PS5 - Department of Economics University of California,...

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1 Department of Economics Spring 2006 University of California, Berkeley Economics 182 Problem Set 5 Due in class on Thursday, April 20th To be handed at the beginning of lecture. Please write your name, GSI name and section time in your problem set. Question 1 Chapter 19 described how the US tried after 1985 to reduce its current account deficit by accelerating monetary growth and depreciating the dollar. Assume that the U.S. was in internal balance but external balance called for an expenditure-reducing policy (a cut in the government budget deficit) as well as the expenditure switching effect caused by currency depreciation. Explain using the II-XX framework how the use of monetary expansion alone would affect the U.S. economy in the short and long runs. Question 2 After 1985, the U.S. asked Germany and Japan to adopt monetary and fiscal policy expansion as ways of increasing foreign demand for U.S. output and reducing the American current account deficit. Would fiscal expansion by Germany and Japan have accomplished these goals? What about monetary expansion? Question 3 Suppose the U.S. and Japanese governments both want to depreciate their currencies to help their tradables industries but fear the resulting inflation. The two policy choices available to them are (1) expansionary monetary policy and (2) no change in monetary
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PS5 - Department of Economics University of California,...

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