Question

 

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.

 

 

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

 

 

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.

 

 

 

 

 

 

 

 

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.

 

Answer

 

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

 

Answer

Answer 1

For each short answer, the word limit is 100 words. You need to make assumption clear, reasonable and explicit if making any.

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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.

Answer

If the US economy is already near full employment, any further attempts to stimulate aggregate demand (through fiscal policy here) will only lead to inflation. This is because the AS curve will now be inelastic. Thus if aggressive fiscal policy is pursued, the US Central Bank will have to raise the cash rate to control inflation. A drastic rise in GDP is not possible.

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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

Answer

Since New Zealand has a higher inflation target and thus a higher inflation rate, the NZ currency is bound to depreciate against the Australian dollar. Due to higher inflation, the cost of production and the price of exports will be higher in NZ. This will reduce the demand for their products, and depreciate their currency.

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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.

Answer

There are various important reasons. Emerging countries have benefited a lot from globalization, as they haven't had to invent everything from scratch. They have adapted new technology developed by the advanced economies. Emerging countries also benefit from a vast demographic dividend. A large part of their population is economically active, while most of the population in advanced economies is not working. The saving and investment rates are also quite high in emerging economies, because they don't spend so much on consumption. They also have abundant natural resources.

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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.

Answer

The mortgage was calculated as per prevailing price level, which was high. Now, the price level has fallen. Thus, I have secured the mortgage considering a much higher price of the house. I am at a loss here, and the bank is at a gain. The actual price level is lower than expected.

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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

Answer

Yes, this statement is true.

When consumers and investors are pessimistic, aggregate demand falls. Economic activity slows down, and prices begin to fall. AD can be boosted and optimism can be revived, by a mix of fiscal and monetary policy. Since prices are low, people will be interested in borrowing and buying.

During stagflation, prices are high and GDP growth is low. Aggregate supply begins to decline. This becomes very difficult to solve, because no policy can bring down the prices, as mostly this is due to unforeseen causes. AS may have fallen due to a war, a natural calamity, a scarcity of the raw materials, and so on. Such events cannot be solved by the government.