Item 15
Assume the economy of Country X is operating above its full-employment output level.

Using a correctly labeled graph of aggregate demand, short-run aggregate supply, and long-run aggregate supply, show the short-run equilibrium, labeling the equilibrium price level as PLe and the equilibrium output as Ye.

Draw a single correctly labeled graph and show both a short-run and a long-run Phillips curve. Identify a point that could represent the short-run equilibrium in part (a) and label it as Z.

Assume that the central bank of Country X wants the economy to be in full-employment equilibrium. What open-market operation should the central bank initiate?

Given your answer in part (c), what will be the effect of the central bank’s open-market operation on each of the following in the short run?

The nominal interest rate

Employment. Explain.

Assume that the real interest rate increases in Country X. Will the international value of Country X’s currency increase, decrease, or remain unchanged on the foreign exchange market? Explain.

Assume that Country X’s financial account (formerly called capital account) balance is initially zero. Given your answer to part (e), will its financial account balance now be in surplus, be in deficit, or remain at zero?