Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506725
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Chapter 12, Problem 3CQ
To determine
The impacts of budget deficit on dollar exchange rate, net export, and aggregate demand.
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Students have asked these similar questions
If the Japanese Yen appreciates relative to the U.S dollar, how will this impact U.S imports, exports, net exports, aggregate demand, the price level and the level of real GDP in the U.S? Will depreciation in the value of the US dollar relative to the Japanese Yen have any impact on SRAS? Explain your answer carefully.
In your macroeconomic lectures you are often told that exchange rates and interest rates are important for macroeconomic decision-making.
How does an increase in Japan’s government budget deficit affect each of the following?
The real interest rate in the short run in Japan. Explain.
Private domestic investment in plant and equipment in Japan.
Draw a correctly labeled graph of the foreign exchange market for the euro, and show the effect of the change in the real interest rate in Japan from part (a)(i) on each of the following.
Supply of euros. Explain.
Yen price of the euro
To reverse the change in the yen price of the euro identified in part (b) (ii), should the European Central Bank buy or sell euros in the foreign exchang market? Explain.
Given flexible exchange rates and perfect capital mobility, what will be effect of an expansionary fiscal policy on output and price? Use IS-LM and AD-SRAS-LRAS diagrams to answer this question.
Chapter 12 Solutions
Economics: Private and Public Choice (MindTap Course List)
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- The effect that a change in the price level has on a country's exports and imports is called the: Exchange rate effect. Interest rate effect. International effect. Multiplier effect.arrow_forwardFinance In the following model for the total aggregate demand D=C+I+G+CA the value of consumption demand is decided by 1) disposable income: Y-T 2) real exchange rate: EP*/P 3) interest rate: R a. both 1 and 3. b.3 only. c.1 only. d. 2 only. e. both 1 and 2.arrow_forwardQ3-8 Appreciation of the domestic currency will Select one: a. increase domestic aggregate demand. b. decrease domestic aggregate supply. c. decrease domestic aggregate demand, and possibly increase domestic aggregate supply. d. cause a deterioration in the trade balance, but have no effect on aggregate supply or demand.arrow_forward
- If the domestic currency depreciates,using a graph of aggregate demand and supply EXPLAIN how lags in this policy process can result in undesirable fluctuations in output and inflation.arrow_forwardWhich of the following is correct? a. A recession in other countries reduces U.S. net exports so that U.S. aggregate demand shifts left. b. An increase in the money supply causes the interest rate to decrease so that aggregate demand shifts left. c. An increase in stock prices reduces consumption spending so that aggregate demand shifts left. d. An increase in the price level causes the exchange rate to rise so that aggregate demand shifts left.arrow_forwardSECTION 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.arrow_forward
- In an open economy, and given a horizontal LM curve, which one of the following statements is correct regarding expansionary fiscal policy action? (a) An increase in government spending will lead to an increase in output and demand, the exchange rate will depreciate and exports will decrease; (b) A decrease in taxes will decrease aggregate spending, the exchange rate will depreciate and net exports will increase; (c) An increase in government spending will lead to an increase in output and demand, the exchange rate will remain unchanged and imports will increase; (d) A decrease in taxes will increase output and demand, the exchange rate will depreciate and net exports will increase.arrow_forward4. How does a decrease in foreign price levels affect domestic aggregate expenditures and demand?arrow_forwardIf countries that imported from the United States went into recession, we expect that U.S. net exports would _________ rise, making the aggregate demand shift right. rise, making aggregate supply shift left. fall, making aggregate supply shift right. fall, making aggregate demand shift left.arrow_forward
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