Macroeconomics Answers

2. Government fiscal policy and international trade seem to be linked. Let’s investigate their relationship.
c. Given the change in the value of the country's currency from part B, how will the price of the country's goods relative to other countries' goods change? What effect will this have on its current account?
Answer:

d. What effect will all this have on the country's capital account, and how will this work to keep the balance of payments equal to zero?
Answer:

Using the simple Keynesian model, discuss the impact of an increase in injections on the equilibrium size or the economy. Your answer should include a 45 degree diagram with any assumptions fully explained. (50 marks)

3. In Country X, GDP is $400B below the full-employment level of output. Government officials have measured the marginal propensity to consume at 0.75.
b. Say that, for a variety of reasons, the government shows it is not up to the task of conducting fiscal policy. The central bank steps up and does something about it. If a 1% decrease in interest rates leads to an increase in investment of $50B, how should the central bank's interest rate targets change?

3. In Country X, GDP is $400B below the full-employment level of output. Government officials have measured the marginal propensity to consume at 0.75.
a. The government wants to use fiscal policy to bring the economy back to full employment.
(i) If the government wants to achieve this through a change in spending, what change would be necessary?
Answer:

(ii) If the government wants to achieve this through a change in taxes, what change would be necessary?
Answer:

(iii) If the government wants to achieve this without creating a budget deficit, what change would be necessary?
Answer:

2. The U.S. economy experienced large trade deficits in the 1980s and 1990s and tremendous economic growth in the mid- and late-1990s.
c. Many people believe trade deficits are a serious problem and need to be eliminated.
(i) Explain the three actions the Fed could take to reduce the trade deficit in the U.S., and explain carefully how these actions would result in a reduced trade deficit.
Answer:

(ii) What effect would these three actions from part I of the question have on GDP? Describe the effects on each of the components of aggregate demand. Include an AD/AS graphical analysis of your answer.
Answer:

2. The U.S. economy experienced large trade deficits in the 1980s and 1990s and tremendous economic growth in the mid- and late-1990s.
b. Explain verbally the relationship between investment and long-term economic growth and describe the relationship graphically in an AD/AS graph.

2. The U.S. economy experienced large trade deficits in the 1980s and 1990s and tremendous economic growth in the mid- and late-1990s.
a. Trade deficits have an effect on inflation. Explain the relationship between trade deficits and investment verbally and mathematically using the concept of the balance of payments.
Answer:

d. Consider the relationship between interest rates and inflation.
(i) Explain the difference between real and nominal interest rates.
Answer:

(ii) If the Fed takes actions that will change interest rates, how is this likely to affect inflation?
Answer:

c. Explain the relationship between interest rates and unemployment. How do changes in the interest rate affect the level of unemployment in the economy?
Answer:

b. The Phillips curve relates inflation and unemployment.
(i) Using the AD/AS model, discuss the changes to the economy that the Phillips curve explains well, and describe under what conditions the Phillips curve fails to explain economic behavior. Include graphs of the Phillips curve and the AD/AS model in your answer.
Answer:

(ii) In the late 1990s, the U.S. economy experienced a period of extremely low inflation and extremely low unemployment. Use the AD/AS model to explain what sort of change in the economy would cause this. Include a graphical analysis in your answer, and provide two examples of what might bring about this event.
Answer: