Assignment

Question 1

The 1980s is known as the "lost decade" for Latin American countries. In Peru was following the same trend. At the beginning of the 80s, Peru's economy was struggling with unemployment and recession.

Then the government decided to increase government spending and financed it with increases in money supply.

At the same time, there was a terrorist group "Shining Path" that put bombs in banks, and public buildings. Most the most devastating actions of this terrorist group was when they started bombing electric towers around the country, leaving the economy without electricity and water (you need electricity to pump water).

In ONE graph, fully explain:

a) The initial situation of Peru's economy

b) The impact of the economic policies and the actions of the terrorist group on Peru's output, employment, and price level.

Your graph should be accompanied with a complete explanation of changes in AD and AS, and the impact on output, employment, and price level.

Question 2

One of the policies of the central bank to promote investment was to set the interest rate at a level below the equilibrium interest rate in the market of loans.

a) In graph show the market of loans, and show the impact of the central bank policy (Yes it is microeconomics). Explain what situation is and what happens to the quantity of loans.

b) What are the consequences of this type of policy? How do you think banks will allocate loans? Fully explain.