Over the past two decades, the United States has persistently had a trade deficit.
In an open- economy macroeconomic model, the market for loanable funds identity can be written as, S=I+NCO
In reference to the figure, which of the following shifts show the effects of an import quota?
None of the above is correct.
In reference to the figure, if the interest rates were initially at r2 and import quota was imposed, the interest rate would decrease because demand would shift to the left.
In reference to the figure, if the economy were initially in equilibrium at r2 and the government removed import quotas, the exchange rate would appreciate to E4.
Suppose that U.S citizens start saving more. What does this imply about the supply of loanable funds and the equilibrium real interest rate? What happens to the real exchange rate?
This would imply an increase in the supply of loanable funds since loanable funds consist of bank loans and household savings. This would also imply a fall in interest rates due to excess supply of loanable funds. The real exchange rate will decline since lower interest rates will attract investors from abroad thereby increasing net capital outflow. This in turn causes the supply of the US dollar to rise.
Aggregate demand shifts to the left if the money supply decreases
Which of the following adjusts to bring aggregate supply and demand into balance?
The price level and real output
Other things the same, the aggregate quantity of goods demanded decreases if
All of the above are correct
State at least four variables besides real GDP that tend to decline during recessions? Give the definition of real GDP, argue that decline in these variables are to be expected.
GDP is the money value of all goods and services that are produced within the borders of a country within a specific period of time. It comprises all public and private consumption, investments, government outlays, and exports less exports within a defined territory.
Make a list of at least 5 things that would shift the aggregate demand curve to the right.
Increase in consumption spending.
Increased government spending.
In reference to the figure, an increase in the money supply would move the economy from C to B in the short run and A in the long run.
In reference to the figure, if the economy is at A and there is a fall in aggregate demand in the short run, the economy moves to D
During recessions which type of spending falls?
Consumption and investment
According to the theory of liquidity preference, the money supply and money demand are positively related to the interest rate.
The multiplier is computed as MPC/ (1-MPC)
False. The multiplier is given by 1/ (1-MPC)
In the figure, which of the following sequences shows the logic of the interest rate effect?
Other things the same, which of the following responses would we expect from a decrease in U.S interest rates?
People chose to hold more currency
What is the difference between monetary policy and fiscal policy?
Monetary policy relates to lowering and raising interest rates by the central bank to maintain the economy at equilibrium while fiscal policy relates to tax and spending policies of the government.
Suppose there is no crowding out effects and the MPC is 9. By how much must the government increase expenditures to shift the aggregate demand curve to the right by $10 billion?
When the Fed increases the money supply, the interest rate decreases. This decrease in the interest rate increases consumption and investment demand so the aggregate demand curve shifts to the right. (True or False).
The misery index is calculated as the inflation rate plus the unemployment rate
In the long run, there is a tradeoff between the inflation rate and the natural rate of unemployment.
In the short run, policy that changes aggregate demand changes both unemployment and the price level
In reference to the figure, if the economy starts at c (left graph) and 1 (right graph), then in the short run, an increase in government expenditures moves the economy to b and 3
In reference to the figure, if the economy starts at c (left graph) and 1 (right graph), then in the short run, a decrease in aggregate demand moves the economy to d and 3
If macroeconomic policy expands aggregate demand, unemployment will fall and inflation will rise in the short run. (True or False).
Suppose that the Fed unexpectedly pursues contractionary monetary policy. What will happen to unemployment in the short run? What will happen to unemployment in the long run?
Contractionary monetary policy has an effect of causing more unemployment in the short run since employers will realize that wages have risen and thereby cut back on the demand of labor. In the long run monetary policy can only affect the rate of inflation but not the rate of unemployment.
President George W. Bush and the congress cut taxes and raised government expenditures in 2003. According to the aggregate supply and aggregate demand model only the increase in government expenditures would tend to increase output.
If the unemployment rate rises, which policies would be appropriate to reduce it?
Increase money supply, cut taxes
Explain the in arguments in favor of economic stabilization
Economic stabilization is very important in the economy since it eliminates excessive fluctuations in the economy. A stable economy is one that has constant output growth and low inflation. An economy that is not stabilized is characterized by frequent recessions, financial crisis, and high levels of inflations. A stable economy makes essentials like shelter and food affordable and available to the citizens.
Which of the programs below would transfer wealth from the young to the old?
Taxes are raised to provide more generous social security benefits
Some countries have had high inflation for a long time. Which of the following at least in theory could explain why some countries would continue to have high inflation?
High inflation countries have relatively small sacrifice ratios and so see no need to reduce inflation.
A consumption tax is a tax strictly on spending, while an income is a tax on salary paid for work.
It is advisable to replace income tax with consumption because when a tax on income is reduced, it gives people more disposable income. This increases their level of expenditure and at the same time promoting investment, which would promote economic growth. A tax cut on consumption only reduces the prices of commodities but do not give the citizens the ability to get money to buy the commodities.