Questions:
1. Draw a foreign exchange market diagram for U.S. dollar ($) against Euro ( €). Illustrate and explain how each of the following events would affect the demand and supply of U.S. dollar against Euro and therefore the U.S. dollar exchange rate against the Euro. The events are not related. Draw a diagram for each event.
a. European interest rates increased relative to U.S. interest rates, ceteris paribus.
b. Investors lose confidence in European assets because of the financial crisis in Greece.
2. Draw an AD-AS diagram representing the U.S. economy in a recession. Also draw a diagram of the U.S. labor market in the recession. Illustrate on the diagrams and explain how the U.S. economy may self-correct back to the long-run equilibrium where actual GDP equals to full GDP and there is full employment.
3. Draw an AD-AS diagram representing the U.S. economy in a recession. Also draw a diagram of the U.S. long-term capital market. Illustrate on the diagrams and explain how an expansionary monetary policy will affect the long-term capital market and the U.S. economy.
4. Draw a diagram representing the long-term capital market in the U.S. Illustrate on the diagram and explain the "crowding-out" effects of increased government borrowing to finance budget deficits.