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ECON 1951: Principles of Macroeconomics

Assignment 4 (10%)

Assignment 4 is now due. This assignment contributes 10% towards your final course grade.

Answer the following five questions. Each question is worth 20 marks. Your answers should average about half a page per question for a total of about three pages, double spaced.

1. What are the three sources of funding a national debt? Why are they all problematic? Why is foreign debt far more problematic for a country than domestic debt?

2. Explain fully the concept of “Twin Deficits” and use this concept to explain why the cause of the US trade deficit with China is largely due to American wars across the globe.

3. Explain how countries like Greece have largely misused the Keynesian model to “buy” votes and how this has created “sovereign debt” problems. In this regard, why can countries like Greece, or US states like California and cities like Detroit, become bankrupt, but countries like the US and Canada can never be bankrupt from too much debt?

4. Why does a flexible exchange rate make monetary policy more effective but fiscal policy less effective?

5. Explain the difference between a trade deficit, a current account deficit, and a balance of payments deficit. Explain fully why a current account deficit can be good for a country.