Macroeconomics Answers

25. Consider two small open economies A and B which opted to adopt a floating exchange rate regime, and a fixed exchange rate regime, respectively. While Country A wants to exercise fiscal policy, Country B wants to exercise monetary policy.

(a) What are the possible reasons for Country A to adhere to exercising fiscal policy instead of monetary policy?

(b) According to the Mendel-Fleming model and the monetary approach to the balance of payment, what should be the position of Country A on the policy of liberalizing its (foreign) capital account, i.e. capital mobility? explain the reason.

(c) What should be the position of Country B on the policy of liberalizing its (foreign) capital account, i.e. capital mobility? explain the reason.

24. If country A’s major trade partners complain about the ’artificial’ devaluation of its currency, why this becomes an issue?

23. The Euro has been consistently strong against USD. What would be the impact of this trend on the Euro zone economy in particular that of Germany?

21. A country has a total value of imports and exports of 150 billion Birr and 100 billion Birr, respectively in a given fiscal year. If the country has a total investment worth of 75 billion Birr in the same year, how much is the total domestic saving in that year?

20. The Great Depression of the 1930s was characterized by deflation and significant involuntary unemployment, and a decline in output. The recession that has been observed in 1970s and early 1980s was characterized by increase in both prices and unemployment, and a decline in output. How does the AS-AD model explain this? What are the most

likely policy remedies that could be applied in each case?

19. Suppose the government of a typical developing country increased the salary of civil servants at a time when there is bumper harvest due to timely rainfall. What will happen to prices? show using your knowledge of AD-AS framework.

18. "An economy has a Keynesian property in the short-run and a classical

property in the long-run." how and why?

17. In the year 2008, the world economy experienced a recession.

(a) What was the major cause of the recession?

(b) What similarities can you observe with the recession of 1930s?

(c) Many countries such as the US, Germany, Japan, and China have taken bail-out measures to help the economy recover. Demonstrate the results of the actions using your knowledge of IS-LM framework.

(d) What impact had the recession on developing countries? Through what channels does the recession affect these countries?.

16. Suppose the supply side of an economy is characterized by:

A production function: Q = 3LK; where Q = output, L = labor, and

K= capital

Labor demand: LD = 10 - 2W/P , where W = nominal wage, P = price

Labor supply: LS = 4P/W ; and

Capital stock is fixed at K = 4.

(a) Derive the aggregate supply curve.

(b) Which cases (intermediate Keynessian, extreme Keynesian, classical) does the supply curve represent?

(c) How would your answers to (a) and (b) change if nominal wage

was fixed at 3?

15. "The amount of labor supplied can be reduced when the real wage

increases." Do you agree? how?