Group Exercise 2

Instructions: This is a group exercise. Your team is responsible for preparing the answers to the
following questions. You are not allowed to compare or share your answers with other teams.
Your answers should be typed, and all graphs should be drawn using any appropriate software.
Please list the name of your cohort, your team number, and the names of all team members.
Submit your work (Word document only) via MyCourses document submission (one document
per team)

1. (25 points) Using supply and demand graph as well as written explanations, explain what
would happen to Japan’s aggregate demand, aggregate supply, the equilibrium price level
and the equilibrium real output (GDP) for each of the following scenarios:

a. The Iranian navy blocks the Strait of Hormuz through which 30% of oil is
supplied to the world oil market.

b. The Japanese stock market declines sharply.

c. The Japanese government increases spending while as the same time the Bank of
Japan raises the real interest rate.

d. Japan is hit by a massive earthquake and tsunami that destroys a great part of
Honshu, the country’s main island.

2. (25 points) In 2018 the United States and China entered into a trade dispute that led both
countries to impose tariffs on each other’s goods. Economists concluded that the tariffs
contributed to slower growth in real GDP for both countries, though the effects were
greater in China. Using aggregate demand and supply analysis explain and graph how a
trade surplus can lead to a slowing real GDP in both countries.

3. (25 points) Using a supply and demand graph as well as written explanations, explain
what would happen to the demand, supply, and the equilibrium Real Risk-Free Interest
rate (RRFR) in the domestic real loanable funds (credit) market for each of the following
scenarios:

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 a. USA: The federal government budget deficit is expected to continue to decrease
during the 2019 fiscal year

b. USA: Due to bright economic conditions, US consumers feel more confident

about the future.

c. Colombia: Due to higher domestic interest rates, foreigners invest massively in

Colombian government bonds (issued in Colombian Pesos).

d. Venezuela: Individuals convert their domestic checking account (in bolivars) into
US dollars.

e. Canada: To increase domestic spending, the Canadian government imposes a 5%

tax on all savings account deposits.

4. (25 points) Explain how each of the following events affects the monetary base, the
money multiplier and the M1 money supply of a country.

a. The Central Bank sells government bonds to banks in the bond market.
Answer:

b. You use your bank debit card to buy a meal at a restaurant.

c. There are rumors about a computer virus attack on ATMs.

d. The Central Bank decreases the amount of required reserves that banks have to
hold.

e. The Central Bank prints money and gives it to the government to pay for the
government’s spending.

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