<p>Did the second free response question seem weird to anyone? It seemed like the federal funds reserve rate should have been the money supply instead.</p>
<p>@wisekevin It could have been, but the federal funds rate is also related to the money supply and OMO’s. The greater the money supply, the lower the federal funds rate; thus, the more government bonds bought by the Federal Reserve, the lower the federal funds rate is. -ding :D-</p>
<p>Sigh, looks like I got the answer wrong. If I answered everything else accordingly will I get partial marks?</p>
<p>@wisekevin As I mentioned before, I believe you will (other/potentially incorrect answers don’t affect the SCORING of other answers.)</p>
<p>These are my answers that I remember or have just made up now (since I accidentally misread an easy question because I’m dumb). I’m not 100% about these (I self studied lololol) so if anyone wants to edit any of them, feel free to do so! :D</p>
<p>Question 1</p>
<p>b) i. Cyclical employment - Decrease
ii. NRU - Not affected</p>
<p>c) MPC is 0.75 so MPS is 0.25. Multiplier is 1/MPS, so the multiplier is thus 1/0.25, which is 4. 4 x $100 billion = $400 billion.</p>
<p>e) IIRC, real interest rates rise. Because of this LR economic growth rate decreases because higher real interest rates discourage capital investment.</p>
<p>f) rGDP will decrease because disposable income is decreased and thus the Consumption sector of GDP is decreased.</p>
<p>Question 2</p>
<p>a) i. Buying bonds.
ii. I am fairly sure I got this one wrong because I’m pretty sure I skipped it and never went back to it. -.-" I’m not sure what the answer is, however. Perhaps I guessed. 
(someone please answer this one)</p>
<p>c) Here’s the one I think I might have messed up on as well. Now that I look at this, I’m not sure… I thought that I had made a mistake in thinking that required reserves are static no matter what the money supply is. However, now that I look at it again, I believe that required reserves increases (which I put, luckily) because the reserve RATIO remains the same while the money supply increases.</p>
<p>d) Discount rate is the interest rate charged by the Federal Reserve on overnight loans to commercial banks.</p>
<p>Question 3</p>
<p>a) A decrease in the inflation rate will cause US exports to Korea to increase.</p>
<p>b) i. I totally skipped the chapter on balances because I thought I wouldn’t need it. Turns out I was wrong. I’m not sure about this one, but I think I guessed surplus since their exports increased.
ii. rGDP in the short run will increase because net exports increased.</p>
<p>c) When I first read this, I thought South Korea had actually won something and sat there confused. </p>
<p>@capitalamerica #3 is wrong;
a) should be exports decrease (purchasing power increases causing dollar to appreciate)
b)i)should be deficit (comes from current balance formula;exports is part of it and when exports decrease current balance decreases which will cause deficit)
ii)Real GDP would decrease by the RGDP=C+I+G+Nx formula
c)I don’t know whether its demand or supply but you shift it up to make won worth less
It sounds like you would get part b but not a or c</p>
<p>@jimmyboy23 Exports definitely increase. I’m 99% sure of that.</p>
<p>Dollar appreciates -> American exports decrease and Korean imports increase.
I also put that American exports decrease, and I’m fairly confident that’s right. </p>
<p>You should look instead at the effects of relative inflation rates . The lower inflation rates in the US make US goods cheaper than they are in South Korea; thus, South Korea imports more from the US and so US exports increase. </p>
<p>Unless I got everything wrong in which I will be very embarrassed.</p>
<p>You are wrong because of what I stated in part a. The dollar gains purchasing power because the inflation rate has lowered and this causes the dollar to appreciate in the international market. This in turn causes U.S. exports to be MORE expensive to South Koreans because the dollar price is the same but the won is worth less than it used to be because the dollar appreciated. You’re to focused on price when you need to consider purchasing power when you are comparing currencies. </p>
<p>When I mention purchasing power, I am saying that the dollar becomes more valuable per dollar. So, 1 dollar now gets you more than 1 dollar would before the inflation rate was lowered. This increase in the value of the dollar and the fact that prices are sticky and a couple of other factors causes the dollar appreciation and exports to decrease in the short run.</p>
<p>@jimmyboy23 … Before anything, how does a lowered inflation rate increase purchasing power? Lower inflation doesn’t equate to deflation, does it? The inflation rate of the US is relatively lower when compared to that of South Korea; so, the average price levels of the US are increasing slower than South Korea’s. Thus, the US goods are cheaper and South Korea’s are more expensive, so South Korea wants to import more from the US, no?</p>
<p>The dollar still appreciates eventually, I’m fairly sure. However, I still think that at that instant (think in the shortest of short runs) US exports will increase because of what I had said earlier. Perhaps the appreciation of the dollar CAUSED by the increase in US exports EVENTUALLY leads to a decrease in US exports and an increase in imports?</p>
<p>The inflation rate is the definition of purchasing power. When the inflation rate rises the dollar loses purchasing power (it takes more dollars to purchase a loaf of bread) and when the inflation rate decreases the dollar gains purchasing power (opposite of earlier example). It’s not in the long run that this would occur either, it would happen in the short run as soon as economic exchange rates are reestablished with the new purchasing power of the dollar taken into account.
