Given that a country has a large and possibly unsustainable current account deficit, explain how you can reduce it using each of the following approaches: Elasticity approach The absorption approach The monetary approach Suggest solutions to the limitations of each of the three approaches in a) above.
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Given that a country has a large and possibly unsustainable current account deficit, explain how you can reduce it using each of the following approaches:
- Elasticity approach
- The absorption approach
- The monetary approach
- Suggest solutions to the limitations of each of the three
approaches in a) above.
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Solved in 4 steps
- what are two reasons Why is the statstic for fiscal deficits are so closely monitired in small fixed exchange rate economies?In the New Keynesian sticky price open economy model with a flexible exchange rate: a. Explain why fiscal policy is an ineffective stabilization tool. b. Suppose that there is a reduction in current total factor productivity. What should the central bank do in response?Suppose Country A is a small open economy with a trade deficit. With a risingconcern of plausible supply chain issues, business firms in Country A tend toincrease their level of inventory. Using relevant Classical Theories, explain how this would affect her netcapital outflow, real exchange rate and trade deficit in the long run.
- The tenure of the previous government, from 2013 to 2018, witnessed a skyrocketing current account deficit as it increased from $2.5 billion in FY13 to $18.9 billion in FY18. The major driver was the trade deficit, which widened from $19.2 billion in 2012 to $35.6 billion in 2017, according to data extracted from the ITC’s Trademap.org. Imports increased from $43.8 billion in 2012 to $57.4 billion in 2017 and exports decreased from $24.6 billion in 2012 to $21.9 billion in 2017. Between July 2014 and June 2015, REER had increased by 8.83%. It increased by 5.54% in the prior fiscal year, FY14. In simpler terms, the rupee was kept above its equilibrium value between June 2013 and June 2018, making it cheaper to purchase goods from other countries. Furthermore, exporters lost their competitiveness against foreign competitors in the global market. Today, with the rupee closer to its equilibrium value, exports have increased. This has positively impacted the trade balance, alleviating…If the domestic currency depreciates,A) using a graph of aggregate demand and supply EXPLAIN how lags in this policy process (mentioned in (a)) can result in undesirable fluctuations in output and inflation.Assume that the government is implementing an expansionary fiscal policy and as a result has increased borrowing. At the same time, the central bank is carrying out a contractionary monetary policy. As a result, we can expect: Interest rates would rise substantially and private investments would be significantly reduced. Interest rates would not change substantially as the 2 policies counterbalance each other, and private investments would not be significantly reduced. Interest rates and private investments would rise. Interest rates and private investments would fall.
- Explain two monetary policies that could be implemented by the central bank which would have the same impact as the fiscal packages policy implemented by Trinidad and Tobago due to COVID-19Question 1It is often said by economists that fixed exchange rates make monetary policy totally ineffective as a stabilization tool. Explain why you agree or disagree with this statement. Assume an open economy. Keynes favoured fiscal policy over monetary policy to stabilize the economy and fixed exchange rates over flexible exchange rates. Is it consistent or inconsistent to pair fiscal policy with fixed exchange rates and monetary policy with flexible exchange rates? Explain why.Q3-2 The IS/LM/BP analysis suggests that, under flexible exchange rates, Select one: a. monetary policy is less powerful for affecting national income than under fixed exchange rates. b. a country may have difficulty in staying on the LM curve. c. expansionary fiscal policy may, in theory, cause either depreciation or appreciation of the home currency. d. expansionary fiscal policy will always lead to a decline in national income.
- QUESTION 4: PLACE TRUE OR FALSE OR UNCERTAIN (T/F/U) According to the classical macroeconomic model, expansionary fiscal policy has an inflationary effect. Assuming that you have free capital mobility and fixed exchange rate policy, then fiscal policy has a positive effect on output Expansionary fiscal policy always has a depreciating effect on the domestic exchange rate. According to the relative income hypothesis, the savings rate is a non-linear function of the ratio of current to previous peak income. In the IS-LM-BOP model, macroeconomic adjustments occur through changes in money supply if the country adopts a fixed exchange rate regime. According to the impossible trinity, a country that has a liberalized capital account and independent monetary policy will also achieve a stable exchange rate.SECTION 4: TRUE OR FALSE OR UNCERTAIN 25. According to the classical macroeconomic model, expansionary fiscal policy has an inflationary effect. 26. Assuming that you have free capital mobility and fixed exchange rate policy, then fiscal policy has a positive effect on output 27. Expansionary fiscal policy always has a depreciating effect on the domestic exchange rate. 28. According to the relative income hypothesis, the savings rate is a non-linear function of the ratio of current to previous peak income. 29. In the IS-LM-BOP model, macroeconomic adjustments occur through changes in money supply if the country adopts a fixed exchange rate regime. 30. According to the impossible trinity, a country that has a liberalized capital account and independent monetary policy will also achieve a stable exchange rate.Suppose that in a small open economy exchange rates are fixed. The AD and AS curves are given by:AD:Y =110+2G−T−10π AS:Y =105+10(π−π ̄)where Y is output, G is government spending, T is taxes, π is inflation and π ̄ is core inflation. Why does aggregate demand not depend on monetary policy? What is the natural rate of output? Suppose we are at the long run equilibrium. Suppose also that the government is running a balanced budget and world inflation is equal to 1. What are the values of G, T, Y, π and π ̄? If the government sets both G and T to 10, what will happen to Y and π in the short run?