Econ 201 Midterm 2 Name: Section: Student Number: Answer each question completely, justifying all answers and using graphs as appropriate ; partial credit will be given. 1. Define and explain the Fisher effect , using graphs as appropriate. 5 points. 2. Explain what is meant by the term inflationary gap , using graphs as appropriate. 5 points. 1
3. List and explain the three main functions the financial system performs. 5 points. 4. Explain what is meant by the “Paradox of Thrift.” Why is it considered a paradox? 5 points. 5. Explain the wealth effect , and how it relates to the slope of the aggregate demand curve. 5 points. 2
6. Suppose the market for loanable funds is current in equilibrium, with no (zero) capital inflows or capital outflows and no (zero) government budget deficit. (a) Using a supply and demand diagram, depict this situation. 5 points. (b) Suppose that there is an increase in imports, so that the country is now running a trade deficit.
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