2010 FRQ s for Macroeconomics

8/13/2019 2010 FRQ s for Macroeconomics

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2010 FRQs for Macroeconomics


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1. Assume that the United States economy is currently in long-run equilibrium.(a) Draw a correctly labeled graph of aggregate demand and aggregate supply and show each of thefollowing.(i) The long-run aggregate supply curve(ii) The current equilibrium output and price levels, labeled as YE and PLE, respectively

AD*

SRASLRAS

PLe

Ye

Price

Level

Real GDP


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AD*

SRASLRAS

PLe

Ye

Price

Level

Real GDP

(b) Assume that the government increases spending on national defense without raising taxes.(i) On your graph in part (a), show how the government action affects aggregate demand.

AD*

RGDP1

PL1


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(ii) How will this government action affect the unemployment rate in the short run?Explain.

Unemployment rate will DECREASE. Real GDP will INCREASE.

Businesses are producing MORE Goods/Services so they will need

MORE people to product those goods/services. (The ACTUAL

unemployment rate will be LESS THAN (or Below) the Natural Rateof Unemployment)


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(c) Assume that the economy adjusts to a new long-run equilibrium after the increase ingovernment spending.(i) How will the short-run aggregate supply curve in the new long-run equilibrium compare withthat inthe initial long-run equilibrium in part (a) ? Explain.

Because of inflation and the low unemployment rate,wages will increase. Wages are a major input pricein the Cost of Producing a good. The Cost of

Producing will INCREASE. SRAS curve will shift tothe LEFT. The new SRAS will lie to the left of theoriginal SRAS curve.


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AD*

SRASLRAS

PLe

Ye

PriceLevel

Real GDP

(ii) On your graph in part (a), label the new long-run equilibrium price level as PL2.

AD*

RGDP1

PL1

PL2


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(d) In order to finance the increase in government spending on national defense from part (b),the government borrows funds from the public. Using a correctly labeled graph of the loanablefunds market, show the effect of the governments borrowing on the real interest rate.

QLF*

r*

Real

Interest

Rate

Quantity of Loanable Funds

DLF*

SLF*

Qlf1

r1

DLF1

Market for Loanable Funds


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(e) Given the change in the real interest rate in part (d), what is the impact on eachof the following?(i) Investment(ii) Economic growth rate. Explain.

Investment:As a result of the increase in the realinterest rate, business will borrow LESS money toreplace capital goods, buy new capital goods,

expand factory production or build new factories.

Economic Growth:As a result of decreasedinvestment spending, the nations CAPITAL STOCKwill DECREASE thereby DECREASING futureeconomic growth


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Question #2 2. A drop in credit card fees causes people to use credit cards more

often for transactions and demand less money. (a) Using a correctly labeled graph of the money market, show how the

nominal interest rate will be affected.

Money Market

NominalInterestRate

Quantity of Money

Qms*

MS*

Dm*

i*

i1Dm1


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b) Given the interest rate change in part (a), what will happen to bondprices in the short run?

There is an INVERSE relationship betweeninterest rates and bond prices. The nominalinterest rate decreases and bond prices willincrease.


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(c) Given the interest rate change in part (a), what willhappen to the price level in the short run? Explain

The interest rate decreases. Consumptionexpenditures will increase as people borrow moremoney to buy houses, cars, other goods.Business will borrow more more money to replace

capital goods, buy new capital goods, build newfactories. The dollar will depreciate as USfinancial assets become less desirable. USExports will increase and Imports to the US will

decrease. Net exports will increase. RGDP willIncrease. Aggregate Demand will Increase andshift to the right. PRICE LEVEL WILLINCREASE.


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(d) Identify an open-market operation the Federal Reserve could use tokeep the nominal interest rate constantat the level that existed before the drop in credit card fees. Explain.

The Federal Reserve would SELL BONDS. Thiswould DECREASE the money supply. Shifting theMoney Supply curve to the left and INCREASINGthe Nominal Interest RATE.


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3. A United States firm sells $10 million worth of goods to a firm inArgentina, where the currency is the peso.(a) How will the transaction above affect Argentinas aggregate demand?

Explain.

Buying FROM the US would be an IMPORTforArgentina. This would DECREASEAggregateDemand for Argentina, if all other variables areheld constant.


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(b) Assume that the United States current account balance with Argentinais initially zero. How will the transaction above affect the United Statescurrent account balance? Explain.

This will count as an EXPORTfor the US. It wouldbe an CREDITunder the Current Account andwould create a Trade SURPLUSin the CurrentAccount.


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(c) Using a correctly labeled graph of the foreign exchange market for the UnitedStates dollar, show how a decrease in the United States financial investment in

Argentina affects each of the following.(i) The supply of United States dollars(ii) The value of the United States dollar relative to the peso

Q$*

D$*

S$*Peso

Price

Per

DollarP/$*

Quantity of Dollars

P/$1

S1

Q$1


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(d) Suppose that the inflation rate is 3 percent in the United States and 5percent in Argentina. What will happen to the value of the peso relativeto the United States dollar as a result of the difference in inflation rates?Explain.

Price levels in the US are lower than inArgentina. US good and services are relativelyless expensive. Argentinians will want to buy inthe US. The supply of Pesos will INCREASEin

the FOREX. The Dollar price per Peso willdecrease. The Peso DEPRECIATES relative tothe US dollar.

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2010 FRQ s for Macroeconomics