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May 2025 Section II (Set 2)

0/20 marks

2025 · 3 questions · 17 parts · 20 marks

0Correct0Partial0Wrong17Unattempted
1(A)1(B)1(C)1(D)(i)1(D)(ii)1(D)(iii)1(E)1(F)2(A)2(B)2(C)(i)2(C)(ii)3(A)(i)3(A)(ii)3(B)3(C)3(D)
Context for question 1
Assume that the economy of Barrikos is in short-run equilibrium, with its economic data summarized in the table provided. The government budget is balanced, and the capital and financial account (CFA) balance is zero.
IndicatorRate
Cyclical unemployment rate6%
Natural unemployment rate4%
Structural unemployment rate1%
Actual inflation rate3%
Expected inflation rate5%
1(A)UnemploymentEasy1 mark
What is the numerical value of the actual unemployment rate in Barrikos?
1(B)Inflation, Deflation and the Phillips CurveEasy2 marks
Using the relevant numerical values, draw a correctly labeled graph of the short-run and long-run Phillips curves for Barrikos. Indicate the current short-run equilibrium with a point labeled X. Plot the relevant numerical values on the graph.
1(C)Fiscal Policy, Taxation and Public DebtEasy1 mark
Based on your graph in part B, identify one specific fiscal policy action that the government of Barrikos would take to move the economy toward long-run equilibrium.
Context for 1(D)
Assume that the fiscal policy action identified in part C is implemented.
1(D)(i)Fiscal Policy, Taxation and Public DebtMedium1 mark
Will the government budget in Barrikos move into surplus, move into deficit, or remain balanced? Explain.
1(D)(ii)Inflation, Deflation and the Phillips CurveMedium1 mark
Assume there is no change in inflationary expectations. On your graph in part B, show a possible new short-run equilibrium point, labeled Z, that would result from the fiscal policy action identified in part C.
1(D)(iii)Interest Rates, Bonds and Financial MarketsMedium2 marks
Draw a correctly labeled graph of the loanable funds market, and show the effect of the fiscal policy action identified in part C on the real interest rate.
1(E)Balance of PaymentsEasy1 mark
Barrikos has an open economy and a flexible exchange rate. Based solely on the change in the real interest rate in Barrikos shown on your graph in part D (iii), will Barrikos’ capital and financial account (CFA) balance move into surplus, move into deficit, or remain the same? Explain.
1(F)Balance of PaymentsEasy1 mark
Based on the change in Barrikos’ capital and financial account (CFA) balance identified in part E, what will happen to the international value of Barrikos’ currency? Explain.
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