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Questions.doc Download Attachment
1. Explain the relationship among savings, investment, and net capital outflow.
2. Describe the economic logic behind the theory of purchasing-power parity (PPP). What factors
might prevent PPP...1. Explain the relationship among savings, investment, and net capital outflow.
2. Describe the economic logic behind the theory of purchasing-power parity (PPP). What factors
might prevent PPP from holding true?
3. Describe supply and demand in the market for loanable funds and the market for foreign currency
exchange. How are these markets linked?
4. What is capital flight? When a country experiences capital flight, what is the effect on the
country's interest rate and exchange rate?
5. List and explain the three theories for why the short-run aggregate-supply curve is upward
sloping.
6. What might shift the aggregate-demand curve to the left? Use the model of aggregate demand
and aggregate supply to trace through the short-run and long-run effects of such a shift on output
and the price level. Use the following diagram to help explain your answer.
7. Suppose the Fed expands the money supply, but because the public expects this Fed action, it
simultaneously raises its expectation of the price level. What will happen to output and the price
level in the short run? Compare this result to the outcome if the Fed expanded the money supply
but the public didn’t change its expectation of the price level? Use the diagram below to explain
your answer.
8. What is the theory of liquidity preference? How does it help explain the downward slope of the
aggregate-demand curve?
9. Suppose that survey measures of consumer confidence indicate a wave of pessimism is
sweeping the country. If policymakers do nothing, what will happen to aggregate demand?
Explain what the Fed should do if it wants to stabilize aggregate demand. If the Fed does nothing,
explain what Congress might do to stabilize aggregate demand.
10. What is "natural" about the natural rate of unemployment? Explain why the natural rate of
unemployment might differ across countries.
11. What causes the lags in the effect of monetary and fiscal policy on aggregate demand? What are
the implications of these lags for the debate over active versus passive policy?
12. Some economists say that the government can continue running a budget deficit forever. How is
that possible?
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Economics - 8196954.doc Download Attachment
1. Explaintherelationshipamongsavings,investment,andnetcapitaloutflow.
Answer:
Theeconomicsavingsisusedinfinancinginvestmentathomeorbuyingassetsabroad....1. Explaintherelationshipamongsavings,investment,andnetcapitaloutflow.
Answer:
Theeconomicsavingsisusedinfinancinginvestmentathomeorbuyingassetsabroad.
Therefore,nationalsavingsisequaltodomesticinvestmentplusnetcapitaloutflow.
2. Describetheeconomiclogicbehindthetheoryofpurchasingpowerparity(PPP).Whatfactors
mightpreventPPPfromholdingtrue?
Answer:
Accordingtothetheoryofpurchasingpowerparity,aunitofcurrencyshouldbeusedinbuying
samequantitiesofgoodsinallcountries.Thetheoryimpliesthatthenominalexchangerate
betweenthetwocountriescurrenciesshouldreflectpricelevelintwocountries.Therefore,
countrieswithhighinflationshouldhavedepreciatingcurrencies,andcountrieswithlowinflation
shouldhaveappreciatingcurrencies.
3. Describesupplyanddemandinthemarketforloanablefundsandthemarketforforeigncurrency
exchange.Howarethesemarketslinked?
Answer:
Thesupplyofloanablefundsarisesfromnationalsaving.Thedemandforloanablefundsarises
fromdomesticinvestmentandnetcapitaloutflow.Thesupplyinthemarketofforeigncurrency
exchangearisesfromnetcapitaloutflow.Thedemandinthemarketforforeigncurrency
exchangearisesfromnetexports.Thelinkbetweenthemarketsisnetcapitaloutflow.
4. Whatiscapitalflight?Whenacountryexperiencescapitalflight,whatistheeffectonthe
country'sinterestrateandexchangerate?
Answer:
Capitalflightiswheninvestorsmovetheirsecuritiesoutofaparticularcountrybecauseofafear
ofcountryspecificrisksorpoliticalinstability.Whenacountryexperiencescapitalflight,the
interestraterisesbecausethedemandforloanablefundsshiftsright.Whenacountry
experiencescapitalflightitscurrencydepreciatesandnetexportsrise.
5. Listandexplainthethreetheoriesforwhytheshortrunaggregatesupplycurveisupward
sloping.
Answer:
Thethreetheorieswhyshortrunaggregatesupplycurveisupwardslopingare:
1)StickywagetheoryInthistheory,alowerpricelevelmakesunemploymentandproduction
lessprofitablebecausewagescannotbeadjustedimmediatelytothepricelevel,sofirms
decreasethequantityofgoodsandservicessupplied.
2)StickypricetheoryInthistheory,anunexpectedreductioninpricelevelleavesfewfirmswith
highdesiredpricesbecauseallthepricearenotadjustedimmediatelytothechangingconditions,
whichreducesthesalesandhencefirmshastoreducethequantityofgoodsandservices
produced.
3)MisperceptionstheoryInthistheory,lowpricecausesmisperceptionsaboutrelativeprices
andtheseinducesthesupplierstoreacttothelowerpricelevelbydecreasingthequantityof
goodsandservicessupplied.
6. Whatmightshifttheaggregatedemandcurvetotheleft?Usethemodelofaggregatedemand
andaggregatesupplytotracethroughtheshortrunandlongruneffectsofsuchashiftonoutput
andthepricelevel.Usethefollowingdiagramtohelpexplainyouranswer.
Answer:
Theaggregatedemandcurvemightshifttotheleftwhenthereisreductioninconsumption
spending,reductionininvestmentspending,decreaseingovernmentspendingorreductioninnet
exports.Thefiguretracesthroughstepstoshiftinaggregatedemand.Theeconomybeginswith
equilibrium,withshortrunaggregatesupply,AS1,intersectsaggregatedemandAD1atpointA.
WhenaggregatedemandcurveshiftstoleftofAD2,theeconomymovesfrompointAtoB,
decreasingthepricelevelandquantityofoutput.Withtime,peopleadjusttheirperceptions,
pricesandwagesshiftingtheshortrunaggregatesupplydowntoAS2andmovingtheeconomy
frompointBtoC,whichisinthelongrunaggregatesupplycurveandlowpricelevel.
7. SupposetheFedexpandsthemoneysupply,butbecausethepublicexpectsthisFedaction,it
simultaneouslyraisesitsexpectationofthepricelevel.Whatwillhappentooutputandtheprice... View Full Attachment Show more
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