...Does your answer depend on the exchange rate regime? Explain. - Net foreign wealth is defined as the difference between the foreign assets owned by home country (ex. U.S.) and home country assets (U.S. assets) owned by foreigners. The relationship of net foreign wealth and current account is that the current account balance measures the flow of new net claims on foreign wealth that a country acquires by exporting more goods and services than it imports. - When a country has an initial $10B in net foreign wealth and its total exports and imports in the following three years are $5B and $15B respectively, the country’s net foreign wealth after three years would be $0B. - For a country that has bigger imports than exports, thus net foreign wealth of the economy with a deficit; the government should not interfere by implementing policies such as tariffs. True that policy such as tariffs and quotas could reduce imports, which would technically fix current account deficit. However, reducing imports would also cause an increase in the value of the domestic currency relative to other currencies and make it more expensive for domestic exporters to export local products. Bigger imports than exports means that foreigners prefer to consume goods that they produce, which means demand for domestic goods will fall. What needs to be done is to implement macroeconomic policy such as increasing the Money supply, that would shift the economy, expanding its output and depreciating...
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...Vietnam National University, Hanoi UNIVERSITY OF ECONOMICS AND BUSINESS Macroeconomics Home work 1. Measuring a Nation’s Income Section 1: Multiple choice questions 1. In producing a sweater, a man who shears sheep pays a farmer $4 for a sheep. The shearing shop sells the wool to a knitting mill for $7. The knitting mill buys the wool and makes it into a fine fabric and sells it to a sweater-making firm for $13. The sweater-making firm sells the sweater to a clothing store for $20, and the clothing store sells the sweater, gift wrapped, for $50. What is the contribution to GDP of the previous sales transactions? a. $4. b. $44. c. $50. d. $94. 2. Susie grows corn in her backyard garden to feed her family. The corn she grows is not counted in GDP because a. it was not produced for the marketplace. b. it is an intermediate good which Susie will process further. c. the corn has no value. d. it reduces the amount of corn she will buy at the store. 3. Which of the following would be counted in U.S. GDP? a. the purchase of an historical house b. the purchase of a haircut c. the purchase of a $1000 government savings bond d. the value generated when you wash your car in your driveway 4. If private investment increased by $50 billion while GDP remained the same, which of the following could have occurred, all else being the same? a. Consumption spending decreased by $50 billion...
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... 1 1. [17 points] Consider a closed economy. Suppose that there is an increase in business confidence. a. Using the IS-LM framework and AD-AS model show graphically the impact of the above event on output, interest rates, unemployment rate, and price level in the short run. Assume that the economy starts at the natural level of output. Please label the initial equilibrium with the letter A, and the short run equilibrium with the letter B. b. If the Bank of Canada wants to restore full-employment output, will the Bank of Canada increase or decrease the nominal money supply? Using the IS-LM framework and AD-AS model show graphically the impact of the Bank of Canada’s immediate intervention to restore full-employment on output, interest rates, unemployment rate, and price level in the short run. Please label the equilibrium with the letter C. c. Now suppose that the Bank of Canada decides not to intervene. However, the Ministry of Finance wants to restore full-employment output. Will the Ministry of Finance increase or decrease government spending? Using the IS-LM framework and AD-AS model show graphically the impact of the Ministry of Finance’s immediate intervention to restore full-employment on equilibrium output, interest rates, unemployment rate, and price level in the...
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...monetary policy leads in the short run to an increase in the real money stock, a decrease in the interest rate, and an increase in output. Over time, the price level increases and the real money stock decreases until output has returned to its natural level. * In the medium run, money does not affect output, and changes in money are reflected in proportional increases in the price level. (money is neutral) * Dynamic effects on Fiscal Policy (the composition of outputs is different than it was before) * A reduction in the budget deficit leads in the short run to a decrease in the demand for goods and therefore to a decrease in output. Overtime, the price level decreases, leading to an increase in the real money stock and a decrease in the interest rate. * In the medium run, output increases back to the natural level of output, but the interest rate is lower, and investment is higher. * Dynamic effects on increase in price of oil (affects natural unemployment rate first) * An increase in the price of oil leads, in both the short run and the medium run, to a decrease in output. In the short run, it leads to an increase in the price level, which decreases the real money stock and leads to a contraction of demand an output. * In the medium run, an increase in the price of oil decreases the real wage paid by firms, increases the natural rate of unemployment, and therefore decreases the natural level of output. Chapter 8 * Inflation...