And no the U.S. exports would never increase because they would:
- Stay constant
- international market gets news of the purchasing power of the dollar
- New exchange rates are established
- Exports from U.S. decrease</p>
<p>I’m with @capitalamerica on this one. I’m pretty sure that a change in exports occurs in the medium run, while a shift in demand for a currency due to inflation rates is a long-run effect (purchasing-power parity theory). Therefore, exports would increase first (in the medium run), and then demand for the cheaper currency would increase (in the long-run). I could be wrong - at least in my school, several people said that the currency would appreciate first, so who knows. Also, to answer 2.a) ii) Bond prices would increase, since the Fed buying bonds would increase demand in the bond market, driving up price. Also, bond interest rates and prices are inversely related, and so the lower interest rates would drive up bond prices.</p>
<p>@jimmyboy23 So how come you couldn’t say that the relatively higher inflation in South Korea makes the won weaker and thus loses purchasing power, thus increasing demand for the stronger US dollar and thus US goods, thereby increasing US exports?</p>
<p>The inflation rate in South Korea is assumed to be held constant so it doesn’t matter at all. You don’t need to compare the innflation rates of the two countries just the value of their currency. Per your suggestion, if they wanted the U.S. dollar South Korea would increase their exports to the U.S. and get paid in U.S. dollars. They would want to decrease their imports from the U.S. because they need more wons (the price for them has gone up because of the appreciation of the U.S. dollar) to pay for the U.S. goods.</p>
<p>@jimmyboy23 Um, I’m fairly sure South Korea wouldn’t be paid in US dollars. South Korea would be paid in won; this is what makes up the foreign exchange markets for currency… You buy US goods and services with US dollars, do you not?</p>
<p>Even if the inflation rate in SK is constant, it is still relatively higher. My argument still stands. ><</p>
<p>Okay this is getting crazy… I am going to settle this by consulting a published book.
This comes from “AP Macroeconomics: Crash Course” by REA, page 260 (Chapter 17):
“If inflation is higher in one country than in a trading nation, the demand for the other country’s currency will increase as consumers will wish to buy the relatively cheaper imported goods.
On the other hand, if inflation is lower in one country than others, then the demand for foreign currencies will decrease in the low-inflation country as consumers demand more domestically produced goods.
In sum: A comparatively low price level or inflation rate will likely lead to appreciation of a country’s currency.”
@jimmyboy23 is right.</p>
<p>I’m not sure if that tells the full story. For example, in Economics: Principles and Policy by Baumol and Blinder, it says “A fall in the relative prices of a country’s exports tends to increase that country’s net exports and, thereby, to raise its real GDP.” The US’s relative prices fell, therefore their exports increased. The increase in demand for the currency is a long-run effect - the book says “Most economists believe that other factors are much more important than relative price levels for exchange rate determination in the short run. But in the long run, purchasing-power parity plays an important role.” Therefore, the appreciation will happen after the increase in exports. I’m not trying to create an argument; I’m just genuinely curious what the correct answer is.</p>
<p>@DigitalKing Ironically, that is the book I was referencing and used to self-study.</p>
<p>Let’s analyze this a bit (this is how I read it):</p>
<p>“If inflation is higher in one country (aka South Korea) than in a trading nation (aka the US), the demand for the other country’s currency (aka the US dollar) will increase as consumers will wish to buy the relatively cheaper imported goods (aka US goods).” Thus, imports of US goods in South Korea increases, and in parallel, exports of US goods increases.</p>
<p>Let’s try it again:</p>
<p>“On the other hand, if inflation is lower in one country (the US) than others (South Korea), then the demand for foreign currencies (the South Korean won) will decrease in the low-inflation country (the US) as consumers demand more domestically produced goods (US demands more domestic [US] goods).” Because the US consumers demand more domestically produced goods, that means imports from foreign nations fall, not rise.</p>
<p>Here’s the on that caused me to say my previous statement about the changes in export/import levels LEADING to appreciation:</p>
<p>“A comparatively low price level or inflation rate will likely lead to appreciation of a country’s currency.”</p>
<p>Keyword: “lead to”. </p>
<p>Any thoughts?</p>
<p>@scienceNerd15 I don’t think anyone is really trying to create an argument. This question’s just got us all flipping our tables over. :P</p>