Free Response 2016

Scoring Guidelines 2016

Question 1 (a)

  • Phillips Curve

    • x-axis: unemployment rate

    • y-axis: inflation rate (Since inflation rate could be negative)

    • LRPC = NAIRU = Non-Accelerating Inflation Rate of Unemployment

    LRPC SRPC UNEMPLOYMENT RATE

Question 1 (d)

  • Open Market Operation and Federal Funds Rate

    • To Bloat the economy --> Buy bonds --> Increase in Money Supply --> Increase reserve --> Decrease Federal Funds Rate

    • To Shrink the economy --> Sell bonds --> Decrease in Money Supply --> Decrease reserve --> Increase Federal Funds Rate

    Federal Open Market Committee Federal Reserve Purchases Treasury Securities from Primary Dealers Reserves in the Banking System Increase Federal Funds Rate Declines Federal Reserve Sells Treasury Securities to Primary Dealers Reserves in the Banking System Shrink Federal Funds Rate Increases How the FOMC Controls the Federal Funds Rate

Question 1 (e)

  • The effect of expansionary monetary policy on GDP

    Figure 15.7 Monetary policy (1 of 2) The Fed conducts expansionary monetary policy when it takes actions to decrease interest rates to increase real GDP. This works because decreases in interest rates raise consumption, investment, and net exports. The Fed would take this action when short-run equilibrium real GDP was below potential real GDP. The increase in aggregate demand encourages increased employment, one of the Fed's primary goals. Copyright @ 2017 Pearson Education, Inc \_ All Rights Reserved Long•run causes SHAS A 02 Real GOP Expmi—y PEARSON

    Mt (a) Expansionary monetary policy Ml (b) Contractionary monetary policy P t, real GDP t P , GDP

Question 1 (g)

  • The effect of change in interest rate on foreign exchange market

    INfOBMEDTUDES.COM Trading News and Education How Interest Rates Affect Currencies Interest Rates Debt Investments Less Attractive Less Foreign and Domestic Weaker Currency .com

Question 2 (c)

Review • Dollar value of Required Reserves = Amount of deposit X required reserve ratio • Excess Reserves = Total Reserves — Required Reserves • Maximum amount a single bank can loan = the change in excess reserves caused by a deposit • The money multiplier = l/required reserve ratio • Total Change in Loans = amount single bank can lend X money multiplier • Total Change in the money supply = Total Change in Loans + $ amount of Fed action • Total Change in demand deposits = Total Change in Loans + any cash deposited

  • If Mr. Smith deposits $100 in the bank and $10 is kept in reserves then $90 can be loaned out.

  • If that $90 is deposited in another bank then 10% of the $90 or $9 must be kept in reserve and therefore $81 can then be loaned out in the next round and 10% of that must be kept in reserve and so on and so on and so on. Until all is loaned out.

Question 2 (d)

  • The original $100 was already part of the money supply so you can't include that in the calculation.

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