Short Answer Questions:

• Consider the banking system. ‘Reserves are deposits that banks have received but have not loaned out’.
  • Banks must hold reserves. Why? (2 marks)
  • What are excess reserves? (1 mark)
  • How are excess reserves calculated? (1 mark)
  • What is the significance of excess reserves? (2 marks)
• Consider the following statement in the short-run and the long-run: “The quantity theory of money (quantity equation) states than an increase in the money supply will lead to an equiproportionate increase in the price level”. Is this true or false? Explain. (4 marks)
• A book, One World, Ready or Not – The Manic Logic of Global Capitalism, by William Greider, suggests that because of the rapid growth in productivity, output is increasing too fast – too fast, that is, for total demand to keep up. As a result, the economy could collapse as a result of overproduction.
  • Using the aggregate demand/aggregate supply diagram, illustrate the effect of increased productivity the short-run (holding the LRAS curve constant). (1 mark) (Be sure to add labels to indicate clearly the new equilibrium position)
  • What is the impact on unemployment and inflation as a result of the new equilibrium depicted in part a)? (1 mark)

Explain this adjustment process. (3 marks)

Illustrate here (Tips: to create new lines, simply copy the existing curves and move to the new locations)

4. Imagine that your major trading partners impose high tariffs on all goods, services and resources entering their countries. (6 marks)

• Illustrate the short-run impact on your own economy in the diagram below. (Be sure to add labels to indicate clearly the new short-run equilibrium position) (1 mark)
• What is the effect on the unemployment rate and the inflation rate in your nation in the short-run? (1 mark)
• Economists argue that the economy will automatically self-correct, adjusting to a new long-run equilibrium over time. Clearly explain this adjustment process. (Be sure to explain the adjustment not just state that a curve shifts to restore long-run equilibrium – ensure that this in your own words) (3 marks)

Illustrate here (Tips: to create new lines, simply copy the existing curves and move to the new locations)

3 Lecture Slides on the topic are attached as well. Thanks

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