Question 1: Classical economists and Keynesian economists both have different views on the causes of economic downturns, as well as what to do about restoring the economy to long-run equilibrium.

A) Explain in 4-5 sentences how and why these two views differ. In an economic downturn, what does a classical economist believe will happen? What about a Keynesian economist?

B) Using an LRAS-SRAS-AD diagram, illustrate either the Keynesian or the Classical view of how the economy should return to long-run equilibrium after an economic downturn (recessionary gap). For full credit, be sure to explain each step in your answer.

Question 2: The below information gives details on the U.S. balance of payments for 2013 ($ billion).

Exports of goods 1,592                                Imports of goods 2,294

Exports of services 682                                Imports of services 456

Factor income receipts 773                           Factor income payments 574

Unilateral transfers (net) -123

Private asset sales and purchases (net) 373   Official asset sales and purchases (net) -2

A) Calculate the current account and financial account balance. For full credit, show all steps in your answer.

B) Adding the current account to the financial account balance should give you a zero balance of payments. Calculate the balance of payments for this example. Explain in 1-2 sentences why the balance of payments in this example is not equal to zero.

C) What effect did the collapse of the U.S. housing bubble and the ensuing recession have on international capital flows into the United States - increase or decrease, and why?

(Hint: U.S. interest rates plummeted during the recession.) Explain in 2-3 sentences.

Question 3: Illustrate the effects of the following events on the value of the British pound relative to the value of the U.S. dollar. For full credit, label the axes and explain how you arrived at your answer.

A) Britain's income decreases

B) Britain's price level increases relative to the U.S. price level

C) Britain's interest rates decline relative to U.S. interest rates

Question 4: Use the relationship between the nominal exchange rate and the real exchange rate that was discussed in class to determine the answers to the following questions. For full credit, show how you arrived at your answer.

Year     Nominal Exchange Rate (U.S.)    Price level (U.S.)     Price level (foreign)

2011               2.335                                  105.2                    108.3

2012               2.590                                  105.9                    108.5

2013               3.015                                   106.0                    109.0

2014               3.020                                   107.3                    110.8

2015               3.446                                   107.3                    112.6

A) Calculate the real exchange rate in the U.S. in 2012. Round your answer to three decimal places.

B) Calculate the percentage change in the nominal exchange rate in the U.S. between 2013 and 2014. Round your answer to three decimal places.

C) Calculate the percentage change in the real exchange rate in the U.S. between 2013 and 2014. Round your answer to three decimal places.

D) Did imports from the U.S. get cheaper or more expensive between 2013 and 2014? Explain in a sentence.