Presentation is loading. Please wait.

Presentation is loading. Please wait.

Macroeconomics Free Response graph of the money market (a) Draw a correctly labeled graph of the money market and show the impact of the financial investors.

Similar presentations


Presentation on theme: "Macroeconomics Free Response graph of the money market (a) Draw a correctly labeled graph of the money market and show the impact of the financial investors."— Presentation transcript:

1

2 Macroeconomics Free Response

3 graph of the money market (a) Draw a correctly labeled graph of the money market and show the impact of the financial investors actions on each of the following. (i) Demand for money (ii) Nominal interest rate 1.Assume that declining stock market prices in the U.S. cause many U.S. financial investors to sell their stocks and increase their money holdings. financial investors to sell their stocks and increase their money holdings. MS Money Market DM1DM1DM1DM1 Nominal Interest Rate i.r. 1 i.r. 2 Answers for 1. (a) (i) 1.(a) (i) The decline in wealth decreases many investors decreases many investors demand for major purchases demand for major purchases and decreases the demand for and decreases the demand for money. money. DM2DM2DM2DM2 Answers for 1. (a) (ii) 1.(a) (ii) The nominal interest rate would decrease because the demand for money decreases as the D M curve shifts down, as shown above. for money decreases as the D M curve shifts down, as shown above.

4 decline in wealth price level in the U.S. falls graph of the foreign exchange market for the U.S. dollar change in relative price levels 1. (b) Due to the decline in wealth caused by the change in stock prices, the general price level in the U.S. falls relative to the price level in Japan, a trading partner. Use a correctly labeled graph of the foreign exchange market for the U.S. dollar to show the impact of the change in relative price levels on each of the following. (i) Demand for the dollar (ii) Price of the dollar S$S$S$S$ D1$D1$D1$D1$ E1E1E1E1 Quantity of Dollars Y100 Yen Price of Dollar D2$D2$D2$D2$ E2E2E2E2 Y150 Answers to 1. (b) (ii) 1. (b) (ii) Lower prices in the U.S. would cause an increase in demand for the dollar, resulting in the Japanese having to pay more for American the dollar, resulting in the Japanese having to pay more for American goods. Therefore the yen would depreciate as the price of the dollar goods. Therefore the yen would depreciate as the price of the dollar has increased, and the dollar has appreciated. has increased, and the dollar has appreciated. Answers to 1. (b) (i) 1.(b) (i) T he decrease in wealth will cause less consumer spending which causes the AD curve to shift left and a decrease in the price level. This decrease in PL will cause the Japanese to want to buy more U.S. goods, increasing the demand for the dollar.

5 1. (c) How will the change in the price of the dollar you indicated in part (b) (ii) affect net exports of the U.S. Explain. Answer to 1. (c) The appreciated dollar would cause American goods to be more expensive for Japan and Japans goods to be less expensive for Americans; therefore, we would export less and import more, resulting in a decrease in net exports. Answer to 1. (c) The appreciated dollar would cause American goods to be more expensive for Japan and Japans goods to be less expensive for Americans; therefore, we would export less and import more, resulting in a decrease in net exports. AD 1 LRASSRAS E1E1E1E1 PL 1 RGDP Y1Y1Y1Y1 (d) Using a correctly labeled AD/AS change in graph, show how the change in Xnaffect each of Xn in part (c) will affect each of the following the following in the short run. (i) Aggregate Demand (ii) Output and price level PL AD 2 PL 2 Y2Y2Y2Y2 Answer to 1. (d) As can be seen on the graph, the decrease in Xn would decrease AD. The decrease in AD would decrease output to Y2 and PL to PL2. (e) Given your answers to part (d), what will happen to unemployment in the short run? Explain. Answer to 1. (e) T he decrease in Xn in part (d) will result in a decrease in AD and output, which would increase unemployment in the SR. E2E2E2E2

6 2. federal funds rate 2. In recent years, the Federal Reserve has made targeting the federal funds rate a main focus of its monetary policy. (a) Define the federal funds rate. Answer: The rate that banks charge one another for overnight loans lower the federal funds rate (b) If the Federal Reserve wants to lower the federal funds rate, what open-market operation open-market operation would be appropriate? Answer: The Fed would buy bonds from the banks or public. Buying bonds means a bigger supply of money and lower fed funds rate. (c) Assume that the open-market operation that you indicated in part $10 millionRR is 0.2 (b) is equal to $10 million. If the RR is 0.2, calculate the maximum change in loans throughout the banking system change in loans throughout the banking system. Answer: If the Fed buys bonds from banks, DD could increase by the $10 million initially & with a M M of 5, the total money supply could increase to $50 million. If the Fed buys bonds from the public, DD could increase by $10 M initially. W ith M M of 5, $2 M would be kept in RR & $8 million could be loaned out & increase to $40 million more in DD for a total of $50 million. effect of the open-market operation (d) Indicate the effect of the open-market operation that you indicated nominal interest rate in part (b) on the nominal interest rate. Answer: Buying bonds would increase the MS and lower nominal Interest rates. inflation (e) Assume that the Feds action results in some inflation. What would be the impact of the open-market operation on the real rate of interest impact of the open-market operation on the real rate of interest? Explain. A nswer : T he real interest rate would decrease. Real IR = Nominal – Inflation; if we get more inflation, then Real IR = Nominal – even more Inflation, so it decreases.

7 counted in the 3. Indicate whether each of the following is counted in the U.S. GDP U.S. GDP for the year Explain each of your answers. used textbook (a) The value of a used textbook sold through an online auction in 2006 Answer: No, it was counted the year it was produced. Because it was not produced again, it would not be counted. That would be double counting. Rent b. Rent paid in 2006 by residents in an apartment building built in 2000 Answer: Yes, payment is being made for productive services of the broker. So the purchase of stocks would not count but his work would. Commissions c. Commissions earned in 2006 by a stockbroker Answer: Yes, rents consist of the income received by the households and businesses that supply property resources. It is included in the income approach approach to GDP. autos produced in 2006 entirely in South Korea d. The value of autos produced in 2006 entirely in South Korea by a firm fully owned by U.S. citizens Answer: No, GDP measures production inside the U.S. regardless of ownership. These autos were produced in South Korea. ownership. These autos were produced in South Korea.

8


Download ppt "Macroeconomics Free Response graph of the money market (a) Draw a correctly labeled graph of the money market and show the impact of the financial investors."

Similar presentations


Ads by Google