<p>long run phillips curve.. is just vertical with unemployment being a constant right?</p>
<p>for 1e, i put $ will depreciate. When country experiences an inflation, its currency always depreciates as people will try to attain the yen cause it has greater value. And on 1d supply moves to the right because more people r trying to get rid of the dollar</p>
<p>did anyone get form B?</p>
<p>paungle, here are all my answers. can anyone evalute all of these and give me a rough estimate of what they think I got %age wise?</p>
<ol>
<li><p>a) I drew a graph with AD and AS intersecting at below the Fe line which is in the intermediate range of AS. I also drew the LRAS vertical line cutting straight through theg raph and labeled current output and equilibrium.
b) I drew AS shifting inward and showed the corresponding output decrease and the rising price level...but i forgot to make the connection to stagflation (DUH!)
c) Unemploymwnt will increase as Real GDP is declining because as inventories remain idle (horizontal range of AS) businesses will lay off workers.
d) I drew a proper exchange market graph for US dollars and illustrated an increase in the supply of US dollars on the foreign exhange market becuase buisnesses will be less inclined to invest in a declining industry thus they will exhange their currency for a relatively more stable yen.
e) As a result of the dollars being supplied and exhchanged for yen, I put that the US dollar would depreciate.</p></li>
<li><p>a) I drew a correct money market graph and inllustrated a downward shift in the demand for money thus lowering the nominal interest rate. My reasoning was becuase people had more income on hand, they would be less inclined to demand money in the market.
b) I drew a correct loanable funds market (on the x axis i accidentally put quantity of money instead of loanable funds) and showed supply decreasing becuase of households deciding to increase saving thus driving up the real market interest rate because not as much loanable funds are available.
c) Nominal int rate=real int rate+inflation. 6=6+0. Inflation is now 2%. 8=6+2. Nominal interest rate is 8% and Real Interest rate is 6%.</p></li>
<li><p>a) At Fe, the actual rate ounemplyment coincides with the NRU becuase at this level everyone wanting a job can get a job thus no more people can be employed (NRU=frictional+structural and is 5%). The expansionary fiscal policy at this point will only cause increases in the price level as the economy is at the limit of the intermediate range of AS.
b) I put that part time workers are classified as employed just as full time workers so the unemplyment rate will not change.
c) If the government reduces unemplyment compensation, this might give discouraged workers incentive to actively seek work again but will not affect NRU. People will always be between jobs or out of work because their job skills have been phased out (Although this might force them to relearn new skills as compensation decreases). I drew a Long Run Phillips curve that was vertical but forgot to write NRU on the bottom of the graph but said in the answer that the LRPC coincides with the NRU.</p></li>
</ol>
<p>So how do you guys think I did overall? I'm so scared I completely bombed it ugh.</p>
<p>you missed:</p>
<p>1(d)(e)- stagflation means there is inflation, which means that interest rates are higher, which means that there is going to be an influx of foreign capital--in this case, Japanese capital--trying to capitalize on the higher "price of money" (i.e. the higher interest rate), which would cause the dollar to appreciate in value relative to the yen. This will coincide with our exports decreasing as they become too expensive for the world market (another sign that the value of the dollar is increasing in this example)</p>
<p>2(a) if there is an increase in income (which usually is only an increase on paper until you get the actual money) there is going to be an increase in the demand for money because as people have higher incomes, they are going to need more cash to put them to use, which is going to drive the interest rate up.</p>
<p>2(b) Savings provide the cash FOR the loanable funds market. If people are saving more, they are putting more in their banks, which means that they are increasing the amount of available loanable funds, which means that the interest rate is going to go down.</p>
<p>paungle, y do u assume that if there is inflation, interest rate will always go up? Take expansionary monetary policy for instance, AD moves up so there is inflation but at the same time interest rate is going down. But the bottom line is there is inflation, so the dollar is losing its buying value, y would foreigners want to buy it?
For d, it said it in the question that u were supposed to show what happened to the supply of the dollar. So u should have labeled the graph vertically yen price of $ and horizontally Q of $ and then moved supply to the right as more people would be trying to get rid of the $</p>
<p>alright, for the questions:
1. below full emplyment ,so vertical line to the right of equilibrium.
increase in price of oil shifts AS to the left (stagflation)
effect on supply of dollars: all i knew is that the dollar would depreciate because of stagflation, so i said there was an increase in the supply of dollars, which decreased its value.
2. Demand for money increases with income, so interest rates increase on Sm v. Dm graph.
Savings v. Investment graph for loanable funds market, increase in savings would cause interest rates to decrease.
Nominal interest rate stays the same, but real interest rate decrease to 4%.
3. Unemployment would not change because of switch from full-time to part-time, because they are both included as equals.
Unemployment compensation decrease would decrease the natural rate of unemployment.
