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MGMT 673 – Global Economic Analysis MGMT 673 Problem Set 7

Question # 00082971
Subject: Economics
Topic: Macroeconomics
Due on: 07/18/2015
Posted On: 07/17/2015 01:34 PM

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PROBLEM 7 TO BE SOLVED FOR MY MGMT 673


1. The largest portion of the Current Account is international trade in goods. For the US, this account is tracked by the US Census Bureau (somewhat strangely). Use a web search or search within the US Census Bureau homepage for “US trade in goods with world seasonally adjusted.” What is the most current full year balance? What does this balance mean in terms of exports and imports?

2. Household finances are similar in some ways to a nation’s international transactions.

a. Suppose a household consumes (spends) more than its income. What are 3 legal ways it can finance this deficit? Give an example of each.

b. How can a nation that runs a persistent Current Account deficit finance its excess consumption?

3. A nation with a large current account deficit is consuming more than it produces or living beyond its means. Is this necessary bad? What is your judgment for the United States?

4. If the central bank does not intervene in the foreign exchange markets (the RA balance is zero), briefly explain why CA + KA = FA (see Exhibit 16-3).

5. Suppose that the US current account deficit must be reduced. Explain in terms of CA ? (S – I) + (T – G) what must be done to reduce the current account deficit. Why will this be difficult? (Hint: It may be helpful to think about the household that has been living beyond its means, perhaps by borrowing on credit cards).

With the following problems, we begin to integrate the 3-sector model. These problems follow from the examples in Martinsen, chapter 17, pages 566 and 567. For each economic condition, insert a new supply or demand curve and insert arrows to demonstrate that the statement accords with the theory.

6. An increase in aggregate demand for a nation’s goods and services, such as would occur if the government increased spending, normally causes an increase in the amount produced and a higher average price level.

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7. An increase in a nation’s supply of goods and services, as would occur if the oil prices fell in the world market, tends to raise the amount sold per time period and lowers the nation’s average price level. Greater output creates more jobs which reduces the unemployment rate.

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8. An increase in borrowing demand, as would occur if the government borrows more money to finance the budget deficit, causes the real risk-free interest rate and the equilibrium quantity of real loanable funds per period of time to rise.

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9. An increase in the supply of a nation’s real loanable funds, as would occur if the central bank engaged in open market purchases of financial securities, reduces the real risk-free interest rate and increases the quantity of real loanable funds per period of time.

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10. An increase in the demand for a nation’s currency, as would arise if foreigners wished to increase purchases of domestic goods, raises both its international value (exchange rate) and equilibrium quantity per period of time.

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11. An increase in the supply of a nation’s currency, as would occur if the central bank engages in open market purchases, lowers the exchange rate and raises the equilibrium quantity per period of time.

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Suggested weight: 8%

12. Here’s one that not yet introduced in the text but will become important. A decrease in the real interest rate encourages borrowing and spending by households (C) and firm’s (I) thereby increasing real GDP.

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Preview: abroad or through the foreign capital flows. Thus by definition, a country with a current account deficit consumes more than it produces and must borrow savings from abroad. Country with surplus in the capital account meets fills the deficit in current account else it has to borrow.....
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