The following diagram shows the channel system of Cash Rate use by the Central Bank. 

Suppose the cash rate is at the policy target rate. 

In the below diagram, policy target rate equals i^T, IOR stands for Interest on Reserves, ES funds stands for exchange settlement funds.

Suppose that there is an increase in money supply and the actual value of the cash rate is different from the Central Bank target rate. Following this change, the Central Bank undertakes open market operations (OMO) to return the actual rate to the target rate.

Given that the actions of the Central Bank are successful, which diagram can illustrate the impact of OMO of the Central Bank?

1. 

2. 

3. 

4. 

Consider the following economy depicted graphically below, where Y* is potential output in this economy. To bring output to potential:

To answer this question, use the model of demand for money that you have learned in class.

The diagram below illustrates the relationship between demand for money and nominal interest rate (i).

Which diagram below shows what will happen to the money demand when there is an increase in price level (P)?

1. 

2. 

3. 

4. 

Recall the PAE model we learned, analysed and discussed in this course.

Assume an economy where:

PAE = C + I^P

 +

G

C = C₀

 +

c(Y-T)

I = I₀

G = G₀

T = T₀

 +

tY

The balanced budget multiplier for this economy

is:

Recall the PAE model you studied in class, where 

The unlabelled diagram below presents the initial equilibrium in Country X. 

Assume that the government of Country X has increased the marginal tax rate (t).

1. 

2.

3.

4. 

5. 

Suppose that the current situation in country A is represented by the following diagram:

Which of the

following best describes country A situation?

(i)        

(ii)        

(iii)        

(iv)        

Recall the PAE model you studied in class, where 

The unlabelled diagram below presents the initial equilibrium in Country X. Initially, government budget is at balance.

Assume that the government of Country X has increased its expenditures (G) but did not change the taxes (T0), such that the government budget is now in a deficit. Which diagram below is the best representation of this change?

1. 

2.

3.

4. 

5. 

Recall the PAE model you studied in class, where 

The unlabelled diagram below presents the initial equilibrium in Country X. 

Assume that due to increasing uncertainty about the future state of the economy, households in Country X increased their exogenous (i.e., autonomous) savings.

1. 

2.

3.

4. 

5. 

The following equations describe an economy, where Y* is potential GDP.

Suppose the government of this economy used its fiscal policy instruments to ensure that actual GDP was equal to potential GDP.  What is the value of net exports in this economy when the output gap becomes zero?

According to the quantity equation, if velocity and output are constant, then an increase in the money supply leads to _____ in inflation.