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EXAM 2 Makeup |
ANSWER THE FIRST TWO QUESTIONS AND EITHER 3 OR 4. BE SURE TO EXPLAIN YOUR REASONING.
1. It is 2005 and Europe has successfully moved to a single currency, the Euro, and a common monetary policy. All has gone unexpectedly smoothly in the transition and all the nations of the European Monetary Union the whole region have experienced healthy growth and overall economic stability. But now Italy has begun to revert to its old practice of increasing government spending and financing it by deficits. Her deficits grow larger each year.
a. What short run impact will this have on y, c, i, and x in Italy in the short run and in the long run? Explain.
b. What short run impact, if any, do you think this will have on the other economies of Europe? Explain.
c. What long run impact will this have on real interest rates in Italy? Explain.
d. What long run impact will this have on the real value of the Euro on the international market? Explain.
e. Is there likely to be any long run impact from Italy’s growing structural deficit on the other European economies? Explain.
2. One of the most important areas in macroeconomic policy-making is the topics discussed under the umbrella of the Phillips Curve.
a. What is the modern Phillips Curve and how does it differ from the original Phillips Curve in its underlying theory of economic cause and effect? Be specific.
b. In what ways has the modern Phillips Curve changed macroeconomic policy-making in recent years. That is, how have basic implications of this approach changed aggregate demand policies around the world? Explain.
3. a. "The notion of comparative advantage is a powerful and important concept in understanding the unequal distribution of incomes across nations and across individuals. But it is a very incomplete, at best, explanation of "why nations trade" and what underlies the "gains from trade." If you've got a clear and strong comparative advantage, you're one of the lucky ones and you'll benefit greatly from trade. But if you're not so blessed as to have a strong comparative advantage in anything, then you'll simply be left behind. This is as true for individuals as it is for nations." Do you agree or disagree? Explain.
b. "The dark side of a trade surplus is a capital account deficit. Sustaining a trade deficit is easy and natural in a growing economy. But sustaining a trade surplus ultimately drains your capital and must eventually turn even the strongest economy toward stagnation and decline." Do you agree or disagree? Explain.
4 a. Suppose the ever-unpredictable average American takes a sudden fancy to French culture and life-style, including longer vacations, shorter work weeks, earlier retirement, liberal unemployment benefits and, in general, a more relaxed attitude toward work and material rewards. Explain what impact you would expect the resulting increase in the U.S. natural rate of unemployment (NAIRU) to have on
b. "'Expectations' has been an important addition to macroeconomic analysis and has changed our understanding of stabilization policy considerably. Among the lessons learned is the vulnerability of the economy to self-fulfilling prophesies. We live in a delicate balance in which the actual inflation rate is as much a function of inflation expectations as it is the actual policies and real events in the economy. Prospects for inflation stability in such a setting are not good." Do you agree or disagree? Explain.