Suppose there is a sudden blow to confidence in the US: for instance, the stock market falls precipitously, or the President resigns, or there is renewed worry about the spillover effects of war in the Middle East.
a. Use an AS/AD model to show and explain the effect of the erosion of confidence on
• National income (i.e. real GDP).
Assume, reasonably, that the US begins in a situation of full employment and very low levels of inflation. In the course of the explanation, be sure to explain why the AD curve slopes down to the right, and why the AS curves have their characteristic shapes.
b. What is expansionary fiscal policy? Use your diagram in a. to show and explain how this might potentially solve the economic effects of the crisis.
c. What is expansionary monetary policy? What are the mechanisms through which expansionary monetary policy might help resolve the problem in a.?
The business cycles moves from expansion to peak to contraction to trough.
a. Draw a diagram that illustrates this.
b. Discretionary fiscal and monetary policy face lags. Briefly explain what these lags are in each case.
c. Show and explain how the presence of lags could, in theory, amplify rather than dampen the business cycle.
Indicate whether the following statements are true, false, or uncertain, and why
a) Crowding out occurs when a smaller money supply squeezes investment.
b) An automatic stabilizer is a feature of an economic system, such as unemployment insurance or the graduated income tax, that moderates swings in the business cycle.
c) Now that there are more British pounds per dollar than six months ago, the GBP has appreciated.
d) In setting monetary policy, the Fed mainly targets the discount rate.
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4. Exchange Rates
a. For each of the following currencies, find the exchange rate (a) recently, and (b) about six months ago.
Mexican peso [MXN]
Vietnamese dong [VND]
Chinese yuan renminbi [CNY]
Japanese yen [JPY]
Nigerian naira [NGN]
Venezuelan bolivar (fuerte) [VEF]
Indian rupee. [INR]
b.For any One of these currencies, provide a brief explanation for why it has changed in value over the past six months. This will require some digging.
5. Foreign Exchange Market
a. Draw and label a demand-and-supply diagram for Mexican pesos [in terms of dollars].
b. Use the diagram (or new ones) to show and explain what would happen to the value of the peso if:
– The US puts 45% tariffs on imports from Mexico
– Interest rates in Mexico rise sharply
– Inflation in the US jumps to 10%.
6. The Great Recession
In 2008-2009 the US went through its worst recession since the 1930s. Write a short piece on The Extent and Causes of the Great US Recession. You will need to show the extent of the recession – for instance, by showing data on the trajectory of GDP and/or unemployment – and then look for possible explanations. We will discuss your findings in class.
COUNTRY ECONOMIC ANALYSIS
Answer the following questions:
1. What are the trends in economic growth, inflation, and unemployment?
2. is the government budget near balance, and are taxes clear and reasonable?
3. How does the government run monetary policy?
4. What are the country’s trade and exchange rate policies?
5. Is this an easy country in which to do business?
You will probably need to gather data over at least a few years on:
The economy: real GDP, real GDP/capita, the growth rate of GDP, the main components of GDP (C, I, G, X, IM), the main sectors of the economy (agriculture, manufacturing, services), the unemployment rate, inflation rate, money growth rate, and exchange rate.
Government: Tax rates and revenue (for the main taxes), government spending (including main headings), deficit, and debt.
Trade: Exports, and imports, of goods and services; the balance on the current account, and capital account; and information on barriers to trade (e.g. tariffs).
Some of the data might be presented in tables; and some of it in graphs.
Product code: Economics-QA27
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