BLC Problem Set (Final exam)

BLC Problem Set (Final exam) - BLCProblemSet...

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Unformatted text preview: BLCProblemSet Econ102 FinalExamReview TA:DougBennett(ddbennett2@wisc.edu)  1) SupposetheFOMCoftheFederalReservemisjudgesandbelievestheeconomybelowis operatingabovepotential.   LRAS Pricelevel,P SRAS AD RealGDP,Y   a) AssumingtheFedconductsopenmarketoperationstoaddresstheperceivedproblem,show theeffectoftheoperationsonthemoneymarketbelow.   Interestrate,r S (money) Interestrate,r r* D (investment) D (money) Money,M  LRAS b) Whatistheeffectoninterestratesandinvestment?         I* Investment,I  c) Whataretheeffectsontheothercomponentsofaggregatedemandintheshortrun?          d)    Pricelevel,P LRAS SRAS AD RealGDP,Y     e) Istheeconomyoperatingaboveorbelowpotential?    f) Explainhowtheeconomywouldreturntopotentialoutputinthelongrunifleftonitsown.      g) Supposethegovernmentdidnotwanttowaitontheeconomytoreturntopotentialonitsown. Whatfiscalpolicyoptionsareavailabletoit?     h) SupposeinsteadthattheFedrealizeditsmistakeandreversedcourse.Woulditbuyorsell bondsintheopenmarket?   i)   Interestrate,r Interestrate,r Money,M Investment,I  j) Whatistheeffectoninterestratesandinvestment?       k) Whatisthelikely intheshortrun?      componentsofaggregatedemand    2) AssumetheFedconductscontractionarymonetarypolicythroughtheuseofopenmarketsales  a) Allelseconstant,whatisthelikelyeffectonthepricesofexistingbonds? (Usethechartandequationbelowtohelpyouanswerthequestionifnecessary)  Interestrate,r S (money) r* D (money) Money,M    BondPrice= Promisedpayment (1+i nterestrate)    b) Allelseconstant,willthedollarappreciateordepreciatevs.othercurrenciesintheshort run?  (Circlethecorrectanswersbelow)  Openmarket bondsale (Increase/Decrease) inmoneysupply (Rise/Fall) ininterestrates (Rise/Fall) inexchangerate (Increase/Decrease) innetexports    (Increase/Decrease) inGDP  3) Ifa1 ­yearbondpaysoutatotalof$1000atmaturity(oneyearfromnow)andcarriesan interestrateof5%,whatisitscurrentprice?      4) Ifyoususpectedtheeconomyweregoingtotanknextyearandthisoutcomewasunexpected bythemarket,wouldyoubuyorsellbondsbeforehand?    (Usethechartandequationbelowtohelpyouanswerthequestionifnecessary)  Interestrate,r S (money) r* D (money) Money,M             BondPrice= Promisedpayment (1+i nterestrate)  5) Whatisaliquiditytrap?     (Usethechartbelowtohelpyouanswerifnecessary)   Interestrate,r Sm Interestrate,r Dm D (investment) r* Money,M I* Investment,I      6) Considerthefollowingeconomytheyearbeforeapresidentialelection.  Pricelevel,P LRAS SRAS AD RealGDP,Y   a) Iftheincumbentpresidentwantedtoincreaseherchancesofwinningtheelection,what fiscalpolicymightsheattempttoimplement(otherthanchangingtaxes)?     b) Followingthepolicy,arepricesandwageslikelybepressuredhigherorlower?     c) Showtheeffectsofrisingpricesonthecurvesbelow.   Interestrate,r S (money) Interestrate,r r* D (investment) D (money) Money,M I* Investment,I    d) Whathappenedtothelevelofinterestratesandinvestmentspending?    Whatisthetermforthisphenomenon?    7) Imagineaneconomyoperatingatfull ­employmentpotential.Showtheshort ­runandlong ­run effectsofadecreaseinthesupplyofmoneyongoods,moneyandinvestmentmarkets.   Interestrate,r S (money) Interestrate,r Pricelevel,P LRAS SRAS r* D (investment) D (money) Money,M          I* Investment,I AD RealGDP,Y  8) Considerthemarketfordollarsvs.eurosdepictedbelow.   Exchangerate Supply 1.1e uroperdollar 0.9e uroperdollar 0.7e uroperdollar Demand Dollars    a) Iftheexchangerateiscurrently1.1europerdollar,thenweexpectthedollarto ____________andtheeuroto________________.   b) Iftheexchangeraterisesfrom0.7europerdollarto0.9europerdollar,whatisthelikely effectonU.S.netexports?     9) WhatisthepriceofaBigMacintheU.S.ifPPPholds,theexchangerateis8yuanperdollarand thepriceofaBigMacinChinais28yuan?     10) SupposetheJapaneseinflationraterisesfrom2percentannuallyto4percent.Allelseconstant, willthedollarappreciateordepreciatevs.theyen?  (Hint:drawitoutwhenyougettheseproblems) Exchangerate Supply 110yenperdollar 100yenperdollar 90yenperdollar Demand Dollars  11) SupposeinterestratesriseintheUSandareunchangedinEurope.Willthedollarappreciateor depreciatevs.theeuro?   Exchangerate Supply 1.1e uroperdollar 0.9e uroperdollar 0.7e uroperdollar Demand Dollars   12) Ifthecurrentexchangerateis0.75europerdollar,whatistheexchangerateindollarsper euro?     13) SupposethepricesofgoodsandservicesfallinEuropeandareunchangedintheUS.Willthe dollarappreciateordepreciateagainsttheeuro?  Exchangerate Supply 1.1e uroperdollar 0.9e uroperdollar 0.7e uroperdollar Demand Dollars   14) Lookingatthechartfrom#13,knowthatiftheexchangeratewere1.1europerdollar,the dollarwouldbestrongervs.theeurothanitwouldbeinequilibrium(importswouldrise, exportsfall,netexportsfall,UShasacurrentaccountdeficit,balanceofpaymentsdeficit).  Iftheexchangeratewereat0.7europerdollar,thedollarwouldbeweakervs.theeurothanit wouldbeinequilibrium(importswouldfall,exportsrise,netexportsrise,UShasacurrent accountsurplus,balanceofpaymentssurplus).  ReadSection19.3inChapter19formoredetailonthecurrentaccount,financialaccountand capitalaccount. ...
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