

  

Question 2 (c)

• Bank can borrow from the Federal Reserve or from another bank if it runs out of money

Question 3 (a)

• x-axis: Real GDP or Y

• y-axis: (Aggregated)Price Level

  

Question 3 (b)

• Increase in exports will shift the AD to the right

  

Question 3 (c)

Question 3 (d)