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...Aggregate Demand This section gives you a platform for understanding issues such as inflation, economic growth and unemployment. Aggregate demand (AD) and aggregate supply (AS) analysis provides a way of illustrating macroeconomic relationships and the effects of government policy changes. Aggregate Demand The identity for calculating aggregate demand (AD) is as follows: AD = C + I + G + (X-M) Where C: Consumers' expenditure on goods and services: This includes demand for consumer durables (e.g. washing machines, audio-visual equipment and motor vehicles & non-durable goods such as food and drinks which are “consumed” and must be re-purchased). Household spending accounts for over sixty five per cent of aggregate demand in the UK. I: Capital Investment – This is investment spending by companies on capital goods such as new plant and equipment and buildings. Investment also includes spending on working capital such as stocks of finished goods and work in progress. Capital investment spending in the UK typically accounts for between 15-20% of GDP in any given year. Of this investment, 75% comes from private sector businesses such as Tesco, British Airways and British Petroleum and the remainder is spent by the public (government) sector – for example investment by the government in building new schools or investment in improving the railway or road networks. So a mobile phone company such as O2 spending £100 million on extending its network capacity and the government...
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...Fixed Exchange Rates 1. CB attempts to stimulate economy (buys domestic assets) 2. E0 ⇒ E2 ; AA1 ⇒ AA2 3. But CB is pegging! Can’t allow depreciation to happen 4. So the CB sells foreign reserves to move E2 ⇒ E0 ⇑ (depreciation) 5. This brings exchange rate back to E0, and forces AA2 back to AA1 6. Monetary policy is ineffective under fixed exchange rates 1 Monetary policy ineffective under fixed exchange rates • With a fixed exchange rate, you give up on an independent monetary policy. You cannot use monetary policy to target domestic inflation or to try to smooth out the domestic business cycle • The only hope for independent monetary policy is capital controls to prevent traders buying or selling domestic currency • But capital controls reduce trade and foreign direct investment, and present opportunities for corruption 2 Fiscal Policy under Fixed Exchange Rates Fiscal policy is more effective under fixed exchange rates 1. Fiscal stimulus (increase spending; lower taxes increases aggregate demand (shifts DD to right) But this causes initial appreciation (fall in E); equil is at 2. To protect the peg, CB must buy foreign assets with home currency. This increases the domestic money supply, which moves economy to final equil 3 (higher output) Fiscal policy is potent because it causes both the DD and the AA schedules to shift 3 2. ⇓ (appreciation) 3. 4. Disadvantages of Fixed Exchange Rates • With a fixed exchange rate you give...
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...positive net worth? | | | | | Selected Answer: | A bank with positive net worth cannot fail. | Correct Answer: | Most of the bank's assets are illiquid. | | | | | Question 2 | 1 out of 1 points | | The three most important sources of economic growth are | | | | | Selected Answer: | increases in employment, increases in the capital stock, and improvements in technology | Correct Answer: | increases in employment, increases in the capital stock, and improvements in technology | | | | | Question 3 | 0 out of 1 points | | If the capital stock increases faster than employment, then we would expect | | | | | Selected Answer: | both output and labor productivity to fall | Correct Answer: | both output and labor productivity to rise | | | | | Question 4 | 0 out of 1 points | | Refer to Figure 8-9. The production possibilities frontier tells us that there is a trade-off between investment in capital and | | | | | Selected Answer: | investment in human capital | Correct Answer: | living standards in the present | | | | | Question 5 | 0 out of 1 points | | In figure 7-1, the equilibrium hourly wage and number of workers employed are: | | | | | Selected Answer: | $8; 120 million | Correct Answer: | $12; 150 million | | | | | Question 6 | 1 out of 1 points | | Refer to Figure 10-1. The graph shows | | | | | Selected...
