1. The increased use of credit cards reduces the public's desire to hold onto money.

1. Illustrate the effect of the change above on a fully labeled money market graph.
2. Based on the change in the interest rate from part (a), what will happen to the prices of previously issued bonds?
3. What will happen to the price level and real income? Explain.
4. Will the velocity of money in this scenario increase, decrease, remain the same, or is the change indeterminate?
5. What open market operation would the central bank need to take to offset the change in the interest rate from part (a)?

2.

1. It takes Country A two hours to produce a unit of consumer goods and five hours to produce a unit of capital goods. Country B can produce a unit of consumer goods in one hour and a unit of capital goods in four hours. Which country has a comparative advantage in the production of consumer goods? Explain.
2. Country A has the following labor market data:

Employed	91,000
Frictionally unemployed	4,000
Structurally unemployed	2,000
Cyclically unemployed	3,000
Not in the labor force, aged 16 years and over	25,000

1. Calculate the unemployment rate for Country A.
2. Calculate the labor force participation rate for Country A.
3. Illustrate Country A's current employment of resources every 10 hours on a production possibilities curve with capital goods on the vertical axis and consumer goods on the horizontal axis. Assume constant opportunity costs. Indicate the current employment based on the data from (b) with a point labeled E.

3. A country has a natural rate of unemployment of 4 percent, an actual rate of unemployment of 8 percent, and an inflation rate of 4 percent. (1 point)

1. With the data provided above, draw a fully labeled graph of the short-run and long-run Phillips curves for the country above. Label the short-run equilibrium B. Make sure to label the numerical values provided.
2. If the government takes no action, will the short-run aggregate supply curve shift left, shift right, or not move? Explain.
3. If this country's government takes no action to reduce cyclical unemployment, will the long-run Phillips curve shift left, shift right, or not move? Explain.
4. What is one fiscal policy action that could reduce the unemployment rate in the short run?
5. Assume the policy from part (d) is completely effective. Illustrate the impact of the action from part (d) on the price level and real output with a graph of the aggregate demand and short-run aggregate supply.
6. Assume there is a flexible exchange rate system. As a result of the effect on real GDP from the fiscal policy in part (d), will the currency of this country above appreciate, depreciate, or not change in value in the foreign exchange market?