Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Chapter 13, Problem 1AP
To determine
Effect of protective measure on economy
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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.
The following question relates only to the equilibrium in the goods market IN A CLOSED ECONOMY and asks you to carry out a graphical analysis using both the Keynesian cross diagram together with the IS-MP diagram.
>>>) Consider an open economy with a floating exchange rate regime. After a terrorist attack in the country, consumer confidence and business confidence have taken a serious hit, negatively impacting consumption and investment in the economy. To prevent the economy from suffering too badly, the central bank wants to intervene in such a way as to keep output at the same level as before the terrorist attacks. Within the IS-MP framework, explain and illustrate graphically the impact of the drop in consumer and business confidence and subsequent central bank intervention on equilibrium output, the real interest rate, net cash outflow, the trade balance and the country’s real exchange rate. Is it possible for you to determine the overall impact on consumption and…
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(,) = 5000 – 1000r+0.25Y and 1d (r) = 500 – 1800r +0.2Y. The government wants to take advantage of growth and increases
its expenditures to: G- 190o. 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
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- Suppose world interest rates go up, driving the world into a recession (that is, world income falls). Use the AD-AS model to analyze how this affects prices and income in our national economy. Do your results depend on whether exchange rates are fixed or flexible?arrow_forwardIn the foreign exchange market, the supply curve for the dollar is upward sloping. That is, when the exchange rate (foreign currency per dollar) increases, the quantity of dollars supplied increases. Assuming actors have not yet had time to change their expectations about the future exchange rate, when the exchange rate increases, why is the supply curve of dollars in the foreign exchange market upward sloping? Foreign goods and services are less expensive to import. U.S. firms profit more by selling their goods and services domestically rather than selling to foreigners. The expected profitability of purchasing a dollar today to sell in the future rises. U.S. goods are less expensive for foreigners to purchase.arrow_forwardImports and short-run output: In addition to depending on the exchange rate (and therefore on the interest rate), imports may depend on short-run output: when the economy is booming, consumers tend to demand more foreign goods. To incorporate this result into our short-run model, suppose the new net exports equation is Derive the IS curve with this new equation, and explain how it differs from the standard IS curve in the short-run model.arrow_forward
- Macroeconomics. Explain how the exchange rate adjusts to a temporary decrease in the foreign interest rate, R*, holding output constantarrow_forwardThe Big Mac index was introduced by The Economist magazine in 1986, as a playful example to introduce the concept of purchase power parity (PPP) and under/overvaluation of currencies. The PPP rates are usually compiled based on consumer baskets of comparable quality. The problem is that goods in different economies are hardly comparable. The customer basket contains only one good which is made everywhere in exactly the same way – McDonald’s Big Mac. You might think that is an oversimplification, but in fact the Big Mac Index has been widely used for comparing currencies ever since it was first published. Explore the concept behind the Big Mac index and critically assess the importance of comparability of goods in various economies.arrow_forwardSuppose that the central bank decreases the tax rate. What happens to the output (Y), real interest rate (r), exchange rate (e), investment (I), and net export (NX) under the following model environment? (Note: (1) The exchange rate e is the amount of foreign currency per unit of domestic currency. (2) Explain your answers using the graph/figure.) Short-run closed economy. Short-run small-open economy (Floating exchange rate). Short-run small-open economy (Fixed exchange rate). Short-run large-open economy (Floating exchange rate). Long-run closed economy.arrow_forward
- Using the model that we have developed, show what would happen with a new equilibrium domestic price level and real output if the Central Bank increases the policy rate. What will be the size of the AD curve shift? Keeping nominal exchange rate and foreign price level constant, what will happen with the real exchange rate, import and net export?arrow_forwardConsider the aggregate demand function, D(EPF/PH, Y-T, I, G) = C(Y-T) + I + G + CA(EPF/PH, Y-T). When Foreign price fell, how would the consumption, the current account and the aggregate demand change: Increase, Decrease or No change? Consumption: Current account: Aggregate demand:arrow_forwardAn economy is described by the following two equations. Y = C (Y – T) + I (r* ) + G – NX(e) M/P = L(r*, Y) If the taxes are raised in this economy, and assuming a floating exchange rate regime; explain what happens to: i. Aggregate income,arrow_forward
- Consider a small open economy currently in a steady state with zero net exports and investment of 430.85 units of output. Suppose the economy has a recession (its current output falls) which reduces its saving falls by 240.83 units of output. Compute the change in the economy's trade balance in units of output. Report your answer to 2 decimal places.arrow_forwardAssume that in 2010, Country A had an exchange rate of 0.770.77 units of national currency (UNC) per U.S. dollar (USD). By 2015, Country A's budget deficit increased, and Country A decided to issue bonds to finance the deficit. As a result, the exchange rate changed by UNC0.06UNC0.06. Calculate the 2015 exchange rate.arrow_forwardUsing the model that we have developed, show what would happen with a new equilibrium domestic price level and real output if the government increases government spending that are fully financed by increase of taxes (change of government spending is equal to the increase of taxes). What will be the size of the AD curve shift? Keeping nominal exchange rate and foreign price level constant, what will happen with the real exchange rate, import and net export?arrow_forward
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