2021 (Set 1) AP Macro FRQ#1
Watch me answer it here
1. Assume the economy of Sweden is in long-run equilibrium and has a surplus in its current account.
a) Is the Swedish capital account and financial account in deficit, surplus or in balance? Explain.
If the Capital account is in a surplus that implies the financial account must be in a deficit as
CA + FA = 0
b) Draw a CLG of the AD/AS curve for Sweden showing the PL and Y.
Recognize that you must have read #1, Sweden is in long-run equilibrium.
c) The UK decreases its imports from Sweden. On the graph show the new eqilibrium PL & Y.
A decrease in UK imports is a decrease in Swedens exports.
If exports decrease, then AD decreases along with the Price Level (PL), RGDP and Output
d) As a result of the decrease in imports into the UK will Sweden's policy makers be more worried about cyclical unemployment or inflation in the short-run? Explain.
Cyclical unemployment occurs due to a downturn in the economy = recession.
If we are at long-run equilibrium and exports in Sweden decrease we move into a
recessionary gap = cyclical unemployment
e) If the Swedish central bank's (Monetary policy) goal is to return the econmy to long-run equilibrium what open market operation must it use?
FED = Open market operations means either buying bonds or selling bonds.
To move us from a recession to long-run equilibrium the central bank must use expansionary policy by buying bonds.
Buying bonds causes the Money Supply (MS) to increases which causes the
Nominal Interest Rate (NIR) to fall, causing Investment to increase,
AD to increase, RGDP & Output to increase pushing the economy
back to Long-run Equilibrium
f) Draw a CLG of the Sedish krona showing the effects in the FOREX of the UK's decrease in imports from Sweden on the Krona's value in the FOREX.
As UK citizens buy less goods from Sweden the demand for Swedish krona decreases.
g) If the Swedish central banks goal is to reverse the exchange rate change shown in part f, by changing the interest rate, what open market operation would it use?
Open market operations buy the central bank is either buying or selling bonds.
The Swedish Central Bank would sell bonds
Selling bonds, decreases the Money Supply (MS), increasing the Nominal Interest Rate (NIR)
When the NIR is increasing the Real Interest Rate (RIR) is increasing
Larger RIR's attract inflows of currency from the UK into Sweden
meaning that the demand for the Swedish krona will increase
as UK citizens wants to make more profits by depositing money in Swedish
banks to receive the higher Real Interest Rates
to put money in Swedish banks the UK citizens must buy krona
in the FOREX
this increases the demand for the krona
causing the value of the krona to increase.
h) Explain G
