Monday Free Response
1.  Assume that the country of Rankinland is currently in recession.
(a) Assume that Rankinland produces only food and clothing. Draw a correctly labeled production possibilities curve for Rankinland. Show a point that could represent the current output combination and label it A.

(b) Assume that the Central Bank of Rankinland pursues an expansionary monetary policy.
 (i) Identify the open-market operation that the Central Bank would use. Buy Bonds
 (ii) Draw a correctly labeled money market graph and show the short-run effect of theexpansionary monetary policy on the nominal interest rate.  
 (iii) Assuming no change to the price level, what happens to the real interest rate as a result of the expansionary monetary policy? Explain.  Decrease, due to the increase in the supply of loanable funds available. Real interest and nominal interest always move in the same direction.
 (iv) Given your answer to part (b)(iii) regarding the real interest rate, what happens to the real gross domestic product (GDP) in the short run? Explain. GDP will increase. More money available to loan out. MS increase, interest rates decrease, causing Investment spending to increase ( Consuming spending to also go up) which causes AD to shift to the right and GDP (Y) to increase
(c) Suppose Rankinland has a current account deficit. Rankinland’s currency is called the bera.
 (i) What will initially happen to the current account deficit in Rankinland solely due to the change in the real GDP from part (b)(iv) ? Explain. the deficit continues to increase, due to the price level increasing. More imports than exports, causing Net exports to decrease.
 (ii) What will happen to the international value of the bera solely due to the change in the real GDP from part (b)(iv) ? Explain.   The value of the bera will depreciate.  If price level increases, nobody wants to purchase Rankinland products, so the demand for the bera shifts to the left, causing the equilibrium price to decrease meaning the value of the bera compared to other currency decrease or depreciates

Wednesday Free Response
2.  Assume that the United States economy is operating at full employment.
(a) Using a correctly labeled graph of the long-run aggregate supply, short-run aggregate supply, and aggregate demand, show each of the following.
 (i) Current price level, labeled PL1
 (ii) Current output level, labeled Y1

(b) Assume that personal savings in the United States increase. Using a correctly labeled graph of the loanable funds market, show the impact of the increase in personal savings on the real interest rate.

(c) Based on the real interest rate change identified in part (b),
 (i) will interest-sensitive expenditures increase, decrease, or remain unchanged?  Increase
 (ii) what will happen to the rate of economic growth? Explain.  Economic growth will increase, bc with the decrease in real interest, Investment spending will increase. In the long run, an increase in investment spending will increase capital, and an increase in one of factors of production (capital)  will  cause economic growth to increase
(d) Assume that the real interest rate of the euro zone increases relative to the real interest rate of the United States. Draw a correctly labeled graph of the foreign exchange market for the euro and show the impact of the change in the real interest rate in the euro zone on each of the following.

 (i) Demand for the euro. Explain. increase, shift to the right due to increase in interest rates in Euro, more European bonds are going to be demanded.
 (ii) Value of the euro relative to the United States dollar      Appreciation
(e) Assume that the United States current account balance is zero. Based on the change in the value of the euro identified in part (d)(ii), will the United States current account balance now be in surplus, be in deficit, or remain at zero?  US current account will be in surplus, due to the appreciation of the Euro. Europe can now buy more U.S. exports.

Thursday
 3. The United States and South Korea are trading partners, and the United States has a zero current account balance. Assume now that the inflation rate in the United States decreases relative to the inflation rate in South Korea.
(a) Based on the decrease in the inflation rate in the United States, will United States exports to South Korea increase or decrease?
(b) Based on the change in United States exports in part (a), answer each of the following.
(i) Will the United States current account balance remain at zero, be in surplus, or be in deficit?
(ii) What will happen to real gross domestic product in the United States in the short run? Explain.
(c) The South Korean currency is the won. Draw a correctly labeled graph of the foreign exchange market for the United States dollar. Show the effect of the lower inflation rate in the United States on the won price per United States dollar.