Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506725
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Chapter 12, Problem 3CQ
To determine
The impacts of budget deficit on dollar exchange rate, net export, and aggregate
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What impact will budget deficits have on the exchange rate value of the dollar? How will this impact net exports and aggregate demand? Explain.
What is the effect of a fiscal expansion on output and interest rates when exchange rates are fixed and capital is perfectly mobile?
In your macroeconomic lectures you are often told that exchange rates and interest rates are important for macroeconomic decision-making.
How does an increase in Japan’s government budget deficit affect each of the following?
The real interest rate in the short run in Japan. Explain.
Private domestic investment in plant and equipment in Japan.
Draw a correctly labeled graph of the foreign exchange market for the euro, and show the effect of the change in the real interest rate in Japan from part (a)(i) on each of the following.
Supply of euros. Explain.
Yen price of the euro
To reverse the change in the yen price of the euro identified in part (b) (ii), should the European Central Bank buy or sell euros in the foreign exchang market? Explain.
Chapter 12 Solutions
Economics: Private and Public Choice (MindTap Course List)
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- What happens to the price level and GDP if there is an increase in the exchange rate?arrow_forwardWhat does it mean when the dollar appreciates compared to when the dollar depreciates? Has the US dollar been relatively strong or weak over the past year? How does the strength of the dollar affect exports and imports?arrow_forwardHow does an increase in government spending affects aggregate demand, investment, and net exports in a small open economy with flexible exchange rates?arrow_forward
- Will a direct increase in the price of U.S. goods relative to foreign goods lead to a change in the quantity demanded of Real GDP or to a change in Aggregate Demand? Will a change in the exchange rate that subsequently increases the price of U.S. goods relative to foreign goods lead to a change in the quantity demanded of Real GDP or to a change in Aggregate Demand?arrow_forwardShow the effects of a fiscal expansion in an open economy with a flexible exchange rate. Show the effects on both the money market as well as what happens to the aggregate demand curve. Make sure to include the changes in interest rate, money demand, and exchange rate.arrow_forwardQUESTION 9 As a result of entering the world economy, Neverland experiences economic boom and its GDP goes up to y= 13250: The functions that describe consumption and investment are still the same: cd(r) = 5000 – 1000r+ 0.25Y and Id(r) = 500 – 1800r +0.2Y. The government wants to take advantage of growth and increases its expenditures to: G- 1000: What is Neverland's current account balance? Note: Type in your answer approximated to two decimal points, i.e., your answer must be of the form "999.99". I will not be able to fix correct answers that were entered incorrectly, such as "999.999" or "999,99" or "999". In case the last digit in the correct answer is zero, e.g., "999.90" or "999.00", Blackboard will automatically delete it and you should not do anything about it.arrow_forward
- A rise in interest rates tends to contract the economy by appreciating the currency and reducing net exports. True Falsearrow_forwardHow can a surge in exports and decrease in imports cause an increase in aggregate demand and what effects does it have on the exchange rate and interest rate?arrow_forwardHow could a greater budget deficit increase the trade deficit? What happens to the multiplier if there is an increase in the marginal propensity to consume? What would likely happen to the level of economic activity if the government took the necessary steps to reduce the deficit significantly in a relatively short period of time? When is the most appropriate time to reduce the deficit?arrow_forward
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