SIE 14 fiscal policy and trade

exchange rate

The measure of how much one currency is worth in relation to another.

credit items (balance of trade)

1. exports 2. foreign spending in the US

debit items (balance of trade)

1. imports 2. US investments abroad 3. US bank loans abroad 4. US foreign aid

2 distinct policies (that impact our economy)

1. monetary 2. fiscal

fiscal policy

- attempts to manage the economy by controlling taxing and spending (tax policy and budget decisions) - enacted by president and congress - based on the assumption that the gov't can control such economic forces (unemployment levels and inflation) by adjusting overall demand for goods and services - lengthy: not efficient for short-term problems - demand-side economics; supply-side economics

Surplus in the balance of payments

- credits > debits - more money flowing into the US than out - exports > imports - increase money supply; grow economy

deficit in the balance of payments

- debits > credits - more money flowing out of US than in - imports > exports - may occur when interest rates in another country are high b/c money flows to where it earns the highest rate of return - decrease money supply; slowing economy

Keynesian Theory

- economic theory (under fiscal policy) that holds that ACTIVE GOV'T involvement in the economy is vital to the health and stability of the econ. - demand for goods ultimately controls employment and prices - gov't's right and responsibility to manipulate overall demand (by changing gov't spending and taxation) - artificially manipulate econ - increase spending (demand) and decrease taxes; increase consumer $ - decrease spending (demand) and decrease taxes; increase consumer $

supply-side economics

- economic theory holding that the key task for fiscal policy is to STIMULATE the SUPPLY of goods, as by CUTTING TAX rates. - allow market forces to determine price of goods - believe fed gov't should reduce gov't spending as well as taxes - focus: creating healthy env. for business: decreasing tax and regulatory burden on businesses

monetary policy

- gov't's attempt to manage the economy by controlling the money supply (and thus interest rates) - FRB encourages this policy to influence money supply

dollar rises

- when the price of US products cost more compared to another currency - exports will decrease - imports will decrease

dollar declines

- when the prices of US products cost less in terms of foreign currency - exports will increase - imports will decrease

Fiscal policy seeks to encourage or discourage economic activity through the A) use of government spending and taxation. B) management of money supply and government spending. C) management of money supply and taxation. D) use of government spending and interest rate controls.

A) use of government spending and taxation. - fiscal policy: use of gov't spending and taxation to smooth out the business cycle - monetary policy: interest rates, money supply

In regards to fiscal policy, which of these statements is correct? I. Fiscal policy is considered the most efficient means to solve short-term economic problems. II. Fiscal policy is not considered the most efficient means to solve short-term economic problems. III. Fiscal policy refers to governmental budget decisions enacted by the U.S. President and Congress. IV. Fiscal policy refers to governmental budget decisions enacted by the U.S. President and the cabinet. A) I and IV B) II and III C) II and IV D) I and III

B) II and III II. Fiscal policy is not considered the most efficient means to solve short-term economic problems. - political process determines fiscal policy, which takes time III. Fiscal policy refers to governmental budget decisions enacted by the U.S. President and Congress.

All of the following would decrease the U.S. balance of payments deficit except A) an increase in exports of domestic goods from the United States. B) a decrease in purchases of U.S. securities by foreign investors. C) a decrease in imports of foreign goods into the United States. D) a decrease in dividend payments by U.S. companies to foreign investors.

B) a decrease in purchases of U.S. securities by foreign investors. - anything that will bring foreign money to the US will decrease the balance of payments - foreign investors pulling their money out of the US or investing less in the US will increase the US deficit

Sparkly florescent earbuds made in the U.S. by Irksome, Inc., are suddenly popular in Asia. People from Canton to Calcutta are buying them in huge numbers. This is mostlikely to cause A) the trade surplus to decrease, or deficit to increase . B) the trade deficit to decrease, or surplus to increase. C) something, but the impact is unpredictable. D) no effect on the balance of trade.

