Econ 204 Final

If 1.29 AUD = 1 USD then 1 AUD = ?

1.00 / 1.29 = 0.78 1 AUD = 0.78 USD

Which of the following best summarizes the Ricardian equivalence?

A government deficit increases private savings by the same amount

If a country's equilibrium is to the right of the Potential GDP line in the AD/AS model, what's the recommended policy?

Contractionary fiscal policy, to decrease growth and the risk of inflation

Despite running consecutive budget deficits for the past 50 years, the United States government increased government expenditure during the 2008 crisis and again during the COVID crisis, increasing the magnitude of the budget deficits during those two periods. Such economic decisions characterize a __________.

Countercyclical fiscal policy.

exchanging currency

Countries must exchange their currency for another country's currency.

In 2016, one U.S. Dollar could buy 3.25 Brazilian Reais. In 2021, one U.S. Dollar can buy 5.36 Brazilian Reais. This means that the Brazilian currency:

Depreciated or weakened

If a government decides to follow a countercyclical fiscal policy, how should it act during the booms and busts of the business cycle?

During the boom, the recommendation is to maintain or increase taxation and reduce government spending aiming to run a balance budget or a budget surplus; during the bust, it's time to cut taxes and increase government spending.

If a country runs many consecutive budget deficits but the level of __________ is high when compared to the level of __________, the risk of default and crisis is __________.

Foreign Direct Investment, Portfolio Investment in government bonds, smaller.

Assume a government decides to implement a new tax policy, resulting in a smaller budget deficit. Based on the national savings and investment identity, this would result in some combination of private investment, private savings, and/or trade deficit.

Higher; lower; lower

In 2021, the Canadian Dollar appreciated relative to the U.S. Dollar. Which of the following actors benefit and which are hurt from this movement in the exchange rate? I. A U.S. firm exporting goods to Canada II. A Canadian tourist visiting the US III. U.S. companies that previously invested in Foreign Direct Investment in Canada IV. A U.S. tourist visiting Canada

I. Benefit, II. Benefit, III. Benefit, IV. Hurt

Associate each term (Roman numbers) with their definition (capital letters). I. Hedge II. Arbitrage III. Purchasing Power Parity IV. Merged currency A. The process of buying and selling goods or currencies across international borders at a profit. B. The exchange rate that equalizes the prices of internationally traded goods across different currencies. C. An exchange rate policy in which more than one country shares the same currency. D. A financial transaction designed to protect an agent from an investment risk.

I. D, II. A, III. B, IV. C

Consider the four policies bellow. Classify them as either fiscal or monetary policy: I. The United States Government promoting tax cuts for small businesses to prevent a wave of bankruptcies during the COVID-19 pandemic II. The Congress approving a higher budget for the Affordable Health Care Act (also known as Obamacare) III. The Federal Reserve increasing the required reserves for commercial banks aiming to control the rise of inflation IV. President Joe Biden approving a new round of stimulus checks for households

I. fiscal, II. fiscal, III. monetary, IV. fiscal

Which of the following is correct about the national savings and investment identity?

If the government runs a budget deficit, it demands financial capital; if the government runs a budget surplus, it supplies financial capital

Assuming that the Ricardian equivalence holds completely true, what would be the impact of a $10 million increase in the government surplus of a country?

Private savings would decrease by exactly $10 million, so private investment and trade balance would stay constant

tariffs

Taxes on imported goods

An imaginary country estimates that their economy can be approximated by the AD/AS model below. How can this government act to move the equilibrium to potential GDP?

