Questions:

3. Assume the economy of Andersonland is in a long-run equilibrium with full employment. In the short run, nominal wages are fixed. (a) Draw a correctly labeled graph of short-run aggregate supply, long-run aggregate supply, and aggregate demand. Show each of the following. (i) Equilibrium output, labeled Y, (ii) Equilibrium price level, labeled PL1 (b) Assume that there is an increase in exports from Andersonland. On your graph in part (a), show the effect of higher exports on the equilibrium in the short run, labeling the new equilibrium output and price level Yz and PL2, respectively. (c) Based on your answer in part (b), what is the impact of higher exports on real wages in the short run? Explain. (d) As a result of the increase in exports, export-oriented industries in Andersonland increase expenditures on new container ships and equipment. (i) What component of aggregate demand will change? (ii) What is the impact on the long-run aggregate supply? Explain.2. The following is a simplified balance sheet for Mi Tierra Bank in the United States. Mi Tierra Bank Assets Liabilities Required reserves $10,000 Demand deposits $100,000 Excess reserves $5,000 Loans $85,000 Owner's equity $0 (a) What is the reserve requirement? (b) Assume that Luis withdraws $5,000 in cash from his checking account at Mi Tierra Bank. (i) By how much will Mi Tierra Bank's reserves change based on Luis' withdrawal? (ii) What is the initial effect of the withdrawal on the MI measure of money supply? Explain. (iii) As a result of the withdrawal, what is the new value of excess reserves on the balance sheet of Mi Tierra Bank based on the reserve requirement from part (a) ? (c) Assume that the next day John withdraws from Mi Tierra Bank an amount that exceeds the bank's excess reserves. Assuming that no loans are called in, how can Mi Tierra Bank cover its required reserves?Directions: You have 10 minutes to read all of the questions in this booklet, to sketch graphs, to make notes, and to plan your answers. You will then have 50 minutes to answer all three of the following questions. It is suggested that you spend approximately half your time on the first question and divide the remaining time equally between the next two questions. In answering the questions, you should emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. Use a pen with black or dark blue ink. 1. Assume that the country of Rankinland is currently in recession. (a) Assume that Rankinland produces only food and clothing. Draw a correctly labeled production possibilities curve for Rankinland. Show a point that could represent the current output combination and label it A. (b) Assume that the Central Bank of Rankinland pursues an expansionary monetary policy. (i) Identify the open-market operation that the Central Bank would use. (ii) Draw a correctly labeled money market graph and show the short-run effect of the expansionary monetary policy on the nominal interest rate. (iii) Assuming no change to the price level, what happens to the real interest rate as a result of the expansionary monetary policy? Explain. (iv) Given your answer to part (b)(iii) regarding the real interest rate, what happens to the real gross domestic product (GDP) in the short run? Explain. (c) Suppose Rankinland has a current account deficit. Rankinland's currency is called the bera. (i) What will initially happen to the current account deficit in Rankinland solely due to the change in the real GDP from part (b)(iv) ? Explain. (ii) What will happen to the international value of the bera solely due to the change in the real GDP from part (b)(iv) ? Explain.BANK A Assets Liabilities Actual reserves $1,000 Demand deposits $5,000 Loans $4,000 BANK B Assets Liabilities Actual reserves $ 100 Demand deposits $ 600 Loans $ 500 BANK C Assets Liabilities Actual reserves $ 10 Demand deposits $ 100 Loans 90 19. Based on the balance sheets above for three different banks, which of the following is true, if the reserve requirement is 10 percent? (A) Bank A has no excess reserves. (B) Bank B has no excess reserves. (C) Bank B can increase its loans by $500. (D) Bank B can increase its loans by $40. (E) Bank C has excess reserves. 20. Which of the following will most likely lead to a 21. With an upward-sloping short-run aggregate decrease in inflationary expectations? supply curve, an increase in government (A) A decrease in the marginal propensity to save expenditure will most likely (B) A decrease in imports (A) reduce the price level (C) A decrease in the money supply (B) reduce the level of nominal gross domestic (D) An increase in the government budget deficit product E) An increase in the prices of raw materials (C) increase real gross domestic product D) shift the short-run aggregate supply curve to the right (E) shift both the aggregate demand curve and the long-run aggregate supply curve to the left15. According to the short-run Phillips curve, lower 17. An increase in which of the following would inflation rates are associated with cause the aggregate demand curve to shift to (A) higher unemployment rates the left? (B) higher government spending (A) Consumer optimism (C) larger budget deficits (B) Population (D) greater labor-force participation rates (C) Cost of resources (E) smaller labor-force participation rates (D) Income taxes (E) Net exports 16. Which of the following will lead to a decrease in a nation's money supply? 