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


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

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

    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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