The AD/AS model shows that a contractionary fiscal policy is suitable, but the choice of increasing taxes, decreasing government expenditure or doing both simultaneously is mostly political

corporate income tax

a tax imposed on corporate profits

regressive tax

a tax in which people with higher incomes pay a smaller share of their income in tax (sales, tax, tobacco tax, etc.)

individual tax income

a tax on a person's earnings

estate and gift tax

a tax on people who pass assets to the next generation—either after death or during life in the form of gifts

progressive tax

a tax that collects a greater share of income from those with high incomes than from those with lower incomes (what the US income tax is)

proportional tax

a tax that is a flat percentage of income earned, regardless of level of income

free trade agreement

allows free trade between members (no tariffs or quotas).● North American Free Trade Agreement (NAFTA)● Replaced by US-Mexico-Canada Agreement (USMCA) in 2020● Asia Pacific Economic Cooperation (APEC)

expansionary fiscal policy

increases the level of AD, either through increases in gov spending or tax cuts - fiscal stimulus

budget deficit can result in:

inflow of foreign financial capital, a stronger exchange rate, and a trade deficit

import quotas

numerical limitations on the quantity of products that can be imported

absolute advantage

the ability to produce a good using fewer inputs than another producer

standardized employment budget

the budget deficit or surplus adjusted for what it would have been if the economy were producing at potential GDP - eliminates impact of automatic stabilizers

Forex market

largest market in the world economy

merged currency

when a nation chooses to use the currency of another nation

2020 national debt:

$27 trillion

protectionism

When a government legislates policies to reduce or block imports (tariffs, import quotas, non-tariff barriers)

contractionary fiscal policy

decreased the level of AD, either through cuts in gov spending or tax increases - fiscal contraction

Weaker US dollar benefits:

A US exporting firm, a foreign tourist in the US, a US investor abroad

richest country in 1900:

Argentina - has been defaulting every decade since 50s (defaulting causes bad recessions)

Arguments that are in support of restricting imports:

Infant Industry Argument, Anti-dumping Argument, Environmental Protection Argument, Unsafe Consumer Products Argument, National Interest Argument

WTO

organization that seeks to negotiate reductions in barriers to trade and to adjudicate complaints about violations of international trade policy.

US gov had a surplus in:

2000

The average level of tariffs on imported products charged by industrialized countries:

40% in 1946 • less than 5% by 1990• now less than 3%

Pro-cyclical

Consumption tends to fall in recessions and rise in booms

Reducing tax rates and increasing government spending are forms of ______, while increasing interest rates is ______.

Expansionary fiscal policy; contractionary monetary policy

Types of investments that require exchanging currency:

Foreign direct investment (FDI): purchasing a firm (at least 10%) or starting up a new enterprise in another country. AND Portfolio investment: an investment in another country that is purely financial and does not involve any management responsibility (most transactions are this)

____ is a less volatile investment and represents a ____ share of the international market when compared to ____.

Foreign direct investment; smaller; portfolio investment

What is not a probable outcome for a country that abandons protectionist policies and signs a free trade agreement?

Higher number and more diversified locally owned industries

When an economy is at Potential GDP level, a ____ budget deficit likely ____ interest rates and ____ private investment

Higher; increases; crowds-out

Consider a country with a budget surplus of $5, trade surplus of $4, and private savings of $6 (million). What is true?

Private investment = $7 million

merging currencies

The currency is made identical to currency of another nation - eliminates foreign exchange risk and nation has completely given up on domestic monetary policy

trade deficit

Trade deficit = international borrowing. This requires domestic residents to borrow the amount of the trade deficits from foreign residents EX: Suppose there are only 2 countries, Anne and Bob. Anne's exports to Bob equal $100 and Anne's imports form Bob = $125. This is possible only if Anne borrows $25 from Bob. Trade deficits imply a net inflow of foriegn financial capital (savings) Likewise, a trade surplus = international lending (outflow of financial capital)

Which strategy can the Peruvian Central Bank adopt if they wish to depreciate their currency w.r.t. the US Dollar?

Use Soles to buy US Dollars, decreasing the Dollar/Soles ratio

Keynesian response to a recession

Use expansionary fiscal policy to shift AD right and close recessionary gap

Hedge

Using a financial transaction as protection against risk. Ex: guaranteeing a certain exchange rate in the future.

