1) In 2001, President George W. Bush and Federal Reserve Chairman Alan Greenspan were both concerned about a sluggish U.S. economy. They also were concerned about the large U.S. current account deficit. To help stimulate the economy, President Bush proposed a tax cut, while the Fed had been increasing U.S. money supply. Compare the effects of these two policies in terms of their implications for the current account. If policymakers are concerned about the current account deficit, discuss whether stimulatory fiscal policy or monetary policy makes more sense in this case. Then, reconsider similar issues for 2009-10, when the economy was in a deep slump, the Fed had taken interest rates to zero, and the Obama administration was arguing for larger fiscal stimulus. 2) For each of the following situations, use the IS-LM-FX model to illustrate the effects of the shock and the policy response. For each case, state the effect of the shock on the following variables (increase, decrease, no change, or ambiguous): Y, i, E, C, I, and TB. Note: In this question (unlike in the Work It Out question), assume that the government allows the exchange rate to float but also responds by using monetary policy to stabilize output. Hint: In each case, make use of the goods market equilibrium condition to understand what happens to consumption, investment, and the trade balance in the shift from the old to the new equilibrium. a. Foreign output increases. b. Investors expect an appreciation of the home currency in the future. c. The home money supply decreases. d. Government spending at home decreases.
1) In 2001, President George W. Bush and Federal Reserve Chairman Alan Greenspan were both concerned about a sluggish U.S. economy. They also were concerned about the large U.S. current account deficit. To help stimulate the economy, President Bush proposed a tax cut, while the Fed had been increasing U.S. money supply. Compare the effects of these two policies in terms of their implications for the current account. If policymakers are concerned about the current account deficit, discuss whether stimulatory fiscal policy or monetary policy makes more sense in this case. Then, reconsider similar issues for 2009-10, when the economy was in a deep slump, the Fed had taken interest rates to zero, and the Obama administration was arguing for larger fiscal stimulus. 2) For each of the following situations, use the IS-LM-FX model to illustrate the effects of the shock and the policy response. For each case, state the effect of the shock on the following variables (increase, decrease, no change, or ambiguous): Y, i, E, C, I, and TB. Note: In this question (unlike in the Work It Out question), assume that the government allows the exchange rate to float but also responds by using monetary policy to stabilize output. Hint: In each case, make use of the goods market equilibrium condition to understand what happens to consumption, investment, and the trade balance in the shift from the old to the new equilibrium. a. Foreign output increases. b. Investors expect an appreciation of the home currency in the future. c. The home money supply decreases. d. Government spending at home decreases.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Please help me with 1 and 2. Thank you
Transcribed Image Text:1) In 2001, President George W. Bush and Federal Reserve Chairman Alan Greenspan were
both concerned about a sluggish U.S. economy. They also were concerned about the large
U.S. current account deficit. To help stimulate the economy, President Bush proposed a
tax cut, while the Fed had been increasing U.S. money supply. Compare the effects of
these two policies in terms of their implications for the current account. If policymakers
are concerned about the current account deficit, discuss whether stimulatory fiscal policy
or monetary policy makes more sense in this case. Then, reconsider similar issues for
2009-10, when the economy was in a deep slump, the Fed had taken interest rates to
zero, and the Obama administration was arguing for larger fiscal stimulus.
2) For each of the following situations, use the IS-LM-FX model to illustrate the effects of
the shock and the policy response. For each case, state the effect of the shock on the
following variables (increase, decrease, no change, or ambiguous): Y, i, E, C, I, and TB.
Note: In this question (unlike in the Work It Out question), assume that the government
allows the exchange rate to float but also responds by using monetary policy to stabilize
output.
Hint: In each case, make use of the goods market equilibrium condition to understand what
happens to consumption, investment, and the trade balance in the shift from the old to the
new equilibrium.
a. Foreign output increases.
b. Investors expect an appreciation of the home currency in the future.
c. The home money supply decreases.
d. Government spending at home decreases.
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