ECN203 Homework 4 Economic Ideas & Issues

ECN 203: Economic Ideas & Issues
Department of Economics
Fall 2013
Homework 4
[Total Points = 50 pts.]
Notes:

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Full credit will be given ONLY IF (1) your answers are correct and (2) you explain the steps or
reasoning behind your answers.
Due date: Wednesday, Nov. 20th, in hard copy and in class.

Questions:
1. Draw a foreign exchange market diagram for U.S. dollar ($) against Euro ( €). Illustrate and
explain how each of the following events would affect the demand and supply of U.S. dollar
against Euro and therefore the U.S. dollar exchange rate against the Euro. The events are not
related. Draw a diagram for each event. [5 pts. each]
a. European interest rates increased relative to U.S. interest rates, ceteris paribus.
b. Investors lose confidence in European assets because of the financial crisis in Greece.

2. Draw an AD-AS diagram representing the U.S. economy in a recession. Also draw a diagram of
the U.S. labor market in the recession. Illustrate on the diagrams and explain how the U.S.
economy may self-correct back to the long-run equilibrium where actual GDP equals to full GDP
and there is full employment. [15 pts]

3. Draw an AD-AS diagram representing the U.S. economy in a recession. Also draw a diagram of
the U.S. long-term capital market. Illustrate on the diagrams and explain how an expansionary
monetary policy will affect the long-term capital market and the U.S. economy. [15 pts]

4. Draw a diagram representing the long-term capital market in the U.S. Illustrate on the diagram
and explain the “crowding-out” effects of increased government borrowing to finance budget
deficits. [10 pts.]