Free Response 2013

Scoring Guidelines 2013

Question 1 (b)

  • Graph of the money market vs Graph of the loanable funds market

    (a) The Liquidity Preference Model of the Interest Rate Interest rate, r MSI rl Fil Interest rate, r In the short run, an increase in the money supply reduces the interest rate .. MDI Quantity of money (b) The Loanable Funds Model Of the Interest Rate . which leads to a short-run increase in real GDP and an increase in the supply of loanable funds. Quantity of loanable funds

  • Graph of the loanable funds market

  • x-axis: Quantity of Loanable Funds

  • y-axis: Real Interest Rate

    REAL INTEREST RATE

Question 1 (c)

  • More investment, higher GDP growth rate

    incteoses so i.ueases increase becanSe iavesbten\* will lud

Question 1 (d)

  • Foreign exchange market for the euro

  • x-axis: Quantity of Euro

  • y-axis: Dollar per Euro

  • Label e on the y-axis as exchange rate

    QUANTITY OF EURO

  • The demand for the euro increases because the higher real interest rate in the euro zone leads to higher returns for financial investments in the euro zone, attracting funds from the United States to the euro zone.

Question 1 (e)

  • Current Account

    • Depreciate = Deficit

    • Appreciate = Surplus

    Impact on Currency • CA: All the other factors constant, a deficit balance on a country's current account implies that there is excess supply of its currency in the foreign markets. Hence, its currency should depreciate. • KA: All other factors constant, a surplus balance in a country's financial account implies that there is excess demand for assets denominated in its currency. Hence, its currency should appreciate.

    Table 12015 balance of payments (billions of dollars) Current account Gross exports (goods and services) Gross imports (goods and services) Net income New current transfers Current account balance Capital and financial account Capital account Financial account, excluding net reserve assets Financial account, reserve assets Financial account Capital and financial account balance Net errors and omissions Balance of payments (current account + capital and financial account + net errors and omissions) Sources: Wind, SAFE $2, 375 $2,007 -$9 -$16 So $343 -$161 $293 -$161 -$132 So

    Political Stability and Economic Performance Inflation Differentials Interest Rate Differentials Current Account Balances Public Debt Balances Investors inevitably seek out stable countries with strong economic performance to invest capital Countries with lower inflation tend to have stronger currencies as purchasing power increases relative to other currencies Higher interest rates attract foreign capital and therefore cause currencies to appreciate Countries with current account deficits tend to have weaker currencies Countries with large public debts are less attractive to foreign investors, large debt encourages inflation

Question 2 (e)

Non-mandatory changes in taxation, spending, or other fiscal activities by a government in response to economic events or changes in economic conditions. Discretionary fiscal policy implies government actions above and beyond existing fiscal policies, and often occurs in periods of recession or economic turbulence. What is Discretionary Fiscal Policy? definition and meaning mvw.businessdictionary.com/definition/Discretionary-Fiscal-Policy.html

  • SRAS will increase because wages and some other production costs decrease during a recession

    bJL$S bdill fte) are

    ![Aggregate price level 2. ...reduces the aggregate price level and aggregate output and leads to higher unemployment in the short run...

  • An initial negative demand shock... IRAS ADI AD2 Potential output SRASI SRAS2 3. ...until an eventual fall in nominal wages in the long run increases short-run aggregate supply and moves the economy back to potential output. Real GDP Recessionary gap ](./media/image30.png)

Question 3 (a)

  • x-axis: Unemployment rate

  • y-axis: Inflation rate

    INFLATION RATE ( % ) UNEMPLOYMENT RATE ( ) SRPC

Question 3 (e)

  • Real Interest Rate = Nominal Interest Rate - EXPECTED Inflation Rate

results matching ""

    No results matching ""