Macroeconomics
4th Edition
ISBN: 9780393602487
Author: Jones, Charles I.
Publisher: W. W. Norton & Company
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Chapter 20, Problem 9E
To determine
Unwinding of Country U’s
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Aggregate Demand and Aggregate Supply - End of Chapter Problem
A fall in the value of the dollar against other currencies makes U.S. final goods and services cheaper to foreigners, even though
the U.S. aggregate price level remains the same. As a result, foreigners demand more U.S. aggregate output. Your study
partner says that this represents a movement down the aggregate demand curve because foreigners are demanding more in
response to a lower price. You, however, insist that this represents a rightward shift of the aggregate demand curve.
Consider the relationship among exchange-rate changes, aggregate demand, and monetary policy. Assume we begin in a situation with real GDP equal to Y∗.Y*.
Suppose the world price for raw materials rises because of growing demand for these products. Given that Canada is a net exporter of raw materials, what is the likely effect on Canadian aggregate demand? Show this in an AD/AS diagram (assuming no change in the exchange rate).
Suppose instead that there is an increase in the demand by foreigners for Canadian financial assets such as government bonds. What is the direct effect on Canadian aggregate demand? Show this in an AD/AS diagram (assuming again no change in the exchange rate).
Both of the shocks described above are likely to cause an appreciation of the Canadian dollar on foreign-exchange markets. As the Canadian dollar appreciates, what are the effects on aggregate demand in part (a) and in part (b)? Show these “secondary” effects in your diagram and explain.
Given your…
The unwinding of the U.S. trade deficit: Suppose some shock occurs to theU.S. economy that makes foreign investors more reluctant to hold U.S.assets. Use the AS/AD framework to explain the efects of this shock onthe U.S. economy. Note: Tere are several possible answers to this question,depending on which efect dominates. Just be clear about the case you chooseto analyze.
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- A new foreign government is elected and announces that once it is inaugurated, it will expand government purchases permanently. What is the domestic economy's response to this announcement? Use the AA-DD framework to answer your question.arrow_forwardAll of the following, except one, could have caused the increase in aggregate demand from AD1 to AD2. Which is the exception? Multiple Choice An increase in U.S. income received by Canadians. A lower Canadian dollar exchange rate. An increase in the number of American tourists in Canada. More American direct investment in Canada. Less American portfolio investment in Canada.arrow_forwardPlease use the AD-AS model to analyze the effects of monetary policy and fiscal policy on economic outcome in an open economy: a. Please show graphically the shifting of the AD curve after the Fed conducts an expansionary monetary policy in a closed economy (A closed economy means there is no international trade.). How do the price level and the real GDP change? b. Suppose the economy becomes an open economy. Please revise the result that you get in part (a). Please explain how you get the new result using the AD-AS model. c. Please show graphically the shifting of the AD curve after the federal government conducts an expansionary fiscal policy in a closed economy. Please show the crowding-out effect. How do the price level and the real GDP change? d. Suppose the economy becomes an open economy. Please revise the result that you get in part (c). Please explain how you get the new result based on the AD-AS model.arrow_forward
- AD/AS model. Country A is an oil exporting country. The aggregate demand and supply functions are given as below: AD : Y = 710 − 30P + 5G+3Poil AS : Y = 10 + 5P − 2Poil where Y is real GDP, P is the price level, G is the government purchases, and Poil is the world price of oil. Write down the equilibrium condition. Solve for the equilibrium value of real GDP and the price level (hint: take G and Poil as known variables). Draw the AD/AS graph to show when Poil rises in the world market, what will happen the AD and SAS curves. Explain the price level effect and the output effect due to the change of the oil price.arrow_forwardA hypothetical economy is given by the following identities: C = 3000 I = 2000 G = 2500 T = 0.2Y MPC = 0.5 X=6500 Z=5500 + 0.2Y i. Find the equilibrium level of income. ii. Using initial values, what will the new level of Y be if the tax rate rises to T=0.3Y? iii. Calculate the budget deficit/surplus and trade balance using the initial valuesarrow_forwardThe recent Trump tax cuts are projected to increase the national debt by $24.5 trillion over the next 20 years. This will be financed through future taxes. Americans' future standard of living will increase if Question 14 options: the current account goes into surplus the government increases expenditures net exports rise substantially the tax cuts produce a large increase in current and future GDParrow_forward
- Consider the aggregate demand function, D(EPF/PH, Y-T, I, G) = C(Y-T) + I + G + CA(EPF/PH, Y-T). When Foreign price fell, how would the consumption, the current account and the aggregate demand change: Increase, Decrease or No change? Consumption: Current account: Aggregate demand:arrow_forwardOne of the reasons given for the downward sloping aggregate demand curve is the foreign price effect. Clearly explain, step by step, how an increase in the price level will lead to a decrease in the aggregate demand, indicating a downward sloping aggregate demand curve.arrow_forwardWith COVID-19, many economies suffered from severe recession. To save their economies, a mix of monetary and fiscal policies was used in 2020. Explain how monetary policy and fiscal policy could be used to stimulate an economy under a recession. State their limitations under the COVID-19.arrow_forward
- In September the UK Government under the leadership of new Prime Minister Liz Truss announced a set of policies including: ^r. cuts to income tax rates 2. a commitment to billions of pounds of government subsidies for household energy bills. The UK has an inflation rate that is above their target rate and the UK Government is currently running a budget deficit. How these policies would be funded was not specified. Immediately after the announcement of these policies, investors started selling off UK pound assets as the market reacted badly to this announcement. Discuss these policies and their impact on economic variables. There is no single right answer here. Better answers will show depth of good economic analysis of these policies. Diagrams are not required.arrow_forwardPAKISTAN ECONOMYarrow_forwardMention any potential unintended consequences or risks associated with the current monetary and fiscal policy stance in Australia.arrow_forward
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