1. Using short run Aggregate Supply and Aggregate Demand curves, show how the following policies can be expected to affect the price level and real income (or real output).
a. an increase in the Federal Government Budget Deficit.
b. an increase in oil prices.
c. an increase in the productivity of workers.

2. Show how a decrease in the income tax rate will both increase the wage received by workers and decrease the wage paid by employers. Use a supply and demand graph of the labor market.

1. In Peru each worker can produce 30 bushels of corn per year, while in Colombia each worker can produce 40 bushels of corn per year. This implies that Colombia should specialize in corn production when trade is opened up between these countries. True or False? Explain.

2. Suppose that France and England have the following production relationships for one unit of labor. Each country has 200 units of labor. Assume that opportunity costs are constant.

Wine Bread
England 3 4
France 2 1

a. Which country has the absolute advantage in wine production? Explain.
b. Which country has the comparative advantage in wine production? Explain.
c. Draw the PPF for France.
d. Show how France can be made better off with trade.
e. Show how England can be made better off with trade.

3. Using graphs, describe the impact of a tariff on the price, domestic quantity demanded, and domestic quantity supplied of cotton.

4. Describe the possible effects of a depreciation of the U.S. dollar on the trade deficit, aggregate demand, real GDP and the price level.

5. Using graphs, describe how an increase in the required reserve ratio will affect the value of the U.S. dollar relative to the Japanese yen.