Fiscal & Monetary (Combo) Cheat Sheet

Fiscal & Monetary (Combo) Cheat Sheet

2019 Macro Set 2, FRQ #2, FOREX

2019 Macro FRQ #2 Set 2

 a) Current account balance is zero or balanced therefore (exports = imports)
If real US income increases then we could assume that imports will increase. Think about this from the perspective that a society that is wealthier will tend toward importing more goods from other countries. If imports > Exports then we have a current account deficit.

b) Understanding that as real income increases, imports increase. US citizens are importing more goods from the EU and therefore the EU is exporting more goods to the US. US citizens therefore dump US$ into the Forex demanding and buying Euros. Value of the € increases as demand for the € increases.

(i) If the interest rate is increasing in the EU then US citizens will buy Euros and deposit them into EU banks to get the higher rate of interest. The US will have a capital outflow as currency leaves the US and is a capital inflow into the EU. As US citizens dump their $ into the FOREX the demand for the US$ decreases and the value of the US$ decreases.

2019 Macro Set 2, FRQ #1, Long-Run, Fiscal, LRAS Shift

2019 Macro FRQ #1 - Set 2

watch me answer it here

https://youtu.be/V-l6jzJQw9I

1) Assume Artland is operating above full employment.

                           (Above full employment = Inflationary scenario)

(ii) If there is no Fiscal or Monetary policy workers will demand higher wages in an inflationary scenario, this shifts the SRAS curve to the left. Higher wages cause business to raise the prices for their goods and services they produce and output returns to the full employment level as demand for these more expensive goods and services falls.

(i) Government spending can decrease

(ii) The unemployment rate will increase - the NRU will not be affected

(iii) Price level in (b) higher or lower than in (c) - (b) has a higher PL

GS decreases & AD shifts left
Lowering the PL

The price level in (c) is lower as Aggregate Demand shifts to the left with the fiscal policy action of a reduction in government spending.

Equilibrium interest rate will decrease as less government spending implies the government isn't borrowing from the loanable funds market. This could have been shown with either an increase in SLF (like I did) or even better a decrease in the demand for loanable funds.

Either is correct and acceptable

2) LRAS curve will shift to the right in the long run as a lower interest rate will increase investment and therefore capital formation causing LR economic growth.

2019 Macro FRQ #3

2019 Macro FRQ #3

If Econoland's Real Interest Rate is falling citizens take their currency into the FOREX buying foreign currency's to invest in the foreign investment assets to get higher Real rates of interest.

More Foreign Investment Assets

(c)(i)(1) & (2) Currency value will decrease

(c)(ii) Econoland's central bank will buy currency reducing the supply of Econoland's currency and driving the value back up.

2019 Macro FRQ #2

2019 Macro FRQ #2

Actual inflation is less than the Expected Inflation

As the actual rate of inflation is below the expected rate lenders are better off.

Think of it like this.

Your a banker you need 5% profit and you expect inflation to be 3% this year, 

If you just charged 5% at the end of the year the 3% inflation 

would have decreased what you gained on the loan to 2%

5% Nominal rate - 3% Inflation rate = 2% Real rate

so,

If you know you need to make 5% and inflation is expected to be 3% 

you make the rate of interest on your loan to be 8%.

8% nominal rate - 3% Inflation rate = 5% Real rate

as,

The actual inflation rate was less than the 3% expected rate

lenders would be better off as they make more profit 

due to lower actual inflation rates.

The natural rate of unemployment is not affected by by changes in the price level in the LR.

Remember that the NRU includes frictional and structural

Cyclical is not included into the NRU 

Cyclical has to do with recessions and inflationary scenarios

So changes due to AD/AS changes do not effect the NRU

What would affect the LRPC

1) Increased Unemployment Benefits attract citizens to stay unemployed longer shifting the LRPC to the right (Higher Natural Rate of Unemployment)

2) Higher Minimum wage rates - shifts the LRPC to the right

3) Frictional Unemployment increases - LRPC shifts right

4) Structural Unemployment Increases - due to better tech making jobs obsolete. LRPC shifts right.

5) Better ways for unemployed and employers to meet would shift the LRPC left reducing unemployment in the long run.