Macroeconomics Answers

Q1)On the basis of following information(All figures are in Rs),

A. CURRNT ACCOUNT

Exports= 150

Imports= 200

Services= 25

Income= ‐20

Transfer= 35

B. CAPITAL ACCOUNT

External Assistance(net)= 100

External Commercial Borrowing(net)= 150

Short Term Credit= ‐5

Banking Capital(net)= 250

Foreign Investment(net)= 300

Other Flows(net)= 70

Find,

 Trade Balance

 Current Account Balance

 Capital Account Balance

4. Why is it important to try to determine the size of the fiscal policy multiplier?

5. Suppose an economy has an inflationary gap. How does the government’s actual budget deficit or surplus compare to the deficit or surplus it would have at potential output? 6. Suppose the president was given the authority to increase or decrease federal spending by as much as $100 billion in order to stabilize economic activity. Do you think this would tend to make the economy more or less stable? 7. Suppose the government increases purchases in an economy with a recessionary gap. How would this policy affect bond prices, interest rates, investment, net exports, real GDP, and the price level? Show your results graphically. 

1. What is the difference between government expenditures and government purchases? How do the two variables differ in terms of their effect on GDP? 2. Federally funded student aid programs generally reduce benefits by $1 for every $1 that recipients earn. Do such programs represent government purchases or transfer payments? Are they automatic stabilizers? 3. Crowding out reduces the degree to which a change in government purchases influences the level of economic activity. Is it a form of automatic stabilizer? 4. Why is it important to try to determine the size of the fiscal policy multiplier? 

The text describes several fiscal policy options to stabilize the economy: Changes in Government Purchases, Business Taxes, Income Taxes, and Transfer Payments. Based on what you’ve learned so far in the course, determine if the country you are living in currently needs economic stimulus or contraction. Describe how each policy option could specifically be used to change the national economy. Example: Country Z needs economic stimulus. The government could lower the business tax on buying new equipment. This would stimulate the economy because firms would have more money to invest which, in turn, increases demand in the equipment supply sector. 

How FED fund rate influences on real interest rate, output, and inflation ?

Suppose you make a loan of $100 that will be repaid to you in 1 year.if the loan is denominated in terms of nominal interest rate, are you happy or sad if inflation is higher than expected during the year. What if the loan instead had been denominated in terms of a real return.

Given:

1. Y=C+I+G+ X-M

2. C=b+cYd (Consumption function)

3. T=s+tY (tax function)

4. Mn + mY (import function)

5. Yd=Y-T (disposable income)

6. C = 100 + .90Yd

7. T = 40 + .20Y

8. M = 10 + .05Y

9. I = 38 G = 75 X = 25

Questions:

1. Calculate the equilibrium level of income using the model Y=C+I+G+X-M. 2. Determine the size of the new multiplier (import multiplier) for this economy.

consider the goods market equilibrium condition in a closed economy, S+TA-TR=I+G. use this equation to explain why in the classical case of fiscal expansion must lead to full crowding out. Explain using the same equation, what happens to the economy when there is less than full employment

why does exchange rate always overshoot its long run equilibrium following a monetary expansion? explain