Macroeconomic Theory Study Questions #4
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Macroeconomic Theory Study Questions #4 (Chapters 14-18)
1. Explain each ofthe following: Balance ofPayments
Current Account
Capital Account
Foreign Currency Reserves
Crowding out ofInvestment spending
Crowding out ofnet exports
Twin deficits
Demand for a (foreign) currency
Supply of a (foreign) currency
Purchasing power parity
Fixed exchange rate regime
Gold standard
Managed Float
Bretton Woods System
Foreign exchange reserves and stability of a currency
Balance ofPayments curve (BP)
Monetary Policy Objectives
Monetary Policy Targets
Monetary policy tools
Commercial Banks balance sheet
Money Multiplier—money creation process
Apparent and real issues with the Federal Reserve System as a monetary policy maker
Sources of uncertainty in the success of monetary policy
Process of fiscal policy making
Taylor Rule (its source, use and effectiveness)
Automatic Stabilizers
Cyclical versus Structural Deficits
1. Economic theory suggests that ifthere is an insistent trade deficit in the merchandise account, an adjustment in the value ofthe currency will help eliminate it if the country practices floating exchange rate regime. Yet the U.S. recent history does not corroborate the theory. Explain the apparent discrepancy within the context of class material.
2. Explain the determinants of exports and imports in the current account.
3. What would be the economic consequences ofthe U.S.A moving towards using new tariffs and quotas to reduce its trade deficit?
4. Explain the relationship between government deficit (G-T>) and international trade deficit (exports-imports<0).
5. Explain the determination ofthe value of a currency within a market mechanism.
6. Explain economic factors affecting the value of a currency.
7. Explain the relationship between the relative inflation rates and the value of a currency.
8. Explain the current account balance (Exports-Imports balance) in case of a fixed exchange rate regime.
9. Explain the determinants ofnet exports.
10. Explain with the help of a graph how the BP curve is derived and why it is upward sloping.
11. Comment critically: “In case of perfect capital mobility, open economies have full control of monetary policy affecting their domestic interest rates.”
12. Explain the efficacy of economic policy in an open economy with the help of a graph (without perfect capital mobility).
1. Fixed exchange rate
a. Monetary Policy
b. Fiscal Policy
2. Flexible exchange rates
a. Monetary Policy
b. Fiscal Policy
13. Explain the steps of monetary policy from the beginning to the final impact and possible road blocks that could cause uncertainty in its expected impact.
14. Explain the interplay between Monetary Policy targets, tools and monetary policy outcomes.
15. Explain the federal government budget (its surplus or deficit) and possible consequences ofFederal government’s deficit spending.
2021-12-11