1. Assume that a country's economy is currently in recession.

(a) Draw a correctly labeled graph of the long-run and short-run Phillips curves. Label the current equilibrium as point Z.

(b) Assume banks in the country hold no excess reserves and the public's holding of currency is constant. The required reserve ratio is 25%. The central bank of the country buys $100 billion in bonds from the nonbank public.

(i) By how much will the monetary base of the country change?

(ii) Calculate the change in the amount of loans in the banking system in the country.

(iii) Calculate the change in the money supply in the country.

(c) Draw a correctly labeled graph of the money market and show the effect of the change in the money supply identified in part (b)(iii) on the nominal interest rate.

(d) Assume there is no change in inflationary expectations. On your graph in part (a), label a point W that is consistent with the effect of the change in the nominal interest rate identified in part (c).

(e) Based on the change in the interest rate identified in part (c), how will the international value of the country's currency change?

(f) Based on your answer in part (e), will the country's net exports increase, decrease, or stay the same? Explain.