Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Question
Chapter 5, Problem 8AP
To determine
Effect on current account and world real interest rate.
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You have just been hired by the U.S. government to analyze the following scenario. Suppose the U.S. agricultural industry is concerned about the level of fruit and vegetable imports to the United States, a practice that hurts domestic producers. Lobbyists claim that implementing a quota 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.
Given this change, the dollar (appreciate, depreciate) .
Fill in the following table with the effect of a quota on the following items:
Supply of Loanable Funds
Real Interest Rate
Domestic Investment
Net Exports
in crease, decrease, or no change
increase, decrease or no change
increase decrease or no change
increase , decrease or no change
Consider a small country that is closed to trade, so its net exports are equal to zero. The following equations describe the economy of this country in billions of dollars, where C is consumption, DI is disposable income, I is investment, and G is government purchases:
C�
= =
30+0.8×DI30+0.8×DI
G�
= =
5050
I�
= =
6060
Initially, this economy had a lump sum tax. Suppose net taxes were $50 billion, so that disposable income was equal to Y – 50, where Y is real GDP. In this case, this economy's aggregate output demanded was ___________ .
Suppose the government decides to increase spending by $10 billion without raising taxes. Because the spending multiplier is ____________ , this will increase the economy's aggregate output demanded by ____________ .
Now suppose that the government switches to a proportional tax on income of 10%. Because consumers retain the remaining 90% of their income, disposable income is now equal to 0.90Y. In this case, the economy's aggregate output…
You have just been hired by the U.S. government to analyze the following scenario. Suppose the U.S. agricultural industry is concerned about the level of fruit and vegetable imports 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.
Given this change, the dollar_______ (appreciates/depreciates).
Fill in the following table with the effect of a tariff on the following items:
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