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...Problem: Decrease unemployment Fiscal and Monetary/ Short Run Policies (Demand-side policies): There is a range of policy measures a government may use to reduce unemployment, however, the choice of measures are influenced by the cause of the unemployment, the rate and duration of unemployment and the state of the other macroeconomics objectives. If the economy is below its productive capacity, unemployment may be reduced by increasing AD. Expansionary fiscal and/ or monetary policy can be used to create jobs. Fiscal policy: increase government spending and/or cut taxes in order to rise AD. Rise in government spending has the potential to have more of an impact on AD than cuts in tax. With an increase in AD, there will be an increase in Real GDP (as long as there is spare capacity in the economy.) If firms produce more, there will be an increase in demand for workers and therefore lower demand-deficient unemployment. Also, with higher aggregate demand and strong economic growth, fewer firms will go bankrupt meaning fewer job losses. Monetary policy: Monetary policy would involve cutting interest rates. Lower rates decrease the cost of borrowing and encourage people to spend and invest. This increases AD and should also help to increase GDP and reduce demand deficient unemployment. Also lower interest rates will reduce exchange rate and make exports more competitive. Supply-side Policies/ Long Run Policies: Education and Training, Reduce Power of trades unions, Employment...
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...General Certificate of Education Advanced Subsidiary Examination June 2014 Economics Unit 2 ECON2 The National Economy Wednesday 21 May 2014 1.30 pm to 2.45 pm For this paper you must have: an objective test answer sheet a black ball-point pen an AQA 12-page answer book. You may use a calculator. Time allowed 1 hour 15 minutes Section A (ECON2/1) Answer all questions on your objective test answer sheet. Use a black ball-point pen. Do not use pencil. Do all rough work in this question paper, not on your objective test answer sheet. Section B (ECON2/2) Answer EITHER Context 1 OR Context 2. Use black ink or black ball-point pen. Pencil should only be used for drawing. Write the information required on the front of your answer book. The Paper Reference is ECON2/2. Information The maximum mark for this paper is 75. There are 25 marks for Section A. Each question carries one mark. No deductions will be made for wrong answers. There are 50 marks for Section B. The marks for questions are shown in brackets. You will be marked on your ability to: – use good English – organise information clearly – use specialist vocabulary where appropriate. Advice You are advised to spend no more than 25 minutes on Section A and at least 50 minutes on Section B. G/TI/100665/Jun14/E3 ECON2 2 Section A: Objective Test Answer all questions in Section A. Each question carries 1 mark. No deductions will be made...
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...Chapter 3 Measuring Macroeconomic Performance: Output & Prices * The main indicators of macroeconomic performance: 1. Rising living standards – economic growth | * Tendency for level of output (quality and quantity) to increase over time * Growth in the material wellbeing of the population * Is the responsibility of governments and international organizations | 2. Stable Business Cycle | * Low volatility in fluctuations of actual output around its trend or potential output Avoiding extremes of short-run macroeconomic performance * An economy that is growing excessively may be prone to inflation | 3. Relatively stable price level | * Maintaining the real value of the currency * Low (positive) rate of inflation | 4. Sustainable levels of public and national debt | * Public debt: during a budget deficit, the government must borrow from the private sector to meet its spending * Foreign debt: borrowing by domestic residents from foreign countries, influenced by economy’s current account deficits | 5. Balancing current and future consumption | * The relationship between investments and saving in an economy | 6. Full Employment | * Providing employment for all individuals seeking work * Does not mean zero unemployment | Measuring national or aggregate output/Production: Gross Domestic Product (GDP) ...
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...There are two factors that would prevent PPP from being true. The first is that many goods are not easily traded, such as a lawn mowing business. The other is that substitutes are not always perfect when manufactured in different countries, such as automobiles made in the US and Japan, because of the value consumers place on the products. 3. The market for loanable funds and the foreign money exchange are both central to macroeconomics of open economies. First, the real interest rate adjusts to equilibrium between the supply and demand for loanable funds. The supply of loanable funds comes from national savings, and the demand comes from domestic investments and net capital outflow. Second, the balance between the supply and demand of dollars happens when the real exchange rate adjusts. In the exchange rate the supply of dollars comes from the net capital outflow and the demand for dollars are represented by net exports. These markets are linked by net capital outflow because this variable represents the demand of loanable funds and the supply for dollars in for the money exchange. 4. Capital flight happens when a large amount of funds...
