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You are an economist for the nation of Blueland, which is currently an unemployment rate of 5% and an inflation rate of 2%

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You are an economist for the nation of Blueland, which is currently an unemployment rate of 5% and an inflation rate of 2%.  The natural rate of unemployment in Blueland is 4%.

a.)  Draw a correctly-labeled model which shows Blueland's current economic equilibrium.  4 pts.

b.)  Using an ample reserves model for Blueland, what will the Federal Reserve do to bring the economy back to long-run equilibrium?  3 pts.

c). What will happen to the nominal interest rate and the price of bonds if the federal reserve decides to lower the reserve requirement using a limited reserves model for Blueland?  2 pts.

d.)  Based on your answer to part c, what will happen to Blueland's exports ?  2 pts.  Explain.  4 pts.

e.)  Draw a Loanable Funds Market showing the effect of part c on firms' borrowing.  4 pts.

f.)   Based on your answer to part e, what will happen to Blueland's Aggregate Demand?  1 pt.  Explain.  1 pt. 

g.)  Based on your answer to part c and part f, what will happen to Blueland's real interest rate?  2 pts.  Explain.  4 pts.

h.) Toyota of Redland decides to buy $100 million worth of bonds from the Central Bank.  How will this affect Redland's demand for money?  2 pts.  Explain.  4 pts.

 

Bonus + 1:  If a bank borrows at 3.5% in the federal funds market and uses their now-increased reserves to deposit into their reserves account at the Federal Reserve with an interest rate of 4%, this process is known as