Reference no: EM133339933

Part 1)

A country is operating below full employment.

1. Illustrate this economy on a fully-labeled aggregate demand-aggregate supply model. Include aggregate demand, short-run aggregate supply, and long-run aggregate supply.
   1. Label the short-run equilibrium price P_E and the short-run equilibrium output Y_E.
   2. Label the full-employment level of output Y_F.
2. If the government and central bank do not intervene, how would this economy adjust in the long run? Explain.
3. Illustrate the process of part (b) on your graph from part (a).
4. The government decides to use fiscal policy to correct the economic situation in part (a). Assume the difference between the short-run and long-run equilibrium output is worth $80 billion, and the marginal propensity to consume is 0.9. Calculate one specific and effective fiscal policy action the government could take.
5. What would be the short-run impact of the government's action on the aggregate price level?
6. What would be the short-run impact of the government's action on the potential output of the economy?
7. Will the long-run equilibrium price level if the government intervenes be less than, equal to, or greater than the long-run equilibrium price level without intervention?
8. Show the impact of the government intervention from part (d) on the equilibrium real interest rate on a fully labeled loanable funds market graph.
9. Will the long-run aggregate supply curve move as a result of the change from part (h)? Explain.

Part 2)

Country A and Country B are trading partners each with a current account balance of zero. Country A's currency is the dollar, and Country B's currency is the euro.

1. If real output in Country A increases, will it result in a current account deficit, surplus, or no change? Explain.
2. Draw a graph of the foreign exchange market for the dollar of Country A. Illustrate the effect of the increase in real output in Country A on the value of its dollar compared to the euro of Country B.
3. Now if interest rates in Country B decrease what will be the impact on the demand for the dollar of Country A? Explain.
4. Based on part (c), what will be the effect on the value of the dollar of Country A compared to the euro of Country B?

Part 3)

Assume that the people of Phobos and Deimos (the moons of Mars) use equal resources to produce consumer and capital goods, as illustrated in the table below showing maximum possible production figures.

Country	Capital Goods	Consumer Goods
Phobos	20 units	120 units
Deimos	60 units	120 units

1. Draw a fully labeled production possibility curve for Phobos. Place capital goods on the vertical axis and consumer goods on the horizontal axis. Assume constant opportunity cost.
2. On your graph from part (a), label an inefficient point of production I, an efficient point of production E, and an unattainable point of production U.
3. Which country has the comparative advantage in the production of capital goods? Explain.
4. If Deimos shifted from producing 50 units of capital goods and 20 units of consumer goods to producing 35 units of capital goods and 50 units of consumer goods, what would be the impact on its economic growth in the long run?
5. Based on the data table, what range of consumer goods could be traded for 10 units of capital goods that would be mutually beneficial?