Economics Answers

Indicate whether each of the following creates a demand for, or supply of Euros in foreign
exchange markets:
(a) An Australian importer purchases a shipload of French wine.
(b) A German motor vehicle manufacturer decides to build an assembly plant in Adelaide.
(c) An Australian university student decides to spend a year studying at an Irish
university.
(d) A French manufacturer exports machinery to Morocco on an Australian ship.
(e) An Australian government bond held by a Dutch citizen matures.

Explain and illustrate the following statement:
“ A deficit on the balance on current account will impose severe constraints upon domestic
economic policies” (10 marks)

Draw an aggregate demand/aggregate supply diagram where equilibrium occurs below full
employment level of output. Now show the impact of a leftward shift in the aggregate supply
curve. What developments might cause such a shift?

Trace through with the assistance of diagrams, the effect of a fall in the money supply on
investment demand and aggregate demand. (3 marks)
What will happen to real GDP, unemployment and inflation? (3 marks)
What factor(s) will determine the effectiveness of this policy? (4 marks)

Design an anti- recession stabilisation policy, involving both fiscal and monetary policies
which is consistent with:
(a) A relative decline in the public sector. (3 marks)
(b) Greater income equality (4 marks)
(c) A high rate of economic growth.

Land in Napa Valley California can be used either to grow red grapes for wine, or to grow Gala apples. Discuss what will happen to the market for Gala apples (i.e. the equilibrium price and quantity), if the Napa Valley red wines became, permanently, more popular.

The U.S economy slowed significantly in early 2008, and policy makers were extremely
concerned about growth. To boost the economy the government decided to increase
government spending by $700 billion (government consumption) (20 Points)
a. Calculate the resulting change in real GDP arising from the $700 billion in
governments spending if the marginal propensity to consume is 0.5. Explain why the
GDP increases by more than $700 billion.
b. How would the result (change in GDP) change if the marginal propensity to consume
would be higher or lower? Explain your answer.
c. Would the change in GDP be different if the government would have increased
transfer payments instead of government spending to react to the recession? Explain
your answer.

The government cuts public spending. a)Use the IS-LM-model to explain what happens to national income. Explain the effects on goods and money market separately and the interaction of these markets.
b)Which role does the marginal propensity to consume play for the effect on income?
c)Under the assumption that the central bank is responsible for price stability, what will be the appropriate monetary policy action? Use your IS-LM model for your argumentation.

I know what would happen if the government were to increase spending but I'm having trouble answering this question about the government cutting public spending.

What's the main differences between the fiscal theory of inflation and the theory of the price level?

What are some of the main advantages and disadvantages of fixed vs floating nominal exchange rates? Briefly describe the idea behind the Mundel's Trillema and discuss the constraints it effectively imposes on domestic monetary policy. How countries have dealt with trillema problem?