Question

 

For each short answer, the word limit is 100 words. You need to make assumption clear, reasonable and explicit if making any. The quality and logic of arguments determine your marks. (4 marks each)

1. Donald Trump promised a more aggressive fiscal policy with a large increase in spending and significant tax cuts leading to a much larger government (budget) deficit. The US economy was at near the full employment (the unemployment rate in the US was low below 5%), what do you expect will be the response of the US Central Bank in terms of changes to the cash rate? Explain.

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2. The Central Bank of New Zealand has a higher inflation target than the Reserve Bank of Australia. Does this tend to depreciate or appreciate the New Zealand dollar against the Australian dollar? Explain

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3. What are the reasons for increasing convergence between emerging economies (defined as countries with lower GDP per capita but growing rapidly) and advanced economies (countries with high GDP per capita but lower growth)? Explain.

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4. You have successfully secured the mortgage of worth in $1,000,000 from the Bank to purchase a house. After the contract has been written, inflation in the economy turned out to lower than what was expected. Who gained and lost from this development? Explain.

 

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5. The government (and the central bank) has an easier job of dealing with the macroeconomic impacts of consumers and investors being pessimistic about the future of the economy than the period of stagflation. Do you agree? Explain

 

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Answer 1

Donald Trump promised a more aggressive fiscal policy with a large increase in spending and significant tax cuts leading to a much larger government (budget) deficit. The US economy was at near the full employment (the unemployment rate in the US was low below 5%), what do you expect will be the response of the US Central Bank in terms of changes to the cash rate?

Answer: As per the recent announcement of Donald Trump, a more aggressive fiscal policy with more spending by government and significant tax cuts, the US central bank should be promoting the following measures to make the financial decisions align to government:

1. Printing more currency: The Central bank will print more currency to meet up the fiscal deficit.

2. Promoting private Consumption: The central bank will try to boost the private consumption by reducing the rates and other factors.

3. Transfer of buffer reserve to Government: The Central bank may transfer the buffer reserve to the Government to coverup the excess expenses.

4. Increase in Credit lines to Banks and companies: The Central bank will push towards increasing the lending activities with lower rate to boost up production function.

5. Temporary Line of Credit to financial Institution: The central bank will promote and provide the immediate line of credit to banks and financial institutions to boost up the economic activities.