test3

Suppose that real GDP is currently $20.1 trillion, potential GDP is $23.8 trillion, the government purchases multiplier is 1.1, and the tax multiplier is -1.2. Holding other factors (such as prices and interest rates) constant, how will taxes (T) need to change to bring the economy to equilibrium at potential GDP?

-3.08

The exchange rate of dollars per euro is currently $1.00 = €0.95. The U.S. and the European Union allow their currencies to float. Suppose the price of a 2015 Lexus LS600H sedan sells for $113,000 in the United States and €76,000 in Germany. For purchasing power parity of the Lexus sedan, what must this exchange rate become? Specifically, how many euros must $1.00 U.S. dollar be able to buy?

.67

Suppose the exchange rate between the Japanese yen and the U.S. dollar is ¥90 = $1.00 and the exchange rate between the euro and the U.S. dollar is $1.00 = €0.90. What is the exchange rate between the yen and euro? Specifically, how many Japanese yen is one euro worth? Provide your answer in Japanese yens rounded to one decimal place.

100

A bottle of wine made in the European Union sells for €136. Suppose the exchange rate of U.S. dollars for euros changes from $1.00 = €0.85 to $1.00 = €0.73. What has happened to the cost of the bottle of wine in the U.S.? That is, what is the change in the cost of the bottle of wine for consumers in the U.S. in dollars?

26.3

In 1988, George H. W. Bush ran for President pledging, "Read my lips: no new taxes," and he was elected. Nevertheless, in 1990, he signed a budget agreement with Congress that increased several existing taxes. Consider the aggregate demand-aggregate supply diagram below, which represents the macroeconomy. Suppose the market is initially at an equilibrium at point A. What effect will the tax increase have on this economy?

Actual GDP will decrease.

Although the U.S. and most other countries allow their currencies to float, their exchange rates do not completely adjust such that there is purchasing power parity. What are the reasons why the exchange rate for dollars and the currencies of other countries might not completely adjust such that there is purchasing power parity? Indicate reasons why purchasing power parity does not exist perfectly.

Countries impose tariffs. Services cannot be traded internationally.

What might prevent quick or immediate price adjustments with rational expectations, such that there is a trade-off between inflation and unemployment?

Collective bargaining agreements. Annual contracts.

On June 1, 2016, the exchange rate for U.S. dollars and euros was approximately $1.00 = €0.90, as shown in the market for U.S. dollars below. During President Donald Trump's first 100 days as President, he said he prefers a "low interest rate policy:" "The President said that a strong dollar 'sounds good', but added that 'our dollar is getting too strong...it is very, very hard to compete when you have a strong dollar and other countries are devaluing their currency'. He also said that he 'likes a low interest rate policy' and that Janet Yellen is 'not toast'." (Financial Times, "President Trump Abandons the Strong Dollar Policy," April 15, 2017). Suppose President Trump will be successful in lowering interest rates in the U.S. (relative to interest rates in the European Union). As a currency speculator, how should you respond before the interest rate change in order to profit?

Convert dollars to euros.

According to supply-side economics, how can the government promote economic growth?

Lower income taxes to encourage work. Lower capital gains taxes to encourage saving. Lower corporate taxes to encourage investment spending.

In 1988, George H. W. Bush ran for President pledging, "Read my lips: no new taxes," and he was elected. Nevertheless, in 1990, he signed a budget agreement with Congress that increased several existing taxes. Consider the aggregate demand-aggregate supply diagram below, which represents the macroeconomy. Suppose the market is initially at an equilibrium at point A. What effect will the tax increase have on this economy?

Employment will decrease.

In December 2017, the Trump Administration and the U.S. Congress passed tax reform legislation, the 2017 Tax Cuts and Jobs Act, that cut corporate taxes from 35 percent to 21 percent. Consider the aggregate demand-aggregate supply diagram below, which represents the macroeconomy. Suppose the market is initially at an equilibrium at point A. What effect will the tax cuts have on this economy?

Employment will increase.

In December 2017, the Trump Administration and the U.S. Congress passed tax reform legislation, the 2017 Tax Cuts and Jobs Act, that cut corporate taxes from 35 percent to 21 percent. Consider the market for money illustrated in the figure below. Assume the market initially (just prior to the legislation) is in equilibrium at point A. What effect will the tax cuts have on the market for money?

Interest rates will increase.

Consider the short-run and long-run Phillips Curves illustrated in the figure below. Suppose consumers have adaptive expectations, the inflation rate is 5 percent, and the unemployment rate is currently at 6 percent, which is the natural rate of inflation. The Federal Reserve decides that it wants to reduce the unemployment rate. How can the Fed use monetary policy to achieve this objective (of reducing the unemployment rate)?

Lower the target federal funds rate.

Suppose it is the late 1970s, and the rate of price inflation is 12 percent. The Fed chairman, Paul Volker, seeks to permanently lower the rate of inflation (say, from 12% to 8%). The short-run and long-run Phillips Curves for the U.S at this time are illustrated in the figure below. Throughout this analysis, assume consumers have adaptive expectations.

Sell treasuries.

Identify a historical period when empirical data in the United States suggested a stable trade-off between inflation and unemployment.

