Suppose the domestic interest rate is 3 and that the foreign ...

[burchfield96]

Suppose the domestic interest rate is 3 and that the foreign interest rate is 6. And finally, assume that the domestic currency is expected to appreciate by 4 during the coming year. Given this information, we know that
 
  A) individuals will only hold domestic bonds.
  B) individuals will only hold foreign bonds.
  C) individuals will be indifferent about holding domestic or foreign bonds.
  D) the interest parity condition holds.

Question 2

Based on your understanding of the labor market model presented by Blanchard (i.e., the WS and PS relations), explain what types of policies could be implemented to cause a reduction in the natural rate of unemployment.
 
  What will be an ideal response?

[ong527]

Answer to Question 1

A

Answer to Question 2

The natural rate of unemployment will change whenever either the PS or WS relations change. To reduce the natural rate, policy makers could implement polices that: (1 ) reduce unemployment benefits; (2 ) reduce the minimum wage; or (3 ) increase competition in product markets.