Depreciating

a decrease in the value of a currency relative to other currencies Ex: $1 = 1 euro → $1 = 0.90 euro One dollar can now buy only 0.90 euros, so that the dollar is less valuable

Stronger US dollar benefits:

a foreign firm exporting to the US, a US tourist abroad, US consumers of imports, and a foreign investor in the US

Eurozone

a monetary union of 19 EU member states which have adopted the euro (€) as their common currency

payroll tax

a tax based on the pay received from employers; the taxes provide funds for Social Security and Medicare

excise tax

a tax on a specific good, like alcohol, tobacco, and gasoline.

economic union

allows free trade between members, a common external trade policy, and coordinated monetary and fiscal policies - European Union

consumer surplus

amount consumers willing to pay above what they actually paid

producer surplus

amount producers receive above what they would have been willing to accept

Appreciating

an increase in the value of a currency relative to other currencies Ex: $1 = 1 euro → $1 = 1.10 euro means that the dollar has appreciated relative to the euro

splitting up the value chain

different stages of production happen in different geographic locations.

budget deficit rises

domestic private investment falls, private savings rises, trade deficit rises

budget deficit falls

domestic private investment rises, private savings falls, trade deficit falls

A factory that closes 3 production plants in the US and opens one larger plant in Mexico is taking advantage of ____

economies of scale

specialization

increases productivity of labor because we become better at producing things when we each focus on a limited range of activities

PPP 2 functions:

international GDP comparison and other economic stats + can use for long-run predictions of exchange rate movements

intra-industry trade

international trade of goods within the same industry. For example, cars/car parts is one of the largest categories for US exports to Mexico and US imports from Mexico two reasons: 1. Gains from specialization and learning2. Economies of scale.

US debt =

largest debt in the world - but can borrow in its home currency - meaning we can never be forced to default (+interest rate on US debt is extremely low)

State and local spending

less than fed, largest spending category is public education

nontariff barriers

rules, regulations, inspections, and paperwork to make it more costly or difficult to import products Ex: rules requiring certain safety standards or origin regulations

revenue sources for state and local govs:

sales taxes, property taxes, revenue passed alone from federal government, personal and corporate income taxes

Purchasing Power Parity (PPP)

the exchange rate that equalizes the prices of internationally traded goods across countries

marginal tax rate

the tax rate an individual would pay on one additional dollar of income; the tax percentage on the last dollar earned

implementation lag

the time it takes for the funds relating to fiscal policy to be dispersed to the appropriate agencies to implement the programs

recognition lag

the time it takes to determine that a recession has occurred

legislative lag

the time it takes to get a fiscal policy bill passed

national debt

the total accumulated amount the government has borrowed, over time, and not yet paid back (sum of all past deficits and surpluses)

Keynesian response to inflationary booms:

use contractionary fiscal policy to to shift AD left and close inflationary gap

balanced budget

when government spending and taxes are equal

twin deficits

when the economy has both budget deficits and trade deficits (early 80s and 2000s)

budget surplus

when the government receives more money in taxes than it spends in a given year

budget deficit

when the government spends more money than it collects in taxes in a given year - how much the government has borrowed in one particular year - deficit is NOT the debt

Which of the following operations is responsible for the largest volume of transactions in the foreign exchange market?

Portfolio investment

How do Governments Borrow?

Private savings + inflow of foreign savings = private investment + Gov. deficit s + (m - x) = I + (G - T)

Environmental Protection Argument

Race to the bottom - when production locates in countries with the lowest environmental standards, putting pressure on all countries to reduce their environmental standards.

Which of the following sentences correctly describes the budget of the Federal Government of the Unites States during the past six decades?

Since 1961, the Government always runs in budget deficits, meaning it spends more money than it receives every year - except for the brief period of 1998 to 2001

crowding out

where government borrowing and spending results in higher interest rates, which reduces business investment and household consumption

Beth and Maria are two farmers with similar endowments of capital and labor, but their land differs in terms of productivity. Beth can produce 12 pounds of apples and 10 pounds of potatoes in a day, while Maria can produce 8 pounds of apples and 8 pounds of potatoes per day. According to the Ricardian theory, which of the following is true?

Beth has an absolute advantage in both apples and potatoes, but Maria has a comparative advantage in potatoes. So Beth should specialize in the production of apples, and exchange them for Maria's potatoes.

