Question

4. Venezuela is currently in an economic depression and is also experiencing hyperinflation.

List a) the monetary policy tools that might be used to address economic depression and b) the tools that might be used to address hyperinflation.

 Explain how an open market operation to fight the depression is expected to work.

 Explain how an open market operation to fight hyperinflation is expected work.

 Would these policies be in conflict? Why or why not?

 Venezuela currently has a budget deficit. If Venezuela wants to enact expansionary fiscal policy, what will happen to the budget deficit? What will happen to Venezuela’s federal debt?

 Explain two ways that Venezuela might fund its budget deficit.

5. Define the term “investment” as it is used in economics. Define the general term “saving” as it is used in economics.

6. Write down the two national income accounting identities. Now, use them together to derive an equation that relates the trade balance to saving concepts and investment.

7. Using your answer to (6), what must be true of a country’s trade balance if national savings exceeds investment?

Answer 1

4) - expansionary monetary policy which is an increase in money supply can be used to address economic depression.

Contractionary monetary policy which is a decrease in money supply can be used to address hyperinflation.

- open market operation or open market purchase operation increases the money supply. Central bank buys bonds which increases supply of money in the economy. Increase in money supply reduces interest rates on bonds, which increases demand for money or goods. This leads to increase in aggregate demand and results in higher national income.

Open market sale operation where central bank sell bonds in exchange of money. This reduces money supply in the economy. Decrease in money supply increases there interest rate for bonds which further reduces demand for money or goods. This results in decrease in aggregate demand. Decrease in demand when there is no change in aggregate supply results in decreasing prices and inflation reduces.

- these policies would be in conflict because expansionary monetary policy increases output and price and contractionary monetary policy reduces prices and output.