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 2

The economies of Country L and Country A are currently in short-run equilibrium at output levels below full employment. Both countries intend to use monetary policy to close their output gaps. Country L has a banking system with limited reserves, and Country A has a banking system with ample reserves.

2(A)Monetary Policy and Central BankingEasy1 mark

What open-market operation would Country L implement to move the economy toward full employment in the short run?

2(B)Monetary Policy and Central BankingEasy1 mark

What specific monetary policy action would Country A implement to move the economy toward full employment in the short run?

2(C)Money, Banks and the Money SupplyEasy2 marks

Draw a correctly labeled graph of the reserve market in Country A, and show the effect of the monetary policy action identified in part B on the policy rate.

2(D)Aggregate Supply and Macroeconomic EquilibriumEasy1 mark

Assume instead that no policy actions are taken in Country A and that the economy remains in short-run equilibrium at an output level below full employment. Will short-run aggregate supply in Country A increase, decrease, or remain the same as the economy self-adjusts in the long run? Explain.

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