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May 2025 Section II (Set 1)

0/20 marks

2025 · 3 questions · 17 parts · 20 marks

0Correct0Partial0Wrong17Unattempted

1(A)1(B)(i)1(B)(ii)1(C)1(D)1(E)(i)1(E)(ii)1(F)2(A)2(B)2(C)2(D)3(A)3(B)3(C)(i)3(C)(ii)3(D)

Context for question 1

Assume that the economy of Vortania is in long-run equilibrium.

1(A)Inflation, Deflation and the Phillips CurveEasy2 marks

Draw a correctly labeled graph of the short-run and long-run Phillips curves for the economy of Vortania, and label the long-run equilibrium point as P.

Context for 1(B)

Assume that new residential construction projects are being implemented in Vortania.

1(B)(i)National Income, Circular Flow and Aggregate DemandEasy1 mark

Will real output in Vortania increase, decrease, or remain the same in the short run? Explain.

1(B)(ii)Inflation, Deflation and the Phillips CurveEasy1 mark

Assuming no change in inflationary expectations, on your graph in part A, show the short-run effect of the new residential construction projects on Vortania’s economy, labeling the new short-run equilibrium point as S.

1(C)Exchange Rates and CompetitivenessEasy2 marks

Vortania and Rhodara are trading partners with flexible exchange rates. The currency of Vortania is the Vortanian crown (VTC), and the currency of Rhodara is the Rhodaran mark (RHM). Assume that Vortania’s capital and financial account (CFA) balance is zero. Now assume that Vortania imposes new tariffs on imports from Rhodara. Draw a correctly labeled graph of the foreign exchange market for the Vortanian crown, and show the effect of the tariffs on the SUPPLY of the Vortanian crown and the international value of the Vortanian crown.

1(D)Balance of PaymentsEasy1 mark

Based solely on the change in the international value of the Vortanian crown shown in part C, will Vortania’s net exports increase, decrease, or remain the same in the short run?

Context for 1(E)

Based on the change in net exports identified in part D, what will happen to each of the following in the short run?

1(E)(i)Balance of PaymentsEasy1 mark

The capital and financial account (CFA) balance in Vortania. Explain.

1(E)(ii)UnemploymentEasy1 mark

Employment in Vortania

1(F)Exchange Rates and CompetitivenessEasy1 mark

Assume the central bank of Vortania wants to return the Vortanian crown to its international value before the imposition of the tariffs. Would the central bank buy or sell Vortanian crowns in the foreign exchange market? Explain.