Handout 13 - view that American ²nancial crisis has...

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Econ 3140-2 Fall 2009 Handout #13 1. In today°s world of ±exible exchange rate, several facts stand out: (a) For years, America has both low saving rates and current account de²cits toward the rest of the world, (b) America is either the most important trading partner for many countries including Japan and China, or the major investor in their assets for other economies like India, (c) In the current crisis, growth rates have reduced in all countries, turning negative for America and Japan, and slowing down for India and China, (d) The nominal exchange rate of America has appreciated against currencies in the rest of the world. Discuss step by step (also using diagrams) how such facts are consistent with the
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Unformatted text preview: view that American ²nancial crisis has triggered the world wide recession 2. (a) During the Great Depression, up to the Bank Holiday of 1933 , the American Money Supply fell, even though the Money Base was slightly rising. Explain algebraically with the formula of the money multiplier, how this phenomenon was caused by which party due to what motives. (b) Given the public pessimism about the economy, as the interest rate was near the Zero Bound, would it make any di/erence if the Federal Reserve reduces the minimum deposit reserve requirement? (c) Explain with an asset market diagram, what happens to individual behavior if sustained de±ation is to stay? 1...
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