Free Response 2012

Question 1 (a)

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(a) 2 points: • One point is earned for a correctly labeled graph of
  the production possibilities curve (PPC). • One point is earned for
  showing point inside e PPC.

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

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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

    Current account Exports of goods and services Imports of goods and
services Net interest income Net transfers Current account balance
Billions of dollars +1 ,754 -2,215 +167 -142 —436

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Question 2 (b)

  • M1 = Currency + Checkable deposits


  • Assets = Liabilities

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

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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

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Question 3 (c)

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Question 3 (d)

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a. Capital as a form of investment is defined as a factor of
  production in an economic process. This implies that the capital stock
  as a factor can be defined as stock of durable goods, tangible assets
  and reproducible assets in order to increase output. estimation of the
  capital stock and investment matrix in - OECD

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Capital stock Change in the capital stock Output/income

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