Reference no: EM13201

1-      Explain how a policy mix (like the one used in 1990s) could help reduced to eliminate the budget deficit without having an adverse effect on the output.   Illustrate your answer using IS-LM graph.

2-      A 1- year Canadian bond with a face value of 5000 can be purchased at 4800.

a)      Calculate the nominal interest rate in Canada.

b)      If the Canadian dollar is expected to depreciate against the US dollar by 1 % over the next year, calculate the current nominal interest rate in the US.

c)      How much could an American bond with the same Face value as the Canadian bond sell in the market?

3-      Suppose the economy is currently in recession, and the exchange rate if fixed using the IS-LM model.

a)      explain and illustrate the economy adjustment ( in the medium run)

b)      Explain and illustrate the economy adjustment (in the medium run) without devaluation.

4-      Suppose the firm mark up over the cost is 10% and the wage setting equation is W=P (1-u) where U is the unemployment rate.

a)      Find out the real wage rate implied by the price setting equation.

b)      Determine the natural rate of unemployment.

c)      Plot the wage- setting and price setting equation or a property labelled graph and identity the nature rate of unemployment.

5- Carefully explain the neutrality of money on the medium run. Use an aggregate demand - Aggregate supply diagram to illustrate your answer. 

b) Find the natural rate of unemployment (NAIRO)

c) What is likely to happen to the curve if wage indexation becomes more widespread?  illustrate your answer on the graph?