Exercise 1: Foreign Shocks under Flexible Exchange Rates

IS: =+.* \sLM: =()

Where UiP holds, P* = 1, Y* = 1500, M = 2580 and projected inflation = 0

b) Two new IS but with the same values as before:

c) Now, i* = 12%, the rest remain the same.

(30 marks)

Please attach graphical illustrations

PART 2

1. Why do most people use price controls?

A. So that everyone has a chance to buy something. B. So that companies don't make money off the things they sell. C. So that prices don't rise to the level they would if supply and demand were in play. D. So that people don't complain about how expensive a certain good is.

2. Studies have shown that rent-controlled housing tends to get worse faster than other types of housing. This is because: A. when rent is controlled, nobody wants to live in the house and take care of it. B. Since there is a lack of housing, landlords don't do as much maintenance, repair work on their properties to attract tenants. C. People don't care about the houses anymore because their rent is controlled. D. Landlords don't want the house to stay on the market, so they watch the house fall apart.

3. When there is rent control, what is one of the main reasons a landlord may leave his property over time?

1. The landlord doesn't want to take care of the house anymore. B. The landlord is stuck with the property and must continue to keep it up-to-date. C. The landlord gets tired of rent control and leaves the property. D. The landlord can't charge enough rent to cover the costs of heat and hot water, which they are supposed to provide.

4. Why would someone want to hoard something?

A. They are very possessive. B. They are afraid to throw things away. C. They are afraid that the item they are holding won't exist in the future. D. They are afraid that they won't be able to find that item on the free market in the future.

5. Why do prices on the black market tend to be higher than prices on the legal market?

A. Inflation is a big deal on the black market. B. The legal risks of a black market must be paid for. C. Prices on the black market are not higher than on legal markets.

D. Prices on the black market are not set by supply and demand.

6. What makes a surplus?

A. No one buys anything. B. The price is set too high, so there are more supplies than there are buyers. C. The production team made a mistake. D. The producers don't want some supplies to go to waste, so they use them anyway.

7. Why does making sugar in the U.S. waste a lot of resources?

A. The U.S. doesn't know how to manage its resources. B. The U.S. likes to buy things that are made in the country. C. Making sugar isn't hard, but the U.S. spends a lot of money on it. D. The same sugar can be bought overseas for less money.

8. If a product's price is lowered artificially, what will happen to that product?

A. The product will sell out quickly, and only people who know about it first will be able to get it. B. The product will stay on the shelf until it is bought, which can take a long time. C. The product will be sold to people who know how to spend their money wisely. D. The product will have a hard time selling, since the artificially low price is not lowered.

What will happen to a product if the price is jacked up artificially?

A. The product will sell out quickly, and only to people who know the price is going up. B. The product will only be sold to people who need it.

C. The product will still be there, but only the few people who can afford it will be able to buy it. D. The product will stay on the shelf forever because no one will be able to buy it.

10. Why might a family have to cut back on how they spend their money?

A. The family just lost all of its sources of income. B. The family is willing to pay more for a place to live than for the amount of food they usually buy. The family doesn't know how to spend their money on D properly.