Consider these three international trade policies, currently in place in the United States: I. A 100% import tax for French products like Gruyere cheese and Champagne, established in 2020. II. A tariff-rate quota established by the United States government in 1990, that limits the quantity of sugar that the country can import from abroad. III. A ban on the imports of cars that fail to comply with the U.S. safety, bumper, and emission standards established in the Imported Vehicle Safety Compliance Act of 1988. Which alternative is correct?

I is a tariff, II is an import quota, III is a nontariff barrier, and they are all forms of protectionist legislation.

Foreign Direct Investment (FDI)

Investment made by a foreign company in the economy of another country.

Suppose that an economy had a budget deficit and a trade surplus in Year 1, but moved to a budget surplus and a trade deficit in Year 2. What's the impact of those changes on the flow of international capital and on the total supply of financial capital (if private savings and investment stay constant)?

Moving from a budget deficit to a budget surplus and moving from a trade surplus to a trade deficit both tend to generate an inflow of financial capital, so the total supply of financial capital will increase

During the mid-1980s, economists would call the budget deficit and the trade deficit the "twin deficits". However, when we analyze the movement of those variables through time, we know that they don't always move together. What can help explain why the budget deficit and the trade deficit don't move in lockstep?

The presence of investment and private savings in the savings and investment identity, which respond to changes in deficits as well

Consider a country that runs a budget deficit of $7 million and a trade deficit of $8 million. If private savings equals $2 million, which of the following is correct?

The supply of financial capital is $10 million, so private investment equals $3 million

Which of the following statements is incorrect about the production possibility frontier below?

This economy can produce 100 Kgs of coffee in an hour with their current technology.

what is INCORRECT about international trade?

Trade barriers remained mostly constant for the past 60 years

A ____ enters the investment-savings identity as a ____ of financial capital.

Trade surplus; demand

Biggest holder of US debt:

US and US investors - China and Japan close behind

In 2019, Brazil's budget deficit was 5.9% of GDP, while Argentina's was 4.4%. What can we infer from this data?

We can't infer their debt/GDP for 2019

In 2019, Japan had a debt/GDP ratio of 256.22%. For the same year, Germany had a debt/GDP ratio of 68.93%. What can we infer from that data?

We can't reach any conclusions about the government budget result of either Germany or Japan for the year of 2019.

gain from trade

a country can consume more than it can produce as a result of specialization and trade.

Dollarize

a country that is not the United States uses the U.S. dollar as its currency - Ex: Panama, Ecuador, Zimbabwe

Fed Gov growing?

a little, spending is usually 18-22% of GDP

economies of scale

as a firm produces more of a good, the average cost of producing each individual unit declines

Infant Industry Argument

block imports for a limited time, to give an infant industry time to mature, before it starts competing on equal terms in the global economy.

Anti-dumping laws

block imports that are sold below the cost of production by imposing tariffs that increase the price of these imports to reflect their cost of production.

hard exchange rate pegs

central bank intervenes in market to keep currency fixed at a certain level

floating exchange rates

completely determined by market forces - a country lets the Forex market determine its currency's value (US uses this, along with 40% of countries in the world) major concern = exchange rates can move a great deal in a short time

countercyclical

consumption rises in recessions and falls in booms

A country that wishes to increase their level of net exports should _____ ____ currency

depreciate their

soft exchange rate pegs

exchange rate is usually determined by market, but central bank sometimes intervenes

Weaker currency

exports less expensive / imports more expensive A weak currency can spur exports and economic growth - more AD

Stronger currency

exports more expensive / imports less expensive - less AD

value chain

how a good is produced in stages.

