If a nation produces less than it spends what do we know about its
net exports? (positive or negative & how do you know?)
net capital outflow? (positive or negative & how do you know?)
savings in relation to its domestic investment? (which is higher & how do you know?)
According to the NX= export – import. Net exports are negative when a nation's imports greater than exports.
According to the NCO=NX. Net capital outflow is also negative.
When S>I, the saving is higher and the excess loanable funds flow abroad and NCO>0
Discuss the factors that might influence a country’s exports/imports/trade balance. Clearly indicate the direction of impact (i.e., if ____ increases then exports increase and imports decrease).
The factors that might influence a country’s exports/imports/trade balance has consumer preferences, domestic & foreign good prices, domestic & foreign consumer incomes, currency exchange rates, transportation costs, government policies.
If consumer preferences for United States goods then exports increase and imports decrease.
If foreign good prices increase then exports increase and imports decrease.
If foreign consumer incomes increase then exports increase and imports decrease.
If currency exchange rates increase then exports decrease and imports increase.
transportation costs depend on the size of good.
government policies depend on the type of policies.
Discuss the factors that might influence a country’s level of net capital outflow. Clearly indicate the direction of impact (i.e., if ____ increases then NCO increases) and explain why this is the case.
The factors that might influence a country’s level of net capital outflow has foreign real interest rates domestic real interest rates perceived risks of foreign asset ownership
If foreign real interest rates increase then NCO increases
If domestic real interest rates decrease then NCO increases
If perceived risks of foreign asset ownership decrease then NCO increases
What is the Law of One Price? Explain what it means in terms of a real exchange rate calculation. If Purchasing Power Parity currently holds for a basket of goods between the United States and Mexico, how would relatively high inflation in Mexico over the next year affect the nominal exchange rate between U.S. dollars and Mexican Pesos? Why?
The Law of One Price means all goods has same price. When all goods have same price the real exchange rate are equal to nominal exchange rate ,and this function the real exchange rate equal to 1 and is PPP. Thus PPP: e=p*/p in long run. When Mexico has the high inflation, P* will be rese, and United States will be same. Therefore, the e will be increase. United States dollar can buy more Mexico goods.
In 2011 Greek citizens were concerned about the size of government debt. Fearful that the government might be unable to fulfill its promise to insure depositors in Greek banks against losses created by bank failures, depositors moved funds out of Greek banks. Describe the effects of these events on:
Greece’s net capital outflow
Greece’s market for loanable funds (which curve shifted, in what direction, and how did the equilibrium interest rate and quantity of loanable funds change?)
*ignore any effects on the market for foreign-currency exchange for this question*
Due to depositors moved funds out of Creek banks, this should be the Capital Flight. NCO shift right at any interest rate investing in Creek is less attractive. Demand in MLF increases because NCO is part of it. Demand curve shift right, real interests rate rises, and quantity of loanable funds rises.
During a recession, U.S. government revenues from the income tax fall and government transfers rise as the reduction in income and the rise in unemployment raise the number of people who qualify for benefits. Describe the effects of these events on:
U.S. market for loanable funds (which curve shifts, in what direction, and how did the equilibrium interest rate and quantity of loanable funds change?)
U.S. net capital outflow
U.S. market for foreign-currency exchange and the U.S. real exchange rate
Draw the effects on the three-part graph (at the end of this document). You may hand-draw the new lines and attach a (clear, straight-on) photo or scan of that page, or you may add lines to the graph in MS word (insert -> shapes -> lines). If you do not have access to a printer, you may draw the whole thing by hand, or ask me for a printed copy of the graph when you take your exam.
List and discuss the three theories presented to explain the downward slope of the Aggregate Demand Curve (AD).
Wealth Effect: Price increase, people feel poorer and buy less, Consumption decrease
Interest Rate Effect: Price increase, people need more dollars to buy their goods and services, so they sell financial assets, Investment decrease
Exchange-Rate Effect: Price increase, United States interest rates rise, increasing demand for US capital assets, NX decrease
List and discuss the three theories presented to explain the upward slope of the Short Run Aggregate Supply Curve (SRAS).
Sticky Wage Theory: Price increase, the wage change slowly.
Sticky Price Theory: due to firm’s different menu cost, one firm don’t change price quickly who will get the more benefits than the other firm.
Misperceptions Theory: Price increase, the firm may believe its relative price is rising, and may increase output and employment. can cause an increase in Y, making the SRAS curve upward-sloping.
Explain how an increased savings rate might impact one or more of the variables in the production function Y=A*F(L,K,H,N). How might those changes affect the Long Run Aggregate Supply Curve?
Increased savings rate might impact increase Labor, Capital, and technological knowledge, but not natural resources
An increase Labor, LRAS shift right.
An increase Capital, LRAS shift right.
An increase natural resources, LRAS shift right.
An increase technological knowledge, LRAS shift right.
Explain why policy lags could make active stabilization policies (both monetary and fiscal) counterproductive. (bad)
Policy lags has time before a policy is implemented and they need spend long time to make a policy to adjust the balance of economics. Therefore, due to time lag in policy implementation and effect recognition, the policy that are meant to be stabilizing can end up being destabilizing. This can lead to even larger economic fluctuations.
Discuss Keynes’ arguments in favor of active stabilization policies. Explain clearly the monetary & fiscal policies a government can implement for expansionary and contractionary effects.
Monetary policies: through change the supply of money, and interest rates
Fiscal Policies: tax and government spending
The decline in aggregate demand has in turn reduced the production of goods and services. The company has more unemployment rate has risen. Monetary and fiscal policies can stabilize aggregate demand and stabilize production. When total demand is not ensuring full employment, policymakers should increase government spending, reduce taxes and expand the money supply. When total demand is too high and the risk of inflation rises, policymakers should reduce government spending, raise taxes and reduce the money supply.
What factors must policymakers take into account when deciding whether to respond to a recession/depression by increasing government spending or by decreasing taxes? In other words, why might $1 of spending have more or less impact on GDP than $1 of tax cuts?
Automatic stabilizers, Multiplier effect, and Crowding-out effect. When fiscal policy increases government spending and thus increases consumer spending. Every tax reduction of US $1 increases GDP by US $0.99. The government expenditure per US $1 increased by US $1.59. Every dollar of government spending directly increased aggregate demand, but only a portion of the tax reduction was saved by consumers.