B) the trade deficit to decrease, or surplus to increase. - increased demand for US product will increase exports, shrinking the deficit, growing the surplus

Your client, Ann Porter, likes fast cars and has been saving for a high-end Italian sports car. She recently saw a report that said the dollar was likely to drop in the near future. She is concerned that this might affect her plans to buy her dream car next year. You tell her A) she should not waste her money on a fancy car. B) yes, it will likely cost her more to buy the car if the dollar drops. C) yes, it will likely cost her less if the dollar drops. D) no, it should have no impact on her plans at all.

B) yes, it will likely cost her more to buy the car if the dollar drops. - weakening dollar --> more expensive foreign car (in US dollars)

Which of the following economists is considered a supporter of demand-side economics? a. Adam Smith B. John Maynard Keynes c. Arthur Laffer d. Milton Firiedman

B. John Maynard Keynes - Keynes was the first demand-side economist - by increasing income available for spending and saving, a gov't could increase demand, improving economy - tenets: higher taxes and gov't spending

You should expect which of these to occur when the dollar strengthens against other currencies? I. Imports will become more expensive II. Imports will become less expensive III. Inflation will go down IV. Inflation will rise A) II and IV B) I and III C) II and III D) I and IV

C) II and III II. Imports will become less expensive III. Inflation will go down - as dollar strengthens, cost of imports goes down - domestic producers will need to compete with less expensive imports - this keeps prices from rising, reducing inflationary pressures

Demand-side economics call on the federal government to do which of the following to encourage economic activity? A) Decrease regulation B) Increase tax rates C) Lower personal income tax rates D) Decrease government spending

C) Lower personal income tax rates - a demand-side (Keynesian) would call for lower taxes on consumers and increased government spending - little emphasis is placed on regulatory burden

A supply-side approach to fiscal policy will use all of these tools EXCEPT: A) decreasing tax rates on business entities. B) providing tax credits to small business. C) personal income tax rebates. D) decreasing government regulatory costs.

C) personal income tax rebates. - supply-side fiscal policy seeks to create a better environment for business to thrive - end goal: growing economy that creates jobs - trickle-down economics: emphasis on business more than consumer - decrease taxes - decrease government regulation costs - tax credits to small business

It would be reasonable to expect an increase in exports from the United States if which of these occurred? I. The dollar strengthened against the euro II. The yen strengthened against the dollar III. The Swiss franc weakened against the dollar IV. The dollar weakened against the British pound A) I and IV B) II and III C) I and III D) II and IV

D) II and IV II. The yen strengthened against the dollar IV. The dollar weakened against the British pound - US exports should increase when foreigners have greater purchasing power - this occurs when foreign currency > US $

The principles of demand-side theory were laid out in the 1936 book, The General Theory of Employment, Interest, and Money written by who? A) Milton Friedman B) Adam Smith C) Arthur Laffer D) John Keynes

D) John Keynes - Keynesian theory - gov't spending encourages economy and stimulates consumer

all of the following situations could cause a fall in the value of the US dollar in relation to the Japanese yen EXCEPT: a. Japanese investors buying US treasury securities b. US investors buying Japanese securities c. an increase in Japan's trade surplus over that of the US d. a general decrease in US interest rates

a. Japanese investors buying US treasury securities - increased foreign investment in the US would raise the US dollar's relative value - (D) decrease in US interest rates would chase money out of the US, increase foreign currency's relative value - (B) US investors buying Japanese securities would raise the value of the yen, causing dollar value to fall - (C) US consumers buying more Japanese goods than Japanese buy US goods (dollar should fall relative to yen)

Which organization or governmental unit sets fiscal policy? a. Federal Reserve Board (FRB) b. Government Economic board c. Congress and the President d. Secretary of the Treasury

c. Congress and the President - congress & president set Fiscal Policy - the FRB sets monetary policy

balance of payments

flow of money between the US and other countries

balance of trade

the difference between a country's total exports and total imports