Cross-Country rates of return

if rates of return in a country look relatively high, then that country will tend to attract funds from abroad

Large short-run fluctuations in the exchange rate can:

produce an unstable business climate and cause problems in the banking sector

free trade price

results in gains from trade - total surplus increases in both countries - producers gain in exporting country and consumers gain in importing country

dumping

selling goods below their cost of production.

opportunity cost of production =

slope of curve

automatic stabilizers:

tax and spending rules that have the effect of slowing down the rate of decrease in aggregate demand when the economy slows down and restraining aggregate demand when the economy speeds up, without any additional change in legislation

annual budget deficit (or surplus)

tax revenue - spending (over a fiscal year)

comparative advantage

the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors

National Interest Argument

the argument that there are compelling national interests against depending on key imports from other nations. (E.g., oil, key tech or materials)

discretionary fiscal policy

the government passes a new law that explicitly changes overall tax or spending levels with the intent of influencing the level or overall economic activity

Foreign Exchange Market

the market in which people use one currency to buy another currency

Arbitrage

the process of buying a currency low and selling it high

Which sentence is incorrect about this production possibility frontier?

All points on the production possibility frontier are equally achievable with the given resources, and all points below and above the frontier are not achievable.

Consider a government that is anticipating a recession in the business cycle and decides to perform active policies in order to prevent it. Which of the options below best describes the type of policies that would most likely mitigate the effects of such a recession?

An expansionary fiscal policy (reduction in tax rates or increase in government spending) and/or an expansionary monetary policy, which would shift aggregate demand to the right

Unsafe Consumer Products Argument

Another argument for shutting out certain imported products is that they are unsafe for consumers. For imported products, WTO says: Countries can set their own safety standards. •Regulations must be based on science. • They should not arbitrarily or unjustifiably discriminate between countries where identical or similar conditions prevail.

For the next three questions, consider the table below, which shows how much olive oil and how much wine would Country Y and Country Z produce in a day, if they dedicated all of their available resources only for the production of that good. What's the opportunity cost of producing one bottle of olive oil for Country Y (in terms of bottles of wine), and the opportunity cost of producing one bottle of wine for Country Z (in terms of bottles of olive oil), respectively?

2 and 0.25

If each country completely specialized in the product in which they have a comparative advantage and traded half of their total production, what would be the final outcome?

Country Y would end up with 60 bottles of wine and 25 bottles of olive oil, while country Z would end up with 60 bottles of wine and 25 bottles of olive oil.

Suppose two farmers, Rocky and Daisy, who can produce the amount of cassava or mate showed on the table below if they use all their available resources only for the productions of that good. According to the Ricardian theory, which of the following is correct?

Daisy has an absolute advantage in both goods and a comparative advantage in the production of mate, so Daisy should specialize in mate, Rocky should specialize in cassava, and they should engage in trade

What would be the change (Δ) of the Consumer Surplus (CS) and Producer Surplus (PS) in those economies?

For France, ΔCS < 0 and ΔPS > 0 (consumers would be worse off and producers better off); for Morocco, ΔCS > 0 and ΔPS < 0 (consumers would be better off and producers worse off).

monetary policy

Government policy that attempts to manage the economy by controlling the money supply and thus interest rates.

Which of the following is not a likely consequence of protectionist policies?

Higher specialization on comparative advantageous industries

An increase in the size of the government deficit can generate a __________ demand for financial capital, __________ the interest rate and, therefore, generate a __________ level of private investment. A(n) __________ monetary policy could be pursued to lessen the impact of the growing deficit on the interest rate and private investment.

Higher; increasing; smaller; expansionary

Associate each concept (Roman numbers) with its definition (capital letters): I. Progressive Tax II. Excise Tax III. Proportional Tax III. Regressive Tax A. A tax applied to a particular good or service. B. A taxation system in which the higher the earnings, the higher the taxation rate. C. A taxation system that sets a flat percentage due in taxes, regardless of someone's income. D. A taxation system in which the higher the earnings, the smaller the share of taxes paid.