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...purchase in order to maximize their utility, whereas firms decide how much to produce in order to maximize profits. In contrast, macroeconomics is the study of the economy as a whole; it focuses on issues such as how total output, total employment, and the overall price level are determined. These economy-wide variables are based on the interaction of many households and many firms; therefore, microeconomics forms the basis for macroeconomics. 2. Economists build models as a means of summarizing the relationships among economic variables. Models are useful because they abstract from the many details in the economy and allow one to focus on the most important economic connections. 3. A market-clearing model is one in which prices adjust to equilibrate supply and demand. Market-clearing models are useful in situations where prices are flexible. Yet in many situations, flexible prices may not be a realistic assumption. For example, labor contracts often set wages for up to three years. Or, firms such as magazine publishers change their prices only every three to four years. Most macroeconomists believe that price flexibility is a reasonable assumption for studying long-run issues. Over the long run, prices respond to changes in demand or supply, even though in the short run they may be slow to adjust. Problems and Applications 1. The many recent macroeconomic issues that have been in the news lately (early 2002) include the...
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...A Paper Presentation on EQUILIBRIUM EXCHANGE RATE Theme: International Finance & Trade Institute Name: Symbiosis Institute of International Business (SIIB), Pune Student Name: 1) Swapnil Rathi 2) Kuldeep Joshi Contact No: Swapnil – 9860222020 Kuldeep – 9028029154 Email id: swapnilrathi@siib.ac.in kuldeepjoshi@siib.ac.in 1 ABSTRACT The exchange rate is the rate at which the supply for a currency meets the demand of the same currency. As foreign exchange rates are affected by a number of factors, the equilibrium exchange rate in turn, are also influenced by its supply and demand. Hence equilibrium is achieved when a currency's demand is equal to its supply. Analysing the equilibrium levels of the exchange rates plays a crucial role in the policy making decisions of the policymakers. Exchange rates have a major influence on the prices faced by the consumers and producers throughout the world and the consequences of misalignments can be extremely costly to the nations involved. Therefore economists have developed number of methodologies for calculating the exchange rates. Each methodology involves conceptual explanations and/or imprecise estimates of key parameters and different methodologies which generate different calculated values for equilibrium exchange rates. This makes it difficult to have much confidence in estimates derived from any single methodology on its own. By the same token, it suggests that, ideally, policymakers should inform their judgments through...
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...IN THIS CHAPTER YOU WILL . . . Learn three key facts about shor t-run economic fluctuations Consider how the economy in the shor t run dif fers from the economy in the long run A G G R E G AT E AND DEMAND S U P P LY Use the model of aggregate demand and aggregate supply to explain economic fluctuations A G G R E G AT E Economic activity fluctuates from year to year. In most years, the production of goods and services rises. Because of increases in the labor force, increases in the capital stock, and advances in technological knowledge, the economy can produce more and more over time. This growth allows everyone to enjoy a higher standard of living. On average over the past 50 years, the production of the U.S. economy as measured by real GDP has grown by about 3 percent per year. In some years, however, this normal growth does not occur. Firms find themselves unable to sell all of the goods and services they have to offer, so they cut back on production. Workers are laid off, unemployment rises, and factories are left idle. With the economy producing fewer goods and services, real GDP and other measures of income fall. Such a period of falling incomes and rising 413 See how shifts in aggregate demand or aggregate supply can cause booms and recessions 414 PA R T E I G H T S H O R T - R U N E C O N O M I C F L U C T U AT I O N S recession a period of declining real incomes and rising unemployment depression a severe recession unemployment is...
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...the real exchange rate to increase? A) a nominal depreciation B) a reduction in the foreign price level C) a reduction in the domestic price level D) all of the above E) none of the above 2. When the dollar appreciates relative to the pound, the pound price of the dollar A) increases. B) decreases. C) does not change. D) increases or decreases, depending on the amount of the depreciation. E) changes in the next period. 3. When the U.S. has a current account surplus, we know that it is also A) running a balanced trade account. B) lending to the rest of the world. C) borrowing from the rest of the world. D) suffering from negative investment income. E) none of the above 4. Assume that the uncovered interest parity condition holds. Also assume that the U.S. interest rate is less than the U.K. interest rate. Given this information, we know that investors expect A) the pound to depreciate. B) the pound to appreciate. C) the dollar-pound exchange rate to remain fixed. D) the U.S. interest rate to fall. E) none of the above 5. The quantity of imports will increase when there is A) a reduction in the real exchange rate. B) an increase in domestic output. C) an increase in foreign output. D) all of the above E) none of the above 6. Assume the Marshall-Lerner condition holds. Which of the following will cause a reduction in net exports? A) a reduction in government spending B) a reduction in investment C) an increase in foreign output D) an increase...
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