1. FED buys bonds from the public Draw graph showing effect on interest rate. What happens to value of $ in foreign exchange market?

2. Sm2
Sm1 i
Money
Market i1 i2 Dm Q1 Q2 Q

3. Draw graph showing effect on the interest rate from increased saving in the U.S. What happens to nation’s capital stock?

4. Loanable
Funds
Market i
SLF1
SLF2 i1 i2
DLF Q1 Q2 Q

5. Effect on P and GDP when $ depreciates

6. ASLR AS P
AD/AS P2 P1
AD2
AD1
GDP Qf Q2

7. FED sells bonds. Draw graph showing effect on interest rate
FED sells bonds. Draw graph showing effect on interest rate. What happens to the value of the $ in the foreign exchange market?

8. Sm2 i
Sm1
Money
Market i2 i1 Dm Q Q2 Q1

9. Government & FED do nothing in response to short-run recession

10. ASSR1
ASLR P
AD/AS
ASSR2 P1 P2 AD
GDP Q1 Qf

11. Effect on interest rate when government runs a budget deficit

12. Loanable
Funds
Market
SLF i i2 i1
DLF2
DLF1 Q1 Q2 Q

13. Value of U. S. $ and Japanese yen when U. S. interest rates increase
Value of U.S. $ and Japanese yen when U.S. interest rates increase. What happens to American imports and exports?

14. Foreign Exchange Market
P ($)
P (Yen)
SYen1 S$
SYen2 P2 P1 P1
D$2 P2
DYen
D$1 Q1 Q2 Q Q1 Q Q2
Yen
Dollars

15. Effect on P, GDP when $ appreciates

16. ASLR AS P
AD/AS P1 P2
AD1
AD2
GDP Qf Q2

17. Effect on AD of FED’s bond sales during inflation

18. ASLR AS P
AD/AS P1
AD1 P2
AD2
GDP Qf Q1

19. Government and FED do nothing in response to short-run inflation

20. ASSR2
ASSR1
ASLR P
AD/AS P2 P1 AD
GDP Qf Q1

21. Effect on AS and SRPC when price of oil increases dramatically

22. Inflation rate AS2 AS1 SRPC2 AD SRPC1 Unemployment rate P P2 P1 GDP2
P goes up
Unemployment rises

23. Expansionary fiscal policy during a recession

24. ASLR AS P
AD/AS P2 P1
AD2
AD1
GDP Q1 Qf

25. Effect on ASLR and LRPC when U.S. capital stock increases

26. Effect on AS P Inflation Unem. GDP LRPC1 LRPC2 NRU2 Qf1 Qf2 NRU1 ASLR1

27. The FED and Monetary policy
Always affects the money market
Money market has vertical supply curve
Increase in money supply lowers interest rates – increases investment and consumption and AD
Lower interest rates cause $ to depreciate – exports increase, imports decrease
Decrease in money supply has opposite effect

28. Loanable funds market
S affected by savings; D affected by increased budget deficit (increasing G or decreasing taxes)
Upward sloping S curve
Increase in budget deficit raises interest rates (decreases I and C – crowding out)
Increase in savings lowers interest rates
Changes in income affect BOTH savings and consumption in the same direction

29. Short run vs. long run
If unemployment rises in the short run, wages fall
Falling wages increases AS (shifts to right)
If unemployment falls in the short run, wages rise
Rising wages decreases AS (shifts to left)
Long run equilibrium is at the NRU

30. Phillips Curves Inflation on y axis; unemployment on x
Short run slopes downward
SRPC moves only when AS moves; if AD moves, there is movement along the SRPC
If AS shifts left, SRPC shifts right; if AS shifts right, SRPC shifts left
LRPC is vertical at the NRU
LRPC moves when NRU changes (when LRAS moves)
If LRAS shifts left, LRPC shifts right

31. Capital Flows
Money coming into a country increases D for that currency and increases S of other currency
Increasing D for a currency causes it to appreciate; increasing S for a currency causes it to depreciate
Higher interest rates in a country increases D for its currency b/c it increases the D for that country’s financial assets
A higher P in a country decreases D for its currency b/c people will buy another country’s goods instead