I. B, II. A, III. C, IV. D

Consider the four transactions below. Classify them as either Foreign Direct Investment (FDI) or portfolio investment: I. JBL (a Brazilian company) opens a whole new facility in the United States II. A Chinese investor buys bonds from an Indian company III. A Canadian beer brewery buys 5% of a German beer brewery IV. Nestlé (a Swiss company) buys 10% of Starbucks (a company based on the United States

I. FDI, II. portfolio, III. portfolio, IV. FDI

During an economic boom, a country experienced all the following situations. Classify them as either discretionary fiscal policy, monetary policy, or automatic stabilizers. Smaller government spending in unemployment benefits, due to the smaller level of unemployed people. A budget increase for state-provided health care, due to the approval of a new legislation. Open market operations by the Federal Reserve, aiming to decrease the circulation of money in commercial banks. An increase in the collection of taxes, due to the higher levels of profits and wages in the economy. A constitutional change to create a new tax over inherited property.

I. automatic stabilizer, II. discretionary fiscal policy, III. monetary policy, IV. automatic stabilizer, V. discretionary fiscal policy.

In November of 2021, one U.S. Dollar could buy 814 Chilean Pesos. In December of 2021, one U.S. Dollar can buy 840 Chilean Pesos. Which of the following agents were financially benefited and which were financially harmed by this exchange rate variation? I. A Chilean tourist visiting the United States II. A U.S. firm importing Chilean goods III. A Chilean company that holds portfolio investments in the U.S.

I. harm, II. benefit, III. benefit

Analyze the graph below, showing the Gross Federal Debt as a percentage of GDP for the United States (1939-2019). Which of the following is correct?

In 2019, the Federal Government of the United States had an accumulated debt/GDP higher than 100%, meaning that the amount of debt accumulated over time is higher than the value of all goods and services produced in that year.

Which of the following statements is incorrect about fiscal policy, investment, and economic growth?

In a market-oriented economy like the United States, the private sector is responsible for most of the investment in physical capital, human capital and new technologies, so the public sector often runs budget surpluses

portfolio investment

Investment in a foreign country via the purchase of stocks (equities), bonds, or other financial instruments. Portfolio investors do not exercise managerial control of the foreign operation.

Now assume that Argentina starts experiencing a relatively high rate of inflation when compared to the United State. How will that change the original equilibrium showed in the graph?

It will decrease the demand for Argentinian Pesos, shifting the demand curve to the right, and increase the number of people/businesses willing to sell Argentinian Pesos, shifting the supply curve to the left. This will depreciate the Argentinian Peso and have an unknown impact in the quantity of U.S. Dollars traded for Argentinian Pesos, pushing the equilibrium up.

Consider the model below, showing the supply and demand curves for the exchange market of U.S. Dollars and Euros. If the European Union announces that they want to pursue monetary policy in the near future to depreciate the Euro in the international market, how will that announcement change the original equilibrium shown in the graph? [Tip: pay attention to the axes labels

It will decrease the demand for Euros and increase the supply, so D shifts to the left, S shifts to the right, U.S. Dollar/Euro exchange rate decreases and the impact on the quantity traded is unknown.

For the next two questions, consider the model below, showing the supply and demand curves for the exchange market of U.S. Dollars and Argentinian Pesos. If the interest rate (rate of return) in Argentina increases (and in the U.S. stays the same), how will that change the original equilibrium shown in the graph?

It will increase the demand for Argentinian Pesos, shifting the demand curve to the left, and decrease the number of people/businesses willing to sell Argentinian Pesos, shifting the supply curve to the right. This will appreciate the Argentinian Peso and have an unknown impact in the quantity of U.S. Dollars traded for Argentinian Pesos, pushing the equilibrium down

Consider a country that is facing a supply crisis, and is planning to increase their imports as a way to make more goods available for households and businesses. Which movement in the exchange rate would benefit that policy?

Making the domestic currency stronger, which would harm exports but benefit imports

For the next two questions, suppose that France can produce an ounce of mozzarella cheese at the cost of $0.20/hour, and Morocco can produce an ounce of mozzarella cheese at the cost of $1.05/hour. If these economies decided to engage in free trade, what would happen with the price of mozzarella in France (PF), the price of mozzarella in Morroco (PM), the quantity of mozzarella supplied by France (QFS), and the quantity of mozzarella supplied by Morocco (QMS)?

PF would increase, PM would decrease, QFS would increase and QMS would decrease.

Which alternative best describes the history of the World Trade Organization (WTO)?

