Subpart (a):
To show the effect of each event on the current account balance and the exchange rate.
Subpart (a):
Explanation of Solution
The US government cutting tax rate is an expansionary fiscal policy. When the exchange rates are fixed, an expansionary fiscal policy leads to an increase in the income. This would lead to a rise in the demand for imports and as a result, the current account balance would decrease. This is because the current account shows the difference between the exports and the imports. When the exchange rate floats, the increase in demand for imports may lead to an increase in the supply of dollar in the foreign exchange and as a result, the dollar may depreciate. Thus, under floating rates, though the current account balance would decrease, the impact may be partially reduced if the dollar
Concept Introduction:
Current account: The current account is the entry of all the transactions of a country's net export, net income on investment, and net transfers as a part of the balance of payment.
Exchange rate: It is the rate at which one currency is exchanged for another currency.
Fixed exchange rate: It is the system of exchange where the exchange rate will be fixed and pre-determined by the central authority. It will be free from the demand and supply of currency in the exchange market.
Floating exchange rate: The floating exchange rate system is a system in which the exchange rate is determined at the equilibrium of the
Subpart (b):
To show the effect of each event on the current account balance and the exchange rate.
Subpart (b):
Explanation of Solution
When the fixed exchange rates prevail, the inflation level in US makes the products less attractive and expensive. This will lead to an increase in the imports and decrease in the exports resulting in a decrease in the current account balance. When the exchange rate floats, inflation would lead to depreciation in the dollar and the current account remains unaffected.
Concept Introduction:
Depreciation of currency: It is the process of decreasing the value of a home currency with regard to another foreign currency in the currency exchange market.
Fixed exchange rate: It is the system of exchange where the exchange rate will be fixed and pre-determined by the central authority. It will be free from the demand and supply of currency in the exchange market.
Floating exchange rate: The floating exchange rate system is a system in which the exchange rate is determined at the equilibrium of the supply and demand for the currency. It will thus change the exchange rate according to the changes in the demand and supply.
Subpart (c):
To show the effect of each event on the current account balance and the exchange rate.
Subpart (c):
Explanation of Solution
When the US adopts an expansionary
Concept Introduction:
Appreciation of currency: It is the process of increasing the value of a home currency with regard to another foreign currency in the currency exchange market.
Depreciation of currency: It is the process of decreasing the value of a home currency with regard to another foreign currency in the currency exchange market.
Fixed exchange rate: It is the system of exchange where the exchange rate will be fixed and pre-determined by the central authority. It will be free from the demand and supply of currency in the exchange market.
Floating exchange rate: The floating exchange rate system is a system in which the exchange rate is determined at the equilibrium of the supply and demand for the currency. It will thus change the exchange rate according to the changes in the demand and supply.
Subpart (d):
To show the effect of each event on the current account balance and the exchange rate.
Subpart (d):
Explanation of Solution
When the consumers favor the domestically produced goods, the demand for imports decreases and this lead to a decrease in the demand for foreign currency. When the exchange rate is fixed, this would lead to an increase in the current account balance and when the exchange rate floats, this would lead to an appreciation of dollar. However, the impact on current account balance remains uncertain.
Concept Introduction:
Appreciation of currency: It is the process of increasing the value of a home currency with regard to another foreign currency in the currency exchange market.
Fixed exchange rate: It is the system of exchange where the exchange rate will be fixed and pre-determined by the central authority. It will be free from the demand and supply of currency in the exchange market.
Floating exchange rate: The floating exchange rate system is a system in which the exchange rate is determined at the equilibrium of the supply and demand for the currency. It will thus change the exchange rate according to the changes in the demand and supply.
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Chapter 34 Solutions
Principles of Economics (12th Edition)
- Production efficiency is most concerned with Choice of inputs in production process Quantity of outputs resulting from the production process The technological process of production All of the abovearrow_forwardChoose all of the following that are assumed to be constant while constructing the production possibilities curve Technology Precise mix of inputs Institutional arrangements like judicial protection of business contracts Outputsarrow_forwardA point that lies OUTSIDE of the PPC can be achieved if A major technological innovation increases production efficiency A sudden influx of resources e.g., massive immigration of trained nurses Economic reform resulting in greater protection of intellectual property rights All of the above Only options 1 and 2arrow_forward
- The marginal benefit from each successive unit of medical care consumed declines BECAUSE each successive unit is more expensive to produce True Falsearrow_forwardIn the Human Capital approach, estimated monetary worth of life is MOST SENSITIVE to which key indicator Discount rate Social security payroll taxes Labour market earnings Workplace injury compensationarrow_forwardOver the last few decades out-of-pocket costs have formed a DECLINING proportion of total consumer expenditure on medical care True Falsearrow_forward
- Cost benefit analyses often assumes the following about consumers EXCEPT Consumers have clear preferences among choices they are exposed to Consumers purposely choose actions that result in higher satisfaction Consumers factor in uncertainty of outcomes in their decision-making regarding net benefits and costs Consumers lack information about attributes of market goods that are necessary for ranking their choice setarrow_forwardThe TRUE relationship between MARGINAL utility and an individual’s stock of health can be best described as a scatter plot True Falsearrow_forwardMany health economists believe that the United States spends its MARGINAL dollars on healthcare in a highly wasteful manner. This view is also known as “flat of the curve” medicine. True Falsearrow_forward
- Increasing provision of out-of-pocket cost calculators by major insurers are attempts to REDUCE price transparency for consumers True Falsearrow_forwardA price hike for medical goods/services that have an inelastic (i.e., <1) own-price elasticity of demand will tend to yield lower revenues True Falsearrow_forwardRisk Loving people are willing to pay insurance premiums that exceed their expected losses True Falsearrow_forward