The 1950s.

The Central American country of Belize is one of approximately 14 Caribbean community countries that pegs its currency to the U.S. dollar. The pegged rate is 2 Belize dollars equal 1 U.S. dollar (2 BZD = 1 USD or 1 BZD = 0.50 USD). This is illustrated in the figure below. How will the actions of speculators affect this market?

The Belize dollar supply curve will shift to the left and the Belize dollar demand curve will shift to the right.

Suppose the exchange rate of U.S. dollars for Japanese yen changes from $1.00 = ¥ 100 to $1.00 = ¥ 120. What effect will this have on the U.S. net exports?

The U.S.'s net exports will decrease.

The West African CFA franc and the Central African CFA franc are two currencies that are pegged to the euro. Currently, these fixed exchange rates are (both) 100 CFA francs = 0.15 euros (€) or 666 CFA francs = 1 euro (€). This is illustrated in the figure below. What, if anything, must the West and Central African governments do to maintain the pegged exchange rate?

The West and Central African governments must buy euros with CFA francs.

In the 1990s, the Thai baht was pegged to the U.S. dollar at a rate of $1.00 = 25 baht. This is illustrated in the graph for U.S. dollars below. How will the actions of speculators affect this market?

The dollar supply curve will shift to the left and the dollar demand curve will shift to the right.

On June 1, 2016, the exchange rate for U.S. dollars and euros was approximately $1.00 = €0.90, as shown in the market for U.S. dollars below. Suppose the interest rate is expected to fall in the European Union (relative to the interest rate in the U.S.). How would this affect the figure below?

The dollar supply curve would shift to the left and the dollar demand curve would shift to the right.

On June 1, 2016, the exchange rate for U.S. dollars and euros was approximately $1.00 = €0.90, as shown in the market for U.S. dollars below. During President Donald Trump's first 100 days as President, he said he prefers a "low interest rate policy:" "The President said that a strong dollar 'sounds good', but added that 'our dollar is getting too strong...it is very, very hard to compete when you have a strong dollar and other countries are devaluing their currency'. He also said that he 'likes a low interest rate policy' and that Janet Yellen is 'not toast'." (Financial Times, "President Trump Abandons the Strong Dollar Policy," April 15, 2017). Suppose President Trump will be successful in lowering interest rates in the U.S. (relative to interest rates in the European Union). How would this affect the figure below?

The dollar supply curve would shift to the right and the dollar demand curve would shift to the left.

Suppose it is 1975 and the unemployment rate is 8.5 percent. The rate of inflation is 9.1 percent. President Gerald Ford has pledged to bring down the rate of inflation. Suppose Ford plans to use fiscal policy to do this. Show the effects of his plans in the Phillips Curve diagram below. Assume consumers have adaptive expectations. This is because the government has been pledging to reduce the rate of inflation for several years but has not remained committed enough to do so. Therefore, people will not believe the inflation rate is lower until they have seen that it is actually lower. Describe the new short-run Phillips Curve with adaptive expectations.

The short-run Phillips Curve shifts downward.

Suppose it is 1975 and the unemployment rate is 8.5 percent. The rate of inflation is 9.1 percent. President Gerald Ford has pledged to bring down the rate of inflation. Suppose Ford plans to use fiscal policy to do this. Show the effects of his plans in the Phillips Curve diagram below. Assume consumers have adaptive expectations. This is because the government has been pledging to reduce the rate of inflation for several years but has not remained committed enough to do so. Therefore, people will not believe the inflation rate is lower until they have seen that it is actually lower. Describe the new short-run unemployment rate and inflation rate.

The unemployment rate will increase and the inflation rate will decrease.

Suppose it is the late 1970s, and the rate of price inflation is 12 percent. The Fed chairman, Paul Volker, seeks to permanently lower the rate of inflation (say, from 12% to 8%). The short-run and long-run Phillips Curves for the U.S at this time are illustrated in the figure below. Throughout this analysis, assume consumers have adaptive expectations. The Federal Reserve decides that it wants to permanently reduce the inflation rate to 8 percent and uses monetary policy to do so. Describe the new long-run unemployment rate and inflation rate.

The unemployment rate will not change and the inflation rate will decrease.

The Central American country of Belize is one of approximately 14 Caribbean community countries that pegs its currency to the U.S. dollar. The pegged rate is 2 Belize dollars equal 1 U.S. dollar (2 BZD = 1 USD or 1 BZD = 0.50 USD). This is illustrated in the figure below. At the pegged rate, is this currency market in equilibrium?

There is a shortage of Belize dollars.

During President Donald Trump's first 100 days as President, he said he prefers a "low interest rate policy:" "The President said that a strong dollar 'sounds good', but added that 'our dollar is getting too strong...it is very, very hard to compete when you have a strong dollar and other countries are devaluing their currency'. He also said that he 'likes a low interest rate policy' and that Janet Yellen is 'not toast'." (Financial Times, "President Trump Abandons the Strong Dollar Policy," April 15, 2017). Suppose President Trump will be successful in lowering interest rates in the U.S. (relative to interest rates in the European Union). What effect will this have on U.S. exports?

U.S. net exports to the E.U. will increase.