On the phillips curve, shift vertical line to the left on inflation vs. unemployment graph.</p>
<p>boohaha.....yeah i tend to agree with u becuase it makes sense that inflation DOES NOT necesseraily mean high interest rates......but i realize it means its a higher price level so maybe thats why....either way regradless of the right answer according to paungle i must have gotten most of them right :D and even if i did get some wrong.......i should be able to get points for backing up my answer. half credit anyone :D.....but i clearly missed the loanable funds one i admit....oh man its going to be close......i need about 70% right and about 50 MC for a 5. SOOOOOOO CLOSE.</p>
<p>boohahaha, I'm not trying to assume anything. The reason why the dollar would increase in value is because the increase in the price of oil would increase the cost of production for producers as well as cause inflation--but the cost of production would still be rising in real terms relative to those of other countries. That increase in the cost of production is going to push exports down as our goods become too expensive for foreign consumers, which means that the dollar would be rising relative to the currencies of those countries.</p>
<p>paungle does that mean supply of dollars will decrease then if our currency has appreciated?</p>
<p>Imports from Japan will increase as a result of the higher domestic prices. More dollars will go into the foreign exchange market in order to pay for the Japanese goods. Thus, the value of the dollar will depreciate. This depreciation is shown as an increase in supply of dollars on one graph and an increase in demand for yen on another.</p>
<p>Exports dont play that much of a role, they make up a very small part of our GDP and US' Xn is negative as it is. Also, the problem said world price of oil goes up, so it is more expensive for the rest of the world too.
In real life, price for oil has gone up and sure that caused gas prices to go up but how many items that US exports have gone up in price directly cause of that? i am sure prices will go up in the long run though.
Just explain to me y any1 would want to buy money that is becoming more and more worthless everyday due to stagflation.</p>
<p>I said depreciate as well...</p>
<p>I think in the short run, more US dollars in the market lessen its value...</p>
<p>you very well could be right--I'm just explaining the logic behind my answer, and trying to prove that it was based on reasoning of sorts, and was not just an assumption as boohahaha, declared earlier.</p>
<p>but actually, the more I think about it, the more I am pretty sure that I am right on this one. because this is stagflation, and not just simple inflation, the increase in unemployment means that the inflation is not being caused from an increase in the money supply (as higher unemployment puts downward pressure on wages), and is in fact inflation in real terms. this real inflation means that there is a higher demand for money to meet the higher price level. that higher demand for money pushes the interest rate up, which causes the dollar to appreciate in value. lookup stagflation and check me. you may still be right, but I think this is how it goes.</p>
<p>so I guess what I am saying is that the currency is NOT becoming worthless, it's just becoming more expensive (which still counts as inflation you know).</p>
<p>I am pretty sure that if the collegeboard had really wanted to test people's knowledge of stagflation, they would have used that term on that part of the FR. Using the information they gave us, I am pretty sure that they wanted us to say the dollar would depreciate.</p>
<p>Also, because the problem itself did not say that oil was a major production input in Japan, we can assume that the Japanese economy was not directly affected by the increase in prices, but indirectly (through our economy).</p>
<p>okay, when unemployment and inflation are both going up, that is the definition of stagflation. Also, how are you all suggesting that there would be more $ in the market place? The increased cost of production would cause the producers to demand more money to meet the higher cost, and consumers would be demanding more money to meet the higher price level. There would be an increase in interest rates that would reflect the higher price level. However, the rise in interest rates would not reflect worthless money, it would reflect the fact that money would have become more expensive. </p>
<p>Think about the 70s for instance when there was stagflation. The price of gas went about to almost $6.00 in today's terms--that was a REAL rise in the price of gas for Americans, not the product of too much money in the money supply. Stagflation in the 70s did not present us with a situation in which the dollar was worthless--it was just too expensive. Same thing in this scenario. I know it's counterintuitive that the dollar is appreciating when our economy is shrinking, but that is why stagflation is so dangerous.</p>
<p>paungle, i am sorry if I offended u, i didnt mean to.</p>
<p>my answers:</p>
<p>1] (a)
(i) keynesian range, short-term range, then vertical long-term range
(ii) equilibriun is the intersection of Short-term supply and negatively sloping demand curve
(b)
(i) Short-term AS shifts to left (due to decreased production potential)
(ii) intereseciton of new AS curve w/ demand is new price level.
(c) It will increase.. Less need for production, less demand for employees.
(d) Dollar demand/supply curve.. Supply of dollar will increase..
(e) US dollar will depricate relative to the Japanese Yen..</p>
<p>2] (a) supply of money will shift to left --> will increase Interest rates (demand for money)
(b) decreased spending --> decreased demand for money --> will shift MD curve to left --> will decreased interest rates..
(c) (i) 8 percent (+2 % inflation rate)
(ii) 6 percent (real doesnt change)</p>
<p>3] (a) Natural rate of employment is higher.
(b) no effect. US govt lists ppl as employed even if they work part-time..
(c) (i) unempoyment decreases..
(ii) long-run phillips curve (vertical) will shift to the left.</p>
<p>Is this good enough for at least 80% on FR??</p>