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Macro discussion questions

D Q week 5
1. What is the impact of a trade deficit on the exchange rate value of the dollar? Make sure you explain how transactions in the foreign exchange market (as a result of the trade deficit) result in price pressures placed on this change exchange rate.

2. Address the economic motivations underlying international trade. Under what circumstances would two countries have no incentives to trade?

3. Provide an actual (real-world) example that could be used to demonstrate the price inelasticity of demand for a given good. Be sure to provide a quantitative definition of price inelastic demand as well as support for the real-world example you provide.

4. What is the purpose of anti-trust legislation? In your answer, be sure to include explicit benefits that can be realized by consumers as a consequence of the enforcement of this legislation. What are some potential costs (to consumers)?

5. Explain the Keynesian perspective with respect to deficit spending by the federal government.

6. Assume the banking system is in reserve equilibrium. The Fed conducts an open market purchase of Treasury securities in the amount of $1 billion. The reserve requirement against deposits is 10%. Identify the potential amount of the money supply increase as a consequence of the Fed's action and describe fully how money is created by the banking system subsequent to the Fed's open market purchase of Treasury securities in the amount of $1 billion.

7. Why does the Monetarist school of economic thought maintain that monetary stimulus is doomed to be ineffective in the long run?

8. Identify and explain significant aspects associated with the task of measuring unemployment. What people are not counted as being unemployed in the U.S. economy? Note: Do not merely describe how the unemployment rate is calculated; