ECN 203 1st EditionExam # 2 Study Guide Lectures: 1 - 12Lectures 19-37 (March 4 – April 27)Possible Exam Questions and Answers1. What are the three types of unemployment? Explain. a. Frictional unemployment are those who are looking for jobs and there are jobs available for them but these people are still searching for the right match. They are in the job search. This is part of the natural rate. b. Structural unemployment are those who were laid off due to a mismatch between skills and the job requirements. They are retraining. This is part of the natural rate and occurs in any healthy, growing economy. c. Demand deficient unemployment is when there are not enough jobs in the economy for those who one want. This is type of unemployment is bad and not part of the natural rate. 2. Define the long run and comment on this statement: It takes 20 years to reach the long run. a. The long run is a macro condition that occurs when all micro adjustments have been completed. The macro long run is the micro condition when it has reached pareto optimal, GCE. b. It does not take a certain amount of time to reach the long run because it is a condition3. What are the conditions that, ceteris paribus, lead to flows of int’l capital out of a country?a. International capital flows occur when funds flow from one country’s capital market into another’s. Capital flows into a country when it is full of opportunity and appears to be a good place to loan funds. Capital flows out of a country when political or economic instability occurs. 4. 4. What are the three factors that determine the level of long term capital supply?a. The three factors include: the level of short term supply line, the inflation premium, and the waiting premium. When these factors are added together it equals the long term supply. 5. The US has a very large budget deficit. Use graphs and explain how the significant gov’t borrowing can affect the level of private investment. Ceteris paribus, how could this affect the trade position?a. The gov’t is borrowing more than they’re spending so the deficit is large. When the gov’t borrows money it adds demand in the LTCM graph which increasesinterest rates and lowers investment – this is called the crowding out effect. This is an expansionary fiscal policy. It reduces spending and investment activities in the private sector by “crowding it out”. This effects the exchange rate by leading to higher domestic interest rates, so the dollar becomes stronger. A stronger dollar means increased imports and decreased exports (X-M) so the trade balance is negative. 6. Suppose the demand for euros by dollar holders expands. Which currency is weaker? Describe what it means for a currency to get weaker. a. The demand for euros increases so the price of the dollar increases. The dollar is getting weaker and the euro is getting stronger. On a FEM graph with euro as the commodity, demand would be pushed to the right, causing the price of the dollarto rise. For the dollar to get weaker means it has less purchasing power than stronger euro. For example, American items are “on sale” to Europe. 7. FOMC a. Identify the positions of the voting members on the FOMCi. The FOMC has 12 members – 7 members of the Board of Governors of the Federal Reserve System, the president of the Federal Reserve Bank of NY, and four of the remaining eleven Reserve Bank presidents who rotate on a yearly basis. b. What is the term for the primary method the FOMC uses in order to implementMonetary policy?i. Open Market Operations. c. What is the primary variable the FOMC targets to implement Monetary Policy?i. The Federal Funds Rate. d. What is slack?i. Any place to the left of the LAS line. It is potential resources, like people, that could be used. e. What is the current Monetary Policy of the FOMC?i. The Federal Funds Rate is next to zero with slack. f. Use graphs and explain how this policy has been implemented from the initial step to its effect on AD. i. The policy is implemented by injected more dollars into the banking system which lowers short term rate, bringing the long term supply line down. This creates in increase in investment and adds to AD, shifting it to the right. ii. The LTCM graph illustrates a shift down in S which lowers r and increases investment. iii. The Macro picture will show a shift in AD to the right which increases real GDP (y). g. Explain why some oppose the current policy.i. Non-interventionists oppose intervention because they believe markets are quick and efficient and can fix themselves. They believe economists will only make matters worse. The micro adjustments will fix the macro economy. h. If crude oil was a factor price, how would a rise in price effect the macro graph?i. The aggregate supply line would shift right in order to supply more oil. 8. Describe and explain the non-interventionist’s argument that interventionist fiscal policy is not necessary when there is demand deficient unemployment. Use graphs. a. The non-interventionists argue that economists do not need to intervene with the economy because they are not precise enough and will only cause more damage. They believe the economy will self-correct and that the assumptions aren’t strong so markets will adjust quickly and efficiently. b. The micro generic labor graph will show an excess of workers. This excess will cause people to work for lower wages so the macro graph will adjust by AS shifting to equilibrium. 9. China a. Identify what China has been doing to its currency i. China has pegged its currency to the US dollar. b. How does china do this?i. China is able to peg its currency by expanding supply in the FEM to meet demand which keeps the price and exchange rate constant. c. Use a graph i. The FEM graph would have the Yen as it’s commodity. d. Why does china do this?i. China does this so the US will continually purchase goods from them. Since the Chinese currency is pegged to the dollar, purchasing from China is like buying everything on sale to the US. e. What is the name of the tradition in political economy that advocates using policies like this to “win” in the int’l trade game?i. Mercantilism f. What is the term used to label policies that nations adopt to guard its domestic producers from unfair int’l competition?i. Protectionism – countries will utilizes tariffs and quotas. g. What is the connection between US fiscal policy and the China currency policy?i. The US borrows