Answer to Question #273719 in Macroeconomics for Lia

Question

Question 4: List and explain various majors (indexes) of human welfare. Compare the Human Development Index (HDI) for major Pacific Island Countries and write critical analysis. ( 5 marks) Question 5: a) How is money supply different in a fixed compared to a flexible exchange rate system? b) Explain why does monetary policy lose autonomy in a fixed exchange rate system ? c) Explain the assumptions of flexible exchange rate and fixed exchange rate. Which is an appropriate system for an small island economy of the Pacific ? ( 5 marks) Question 6 (a)Why is the amount of R&D spending important for growth? How do the appropriability and fertility of research affect the amount of R&D spending? (b) How do each of the policy proposals listed in (i) to (iv) affect the appropriability and fertility of research R&D spending in the long run, and output in the long run?

Answer 1

(a)

The Human Development Index was introduced in 1991 the United Nations Development Programme to stop this report was discussing the various aspects of human development has been ranking in various countries according to the level of the human development index. Human development index is any two weighted average of life expectancy index education at index and standard of living index.

Life expectancy refers to the life expectancy at birth node age 13 because infant mortality is not entering this index as a separate indicator.

Educational attainment is the combination of adult literacy rate main years of schooling . Now many years of schooling have been replaced by the complaint and government ratio. The weighted assigned to that illiteracy rate is two thirds while that of combined enrolment ratio is a third. Standard of living is presented here by transformation of per capita income. First, per capita income or converted into purchasing power parity. Presently, standard of living is captured by the long transfer form of per capita income in purchasing power parity. Human development index lies between 0 to 1. The country with Human Development Index Value up to 0.449 is considered as low human development economy. Country with Human Development Index value up to 0.799 is considered as the human developed economy and the country with the human development index value above 0.8 is considered as the human development economy.

(b)

Under the fixed exchange rate, money supply can change to any desired level decided by the monetary authority. This independence of monetary policy is one of the advantage of the flexible exchange rate. Under the fixed exchange rate system, it can influence and control the money supply. If the economy is experiencing a recession, the monetary authorities that expansionary monetary policy by increasing the money supply. Therefore, under the fixed exchange rate system, monetary authority can influence the money supply. At the same time under the flexible exchange rate system, the demand for money and supply of money are automatically dated according to the changes in the economy, and the market forces of demand for and supply of money will determine the exchange rate without any intervention of the monetary authority.

Under the exchange rate system, a country will maintain the same interest rate as a reserve country. As a result, it causes the ability to use monetary policy to control outcome in its domestic economy. The monetary policy becomes ineffective as a policy held in a fixed exchange rate system. Under the fixed exchange rate system and covered in the first priority must hold at all times which makes monetary policy ineffective and leads to the loss of the autonomy of the monetary policy.

(c)

The flexible exchange rate insulates the country's level of economic activity from foreign expansion and contraction. The flexible exchange rate increases the degree of control of the earth authorities over the money supply and allow them to use both the monetary and the fiscal policy to influence the level of output employment and income of the economy , the flexible exchange rate system is a monetary system that allows exchange rate to be determined by the market forces of demand and supply of money.

At the same time, the flexible exchange rate system is a system under which the monetary authority will intervene in the market to determine the exchange rate. And the exchange rate is not allowed to fluctuate freely. The important assumptions of the fixed exchange rate system is that all transactions takes place in Gold. There is a fixed supply of gold in the world.

Small country Din always prefer fixed exchange rate for the purpose of export and trade should stop by controlling its domestic currency a country can export mode and keep its good as they are sold abroad. The important purpose of this fixed exchange rate system is to keep currency value within the narrow band. With the extend to provide greater certainty for exporters and importers and that help the government to maintain a low inflation, and therefore it will be more suitable for the small countries.