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


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


  • 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

    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

  • 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


Question 3 (e)

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

results matching ""

    No results matching ""