18. Which of the following changes in the supply of (A) A decrease in income tax rates and the demand for a good will definitely result in (B) A decrease in the discount rate a decrease in both the equilibrium price and (C) An open market purchase of government quantity of the good? securities by the central bank Supply Demand (D) An increase in reserve requirements (A) Increase Increase (E) An increase in government expenditures (B) Increase No change on goods and services (C) No change Decrease (D) Decrease Increase (E) Decrease Decrease7. Hyperinflation is typically caused by 11. Which of the following combinations of changes (A) high tax rates that discourage work effort in government spending and taxes is necessarily expansionary? (B) continuous expansion of the money supply to finance government budget deficits Government (C) trade surpluses that are caused by strong Spending Taxes protectionist policies (D) bad harvests that lead to widespread (A) Increase Increase (B) Increase Decrease shortages (E) a large decline in corporate profits that (C) Decrease Not change Increase leads to a decrease in production D) Decrease (E) Decrease Decrease 8. All of the following changes will shift the investment demand curve to the right EXCEPT 12. The amount of money that the public wants to hold in the form of cash will (A) a decrease in the corporate income tax rate (B) an increase in the productivity of new capital (A) be unaffected by any change in interest rates or the price level goods C) an increase in the real interest rate (B) increase if interest rates increase (D) an increase in corporate profits C) decrease if interest rates increase E) an increase in real gross domestic product D) increase if the price level decreases (E) decrease if the price level remains constant 9. The official unemployment rate understates the 13. For an economy consisting of households and unemployment level in the economy because the official unemployment rate businesses only, which of the following is consistent with the circular flow of income and (A) ignores the duration of unemployment production (B) ignores underemployed and discouraged (A) Households are producers of goods and workers (C) includes jobs created by the underground services and consumers of resources. economy (B) Households are users of resources, and businesses are sources of saving. (D) excludes all unemployed teenagers (E) excludes frictionally unemployed workers C) Households are suppliers of resources and consumers of goods and services. 10. If a reduction in aggregate supply is followed by (D) Businesses are users of taxes, and households an increase in aggregate demand, which of the are sources of taxes. following will definitely occur? (E) Businesses are suppliers of resources and consumers of goods and services. (A) Output will increase. (B) Output will decrease. 14. With an increase in the real interest rate, (C) Output will not change. consumption and real gross domestic product (D) The price level will increase. will most likely change in which of the following (E) The price level will decrease. ways? Real Gross Consumption Domestic Product (A) Increase Increase (B) Increase Decrease C) Decrease Increase (D) Decrease Decrease (E) No change Increase1. A country's government runs a budget deficit 4. Unlike a market economy, a command economy when which of the following occurs in uses a given year? (A) more centralized planning in economic (A) The amount of new loans to developing decision making nations exceeds the amount of loans paid B) consumer sovereignty to make production off by developing nations. decisions (B) Government spending exceeds tax revenues. (C) its resources more efficiently (C) The debt owed to foreigners exceeds the debt (D) price signals in economic decision making owed to the country's citizens. E) the popular vote in making resource alloca (D) The amount borrowed exceeds the interest tion decisions payment on the national debt. (E) Interest payments on the national debt exceed 5. The value of a country's currency will tend to spending on goods and services. appreciate if 2. A high marginal propensity to consume implies (A) demand for the country's exports increases which of the following? (B) the country's money supply increases (C) the country's citizens increase their travel (A) A small change in consumption when income abroad changes (D) domestic interest rates decrease (B) A high savings rate (E) tariffs on the country's imports decrease (C) A high marginal tax rate (D) An equilibrium level of income near full 6. Which of the following best illustrates an employment improvement in a country's standard of living? (E) A low marginal propensity to save (A) An increase in real per capita gross domestic 3. The transaction demand for money is very closely product associated with money's use as a (B) An increase in nominal per capita gross domestic product (A) store of value (C) Price stability (B) standard unit of account (D) A balanced budget (C) measure of value (E) An increase in the consumer price index D) medium of exchange (E) standard of deferred payment