Question 1 i) Imagine there is a nuclear plant disaster in a country. In your opinion, how might this disaster cause the GDP for the country to be misleading in terms of well-being?(4 marks)

ii) Analyze how an expansionary fiscal policy will affect the short-run increase in investment when the interest sensitivity of investment is small.(4 marks)

iii) Is it possible for unions to affect the natural rate of unemployment in a country? Explain. (4 marks)

Question 2 i) Suppose that workers and firms in country A suddenly believe that inflation will be quite high in the coming year. Assume that the economy is in long-run equilibrium and aggregate demand does not shift. Using the AD-AS diagram, analyse the effect of the change in expectations on both the short-run and long run levels of price and output.(8 marks)

ii) Assume that a U.S. dollar buys more gold in Australia than it buys in Russia. What does purchasingpower parity imply should happen?(4 marks)

Question 3 i) Let's say you do not know the exact natural rate of unemployment, but you are confident that it is between 4.5-6%. Discuss the appropriate monetary or fiscal policy if the actual unemployment rate is 10.1%. Use diagram/s to support your argument.(9 marks)

ii) If the price of a locally manufactured military aircraft carrier increases, will the consumer price index and GDP deflator be affected? Why?(3 marks)

Question 4 i) In recent years, the Central Bank of Smaland has taken steps to restore the economy after an economic recession through monetary policies. Explain the tools the Central Bank at Smaland can use to aid the economy.(12 marks)

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Question 5

i) An influential government official in country X announced that "Import quotas only annoy our trading partners. If we subsidize our exports instead, we can reduce our trade deficit by increasing our competitiveness". Using the three-panel diagram, show the effect of an export-subsidy on net exports and the real exchange rate. Evaluate and explain why you agree or disagree with the government official?(9 marks)

ii) Explain how nominal and real exchange rate are related. Suppose the nominal exchange rate increases from 3500 to 3800 rupiah per unit of your country's currency, has your currency appreciated or depreciated?(3 marks)