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3 Practice Free Response Questions

3 Practice Free Response Questions. Have Fun!. Opportunity Cost Table. (give-up) (gain). BRAZIL MEXICO 1 Car = ____ Computer 1 Car = _____ Computer

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3 Practice Free Response Questions

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  1. 3 Practice Free Response Questions Have Fun!

  2. Opportunity Cost Table (give-up) (gain) BRAZIL MEXICO 1 Car = ____ Computer 1 Car = _____ Computer 1 Computer = ____ Car 1 Computer ____ Car 4 1 1 1/4 Comparative Advantage Computers: Brazil:Cost of computer = 1/4 car vs. 1 car Comparative Advantage Cars: Mexico:Cost of car = 1 computer vs. 4 computers Cars Practice Problem #1 Cars BRAZIL MEXICO 400,000 Absolute Advantage in Cars: Mexico Equally efficient at Computers 100,000 400,000 Computers 400,000 Computers

  3. Ranges for Efficient Trade(Terms of Trade) Brazil must buy cars at a ratio above 1/4 car per computer Mexico must sell cars at a ratio below 1 computer per car Terms of Trade: > ¼ & less than 1 car per computer or > 1 & less than 4 computers per car

  4. P2 --------------------- E2 AD2 ------------------- Y2 Practice Problem #2 American Economy Price Level LRAS1 SRAS1 Event: Japanese Economy booms --------------- P1 E1 AD1 Y1 Real GDP Japanese economy booms => Japanese buy more imports (some from USA) USA exports more (NX ↑) => AD ↑ => GDP ↑ & Price Level ↑

  5. S1 S1 S2 D2 D1 D1 Practice Problem #2 Market for Dollars Market for Yen Yen Price of a dollar Dollar Price of a Yen Dollar Appreciates P1 ------------------- P1 -------------------- Yen Depreciates ---------------------- --------------------- Q1 Qty of Dollars Q1 Qty of Yen Japanese disposable income rises => buy more imports from USA: => Japanese must exchange Yen for dollars: They demand dollars & they supply Yen skip question #2 part d => not on Final Exam

  6. Practice Problem #3 • The Federal Funds rate is the interest rate Banks can lend or borrow money from each other • The Fed would use purchase Treasury bonds/securities in the open-market. This would inject money into the financial system, thereby increasing MS ↑. An increase in MS would shift MS to the right which leads to a lower nominal interest rates

  7. Practice Problem #3 continued • The multiplier is 1/r.r. so 1/.20 = 5 multiplier. • -Therefore, a 10 million purchase of bonds would lead to a 50 • million ↑ MS. • -However, only 8 million could be loaned out….Therefore,Loans • could increase by $40 million • Nominal Interest rates = Real Interest Rates + Expected Inflation • If inflation rises and is expected to be permanent then inflation expectations • nominal interest rates( think long term) would rise. • Real interest rates would remain unchanged based on rising inflation • expectations and the equation above

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