Economics Review Game

1
Economics Review Game
2
Draw a properly labeled demand and supply
diagram.
3
S
price
D
quantity
4
Draw a supply/demand diagram of the milk market
when cereal prices fall.
5
S
price
D1
D
quantity
6
Draw a supply/demand diagram of the coffee market
in Groton town when Starbucks opens a franchise
on Main Street.
7
S
price
S1
D
quantity
8
Draw a properly labeled aggregate supply and
demand diagram for the U.S. economy.
9
AS
Price Level
AD
Real GDP
10
Draw a recessionary gap.
11
Potential GDP
AS
Price Level
E
AD
Real GDP
12
Identify the three fiscal policy levers Congress
or the President would use in this situation.
13
Fiscal Policy for Recessionary Gap

• Raise government spending (G)
• Raise transfer payments
• Lower taxes

Both affect disposable income (DI), and
therefore consumption (C)
14
Show the effects of tax hike on aggregate supply
and demand.
15
AS
Price Level
E
E1
AD
AD1
Real GDP
16
Show the effect of a substantial rise in oil
prices on aggregate supply and/or demand.
17
AS1
AS
Price Level
E1
stagflation
E
AD
Real GDP
18
Draw a properly labeled money supply and demand
graph.
19
S
Interest Rate
D
Quantity of Money
20
Draw what happens to the money supply and demand
graph when the US government goes into deficit
spending and must borrow money through bonds.
21
S
Interest Rate
interest rates increase
D1
D
Quantity of Money
22
Draw an inflationary gap.
23
Potential GDP
AS
Price Level
E
AD
Real GDP
24
List the three levers of monetary policy that the
Fed would use in this situation, and how they
would use each.
25
Monetary Policy for an Inflationary Gap

• Raise the required reserve ratio (RRR)
• Raise the discount rate
• Sell government bonds in open market operations

26
Draw the effect of selling government bonds on
the money supply and demand diagram.
27
S1
S
Interest Rate (Federal Funds Rate)
E1
Interest rates will rise
E
D
Quantity of Money
28
Draw the effect of an interest rate hike on
aggregate supply and demand.
29
AS
Price Level
Higher interest rates cause investment and
consumption to fall because it is more expensive
to borrow money.
E
E1
AD
AD1
Real GDP
30
Draw the effect of an interest rate hike on the
market for the US dollar (versus the Euro).
31
S
Price of in terms of
Dollar appreciates because foreign investors find
high interest rates on US dollar accounts to be
an attractive place to park their money
E1
E
D1
D
Quantity of Dollars
32
Draw the effect of relatively high inflation in
the U.S. on the dollar (compared to the British
pound).
33
S
Price of in terms of
Dollar depreciates because foreign consumers find
US goods relatively expensive and demand fewer.
US consumers find foreign goods relatively
cheaper and demand more.
E
E1
D1
D
Quantity of Dollars
34
Comparative Advantage

• Determine who would
• import fish if Thailand
• and Vietnam
• specialized and traded
• according to their
• comparative advantage.

35
Comparative Advantage

• Opportunity Cost of Producing FishIn Thailand 1
  fish costs 2 radiosIn Vietnam 1 fish costs 1/3
  radio
• Therefore Vietnam would produce fish, and
  Thailand would produce radios.
• Thailand would import fish, and Vietnam would
  import radios.

36
Comparative Advantage

• Draw the production
• possibilities frontier for
• Vietnam before and
• after trade. The free
• trade price is
• 1 radio 1 fish

37
15
radios
PPF after trade
5
PPF before trade
15
fish