Short free-response question

A global taste for exports

Units 3, 4 and 6
5 points
About 12 minutes

A shorter question on one or two models, often with data in a table. You might calculate something like an unemployment rate, real GDP or the spending change needed to close a gap, draw a labeled graph (described in words on this site), and explain an effect. On the exam: Questions 2 and 3 of 3 in Section II; each is worth a quarter of the section score, with about 12 minutes suggested for each. A four-function calculator is allowed.

The question

Aldmoor and Sorvia are trading partners with a flexible exchange rate. Aldmoor's currency is the ald, and Sorvia's currency is the sol. Consumers in Sorvia develop a strong preference for electric bicycles made in Aldmoor. Aldmoor is initially in long-run equilibrium. Aldmoor's banking system has limited reserves, and its central bank takes no policy action.

Suggested time: 12 minutes

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Part (a)

2 points

Describe a correctly labeled graph of the foreign exchange market for the ald, and show the effect of the change in Sorvian preferences on the international value of the ald.

Your answer to part (a)

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Part (b)

1 point

Based only on the change in the value of the ald in part (a), will Aldmoor's imports from Sorvia increase, decrease, or remain the same? Explain.

Your answer to part (b)

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Part (c)

1 point

Based only on the initial increase in Sorvian purchases of Aldmoor's electric bicycles, what will happen to Aldmoor's price level and real GDP in the short run? Explain.

Your answer to part (c)

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Part (d)

1 point

Based on the changes in part (c), will the nominal interest rate in Aldmoor's money market increase, decrease, or remain the same? Explain.

Your answer to part (d)

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