Chat with AIExam 20: Macro Policy in a Global Setting
What has happened to the U.S.trade balance and exchange rate over the past 30 years? What happened to the size of the trade deficits after 2000?
(43) 
VerifiedThe U.S.exchange rate fluctuated significantly over the past 30 years.The U.S.trade balance, however, has had a deficit nearly every year since 1970.These trade deficits became much larger after 1995 until about 2007 when they fell..
What are the paths through which monetary policy affects the trade balance?
(29) VerifiedMonetary policy affects the trade balance primarily through its effect on income.Expansionary monetary policy increases income.The increase in income will result in an increase in imports with no change in exports, thus shifting the trade balance toward a deficit.Contractionary monetary policy lowers income, which lowers imports and makes a trade deficit smaller.
Monetary policy will also affect the trade balance in a variety of other ways, for example, through the effect on the domestic price level, the interest rate and the exchange rate.These other effects tend to be more long-run effects and tend to reinforce the income effect.Monetary policy affects the price level and the interest rate directly.It affects exchange rates through the interest rate path, the income path and the price level path.
How will restoring U.S.competitiveness affect U.S.macro policy in the future?
(36) VerifiedIn past recent years, foreign individuals and countries had a great demand for U.S.assets.If it were not for this, the long run situation would be less conducive to expansionary macro policy.Because of foreign asset purchases, the US was not forced to use contractionary macro policies to defend the dollar.
However, the high value of the dollar makes US goods and services non-competitive in foreign markets.At some point, foreigners will likely stop wanting to accumulate more U.S.currency or assets.When this happens, assuming nothing else changes, the dollar will depreciate until the US regains competitiveness in goods and services and is not running a trade balance deficit.
Foreign governments are not likely to provoke a crisis in the US economy because global economies are interconnected.However foreign pressure may slow growth in the US and makers of US macro policy will face less unpleasant trade-offs if US goods and services become more competitive in foreign markets.
Short Answer Questions
As special adviser for international economic policy, you have been called in to advise the President.For domestic reasons, the President has decided to attempt to stimulate the economy with a combination of increased deficit spending (expansionary fiscal policy) and loose money (expansionary monetary policy).Domestic considerations are the dominant factor in this decision, but your advice is sought as to the likely international consequences of this action.Of particular interest is the effect of this policy initiative on exchange rates and the trade balance.Give a complete explanation of the likely net effect of this policy.Include in your discussion the most important ways expansionary fiscal and monetary policy can affect exchange rates and the trade balance and also the separate net effects of expansionary fiscal and monetary policy respectively.
(37) Explain two different types of reasons domestic economic policy goals tend to get more attention than international economic policy goals.
(38) Is it preferable for a country to have a high or a low exchange rate? Explain.
(36) Imagine that Canada and the U.S.only trade internationally with each other.The Canadian government has recently undertaken an expansionary monetary policy.What impact will this have on the Canadian dollar exchange rate and Canada's trade balance? What impact will this have on the U.S.dollar exchange rate and U.S.trade balance? Briefly explain.
(49) What does internationalizing the debt mean? What is the potential problem with internationalizing the debt?
(34) Explain the effect of an expansionary monetary policy on the trade balance.
(34) What effect does a high exchange rate have on a country's exports and imports?
(29) Suppose the U.S wants to increase the value of the dollar relative to the Japanese yen.How might the U.S.achieve its goal without undertaking domestic policy changes, but rather by getting the Japanese to undertake some domestic policy?
(49) Define a trade deficit, and explain why there is debate over whether or not a trade deficit should be of concern to policy makers.
(35) What will be the effect of a contractionary monetary policy on the trade balance?
(27) Using the supply and demand diagram for euros, explain verbally and demonstrate graphically the effect of each of the following scenarios on the exchange rate for euros: (1) An increase in income in Europe; (2) An increase in the price level in the U.S.; (3) A decrease in the interest rate in Europe.
(48) For each of the following situations, state for each what aggregate demand policy the country was most likely following:
(a) The economy has been growing and experiencing inflation.At the same time interest rates have been declining while the trade deficit has worsened.
(b) The economy has been growing and experiencing inflation.At the same time interest rates have been rising while the trade deficit has worsened.In this case, rising interest rates failed to attract significant capital inflow.
(c) Inflation has subsided while the exchange rate has risen.
(d) The economy's competitiveness has eroded due to a rising exchange rate and domestic inflation and interest rates have risen.Still, the economy has been enjoying healthy growth.In this case, exchange rates have risen because rising interest rates attracted significant capital inflow.
(36) Is it desirable for countries to coordinate their monetary and fiscal policies, or does it work better to have each country decide its own policies independently? Explain.
(40) Why do governments try to coordinate with each other before adopting their monetary and fiscal policies? Give an example in terms of Canada and the United States.
(42) Using a supply and demand diagram for British Pounds, demonstrate graphically and explain in words how Great Britain can decrease the exchange rate value of the Pound by influencing the private supply of its currency.
(29) Under what macroeconomic conditions would a high exchange rate be better than a low exchange rate?
(33) 
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