Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Chapter 20, Problem 9E
To determine
Unwinding of Country U’s
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Aggregate Demand and Aggregate Supply - End of Chapter Problem
A fall in the value of the dollar against other currencies makes U.S. final goods and services cheaper to foreigners, even though
the U.S. aggregate price level remains the same. As a result, foreigners demand more U.S. aggregate output. Your study
partner says that this represents a movement down the aggregate demand curve because foreigners are demanding more in
response to a lower price. You, however, insist that this represents a rightward shift of the aggregate demand curve.
Consider the relationship among exchange-rate changes, aggregate demand, and monetary policy. Assume we begin in a situation with real GDP equal to Y∗.Y*.
Suppose the world price for raw materials rises because of growing demand for these products. Given that Canada is a net exporter of raw materials, what is the likely effect on Canadian aggregate demand? Show this in an AD/AS diagram (assuming no change in the exchange rate).
Suppose instead that there is an increase in the demand by foreigners for Canadian financial assets such as government bonds. What is the direct effect on Canadian aggregate demand? Show this in an AD/AS diagram (assuming again no change in the exchange rate).
Both of the shocks described above are likely to cause an appreciation of the Canadian dollar on foreign-exchange markets. As the Canadian dollar appreciates, what are the effects on aggregate demand in part (a) and in part (b)? Show these “secondary” effects in your diagram and explain.
Given your…
Currency crises and the demand for dollars: Suppose there is a currency crisisin the rest of the world, leading to an increase in demand for U.S. dollars (a“fight to safety”). Use the AS/AD framework to explain the efects of thisshock on the U.S. economy. Be sure to explain carefully how and why theshock enters the AS/AD model. (Hint: If the rest of the world would likemore dollars, what does it have to give in exchange for those dollars?
Chapter 20 Solutions
Macroeconomics (Fourth Edition)
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- You have just been hired by the U.S. government to analyze the following scenario. Suppose the U.S. manufacturing industry is concerned about competition from overseas low-cost producers exporting their goods to the United States, a practice that hurts domestic producers. Lobbyists claim that implementing a tariff on imports would shrink the size of the trade deficit. The following exercise will help you to analyze this claim. The following graph shows the demand and supply of U.S. dollars in a model of the foreign-currency exchange market. Shift the demand curve, the supply curve, or both to show what would happen if the government decided to implement the tariff. Supply Demand Supply Demand QUANTITY OF DOLLARS Given this change, the dollar Fill in the following table with the effect of a tariff on the following items: Supply of Loanable Funds Real Interest Rate Net Capital Outflow Net Exports Change due to a tariff REAL EXCHANGE RATE (Units of foreign currency per dollar)arrow_forwardYou have just been hired by the U.S. government to analyze the following scenario. Suppose the U.S. manufacturing industry is concerned about competition from overseas low-cost producers exporting their goods to the United States, a practice that hurts domestic producers. Lobbyists claim that implementing a tariff on imports would shrink the size of the trade deficit. The following exercise will help you to analyze this claim. The following graph shows the demand and supply of U.S. dollars in a model of the foreign-currency exchange market. Shift the demand curve, the supply curve, or both to show what would happen if the government decided to implement the tariff. REAL EXCHANGE RATE (Units of foreign currency per dollar) Supply QUANTITY OF DOLLARS Given this change, the dollar, Demand Demand Supply ?arrow_forwardIndia’s preparedness In May 2013, the Fed indicated the possibility of tapering, (a phenomenon of winding liquidity and reducing money supply which would increase interest rates). Higher interest differential in US caused a panic in Indian stock markets and Bond markets leading to a capital flight. India was in dire straits. The three pressure points that emerged were the unsustainable current account deficit (which had risen to 4.8% of GDP); the possibility of ratings downgrade by international credit rating agencies to junk; and lack of adequate foreign exchange reserves to fight a speculative attack on the rupee. The finance minister vowed to maintain the path of fiscal consolidation and bring down the fiscal deficit to below 5% of GDP. Various cuts in plan and non-plan expenditure have been instituted . It was around the same time that a change of guard was happening in the RBI. The new incoming RBI governor, with the finance minister rolled out several measures to setup a…arrow_forward
- India’s preparedness In May 2013, the Fed indicated the possibility of tapering, (a phenomenon of winding liquidity and reducing money supply which would increase interest rates). Higher interest differential in US caused a panic in Indian stock markets and Bond markets leading to a capital flight. India was in dire straits. The three pressure points that emerged were the unsustainable current account deficit (which had risen to 4.8% of GDP); the possibility of ratings downgrade by international credit rating agencies to junk; and lack of adequate foreign exchange reserves to fight a speculative attack on the rupee. The finance minister vowed to maintain the path of fiscal consolidation and bring down the fiscal deficit to below 5% of GDP. Various cuts in plan and non-plan expenditure have been instituted . It was around the same time that a change of guard was happening in the RBI. The new incoming RBI governor, with the finance minister rolled out several measures to setup a…arrow_forwardAD/AS model. Country A is an oil exporting country. The aggregate demand and supply functions are given as below: AD : Y = 710 − 30P + 5G+3Poil AS : Y = 10 + 5P − 2Poil where Y is real GDP, P is the price level, G is the government purchases, and Poil is the world price of oil. Write down the equilibrium condition. Solve for the equilibrium value of real GDP and the price level (hint: take G and Poil as known variables). Draw the AD/AS graph to show when Poil rises in the world market, what will happen the AD and SAS curves. Explain the price level effect and the output effect due to the change of the oil price.arrow_forwardA hypothetical economy is given by the following identities: C = 3000 I = 2000 G = 2500 T = 0.2Y MPC = 0.5 X=6500 Z=5500 + 0.2Y i. Find the equilibrium level of income. ii. Using initial values, what will the new level of Y be if the tax rate rises to T=0.3Y? iii. Calculate the budget deficit/surplus and trade balance using the initial valuesarrow_forward
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