Since the average level of tariffs on imported products decreased during the past the past 60 years, the WTO shifted its focus to policies such as nontariff barriers in agriculture, intellectual property, and environmental impacts of production and trade.

Consider the list of situations below faced by an imaginary country that is suffering an economic crisis. Classify each situation as either a result of discretionary fiscal policy or an automatic stabilizer in the economy. I. Higher government spending in unemployment benefits due to a rise in the number of unemployed people II. A decrease in tax collection due to a decrease in business profits III. Higher public spending due to the introduction of a new emergency credit line for businesses, subsidized by the government IV. Smaller tax revenue resulting from an increase in the amount of households that fall under the poverty line V. Smaller tax revenue due to the approval of a bill that provides tax cuts for small businesses

Situations III and V are discretionary fiscal policy, and I, II and IV are automatic stabilizers

A Bank in Bangladesh borrows $10 million U.S. Dollars at a 2% interest rate from a United States Bank. The bank converts the loan to Bangladeshi Taka at an exchange rate of 80 Bangladeshi Taka to each U.S. Dollar, for a total of 800 million Taka. The bank lends the money domestically at a 5% interest rate. After one year, the loan is repaid with interest domestically (in Taka). However, the exchange rate is now 84 Taka to each U.S. Dollar. After converting all their Taka back to USD, the bank repays their $10 million loan (with interest). What is the profit or loss to Bangladeshi Bank from this process?

The Bangladeshi bank faces a loss of US$0.2 million

Assume that this country's Real GDP is already at the Potential GDP level and the Central Bank wants to counteract the change in private investment induced by the lower budget deficit in the previous question. What policy should the Central Bank pursue?

The Central Bank should perform a contractionary monetary policy, increasing interest rates and reducing the level of private investment, to avoid an overheated economy that would likely incur in inflation.

Consider the graph below, showing the supply and demand curves for the exchange market of U.S. Dollar and Swiss Francs. Originally, the equilibrium is at $1.08 Dollar/Franc, with a daily quantity of $4 trillion Francs traded for Dollars daily. If the Swiss National Bank decides to perform a soft peg exchange rate policy so that the exchange rate is at $1.10 Dollar/Franc (the annual average), like pictured below, which strategy could the Swiss National Bank perform?

The Swiss National Bank can use their reserves of Dollars to buy Francs, which would increase demand and decrease supply of Francs

Which of the following is not a possible consequence of chronic large budget deficits?

The country's currency might appreciate rapidly due to fears of default and increased supply and decreased demand for the currency

Imagine a country that, in Year 1, decided to start a 5-year investment plan that consists in building roads and electricity generation facilities. During those 5 years, the government deficit grew 0.5% per year. However, as a result of that investment, GDP grew 3% per year. Which of the following is correct?

The debt/GDP ratio likely decreased during that 5-year period, since the budget deficit was growing but the GDP was growing even faster.

For the next two questions, consider the graph below, showing the equilibrium interest rate and financial capital for an economy that runs budget deficits. If those budget deficits decrease, how will that impact the demand for financial capital, the interest rate and, therefore, private investment (everything else hold constant)?

The demand curve will shift to the left, decreasing the interest rate and likely increasing private investment.

Consider the model below, showing the supply and demand curves for the exchange market of U.S. Dollars and Euros. If the inflation rate in the European Union increases (and in the U.S. stays the same), how will that change the original equilibrium shown in the graph? [Tip: pay attention to the axes labels]

The demand for Dollars increases and the supply decreases, so D shifts to the right, S shifts to the left, the Euros/U.S. exchange rate increases and the impact on quantity traded is unknown.

Consider a country that runs a government budget surplus of $10 million and a trade deficit of $2 million. If private investment equals $20 million, which of the following is correct?

The demand of financial capital is $20 million and private savings equal $8 million

private investment

The flow of private-sector expenditures on durable assets (fixed investment) plus the addition to inventories (inventory investment) during a period. These expenditures enhance our ability to provide consumer benefits in the future.

production possibilities frontier

a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

international market

trading imports and exports with the rest of the world