Short Answer 1. The gains from trade are limited by the extent of ______________

Question

Short Answer 1. The gains from trade are limited by the extent of _________________________. 2. A firm decides how much to invest by setting _______________________ equal to _____________________. 3. In the long run money is _____________________. 4. An economy has a working-age population of 5000. Of these, 3500 are employed and 500 are unemployed. The workforce participation rate is _______ and the unemployment rate is _______. 5. A __________________ is a financial security that grants the owner a small share of ownership in a company while a ____________________ is a promise to pay a certain amount of money in the future. 6. Aggregate supply is upward-sloping in the ___________________ run because of _________________________________. 7. Free markets, taxes, stable prices and the rule of law are examples of ____________________. 8. The quantity theory of money assumes that _______________ is constant in the long run. 9. GDP can be divided into four categories, what are they? (Yes, write the whole words.) 10. If the unemployment rate is 10%, frictional unemployment is 4% and structural unemployment is 2% then the natural rate of unemployment is ______% and cyclical unemployment is _____%. 11. What are the 3 big categories of things that affect economic growth in the long run? 12. A one-year, risk-free bond has a face value of $200, the real interest rate is 5% and the expected inflation rate is 2%. What is the price of the bond? ? Long Answer 1. The tiny island nation of Atlantia produces only two goods, fish and coconuts. In 2005 they produced 100 fish and 250 coconuts. The price of a fish was $6 and the price of a coconut was $3. In 2006 they produced 120 fish and 200 coconuts. The price of a fish was $7 and the price of a coconut was $4. Using 2005 as the base year and using the quantities from that year as the CPI basket, construct the CPI for each year and use them to fill in the rest of the table below. Year NGDP CPI RGDP Inflation rate 2005 X 2006 ? 2. Let the money base be $500 and the reserve requirement be 10%. a. If banks hold no excess reserves, the public holds no currency and all deposits are checking, what is M1? b. If the velocity of M1 is 4, (and this is independent of the price level) write a function representing aggregate demand for this economy. c. If the long-run equilibrium level of output is 5000, what is the equilibrium price level in the long run? d. Now imagine that the central bank sells $100 worth of bonds. What happens (specifically!) to the money base, M1, aggregate demand, output and the price level in the long run? e. Show the effect of this in both the short run and the long run on an AS/AD graph. f. What will happen to unemployment in the short run? Which type of unemployment are we talking about? In the long run, what will happen to nominal wages? ? 3. a. Show what will happen in the loanable funds market and the bond market if people become more patient. b. Show the effect of this on steady-state levels of capital and output. c. Show the effect of this on real output and the price level in the long run.

Explanation / Answer

1) The gains from trafe are limited by the extent of specialisation due to comparative advantage theory

2)A firm decides how to much to invest by setting the present Cost equal to preset value of benefit/return.

3)In long run, money is neutral

4)workforce prticipation rate=labor force/total population=4000/5000*100=80%

Unemployment rate=(Unemployed/Employed+Unemployed)*100=500/4000*100=12.5%

5)A share is a financial security that grants the owner a small share of ownership and bond is the promise to pay a certain amount of money in future.

6)AS is upward sloping in short run because of unemployment.

8) Quantity theory of momwy assumes Velocity and full employment output is constant.

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