Question 1: The Fed and Monetary Policy (This question is worth 15 points if correctly answered.)
A. List and define three tools that the Fed would use to implement changes in monetary policy. Explain how the Fed would use each tool to decrease the money supply.
B. Assume the economy is operating at Potential GDP. Explain the effects of an increase in the money supply in the short and the long run. I expect to see an AD/AS graph and a graph of money supply/money demand in your answer. I also expect you to explain how the Fed will increase the money supply and how an increase in the money supply affects the macro economy.
Question 2: The Balance of Payments and International Capital Flows.
A. Consider each of the following transactions and identify how the transaction would be categorized in the U.S. balance of payments accounts. For each transaction identify whether it would be counted as part of the balance of payments in the current account or the financial account. Lastly, identify whether the transaction will increase or decrease the relevant account.
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Transaction
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Current/Capital Account
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Increase/Decrease
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An American company purchases machinery that is produced in Germany by a German Company
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An American donates money to Doctors Without Borders to help with earthquake victims in Nepal. Doctors Without Borders is headquartered in France.
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A French citizen purchases goat cheese produced in the United States.
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An American purchases 100 shares of a Swiss company that specializes in the production of chocolate.
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Chinese investors buy golf courses in the United States.
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B. Suppose there are two countries, the United States and Japan. The real interest rate in the United States is 3 percent. The real interest rate in Japan is 5 percent. Explain the capital flows that will take place between the two countries and how you expect this will affect the balance of trade.
Question 3: International Trade
The following table presents the demand and supply for laptop computers in Japan and the United States. Assume Japan and the United States are the only two countries in the world.
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Price Per Computer
(in dollars)
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Quantity Demanded in the United States
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Quantity Supplied in the United States
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Quantity Demanded in Japan
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Quantity Supplied in Japan
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200
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90
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30
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50
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50
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400
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80
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35
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40
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55
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600
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70
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40
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30
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60
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800
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60
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45
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20
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65
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1,000
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50
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50
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10
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70
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1,200
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40
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55
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0
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75
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A. If the United States and Japan do not trade, what is the equilibrium price and quantity in the United States? Japan?
B. Now suppose trade is opened up between the two countries. What will be the equilibrium price in the world market for laptops? With trade, what happened to the price of laptops in the United States? Japan?
C. Which country will export laptops? How many?
D. When trade opens, what happens to the quantity of laptop computers produced, and therefore employment, in the computer industry in the United States? In Japan? Who benefits and who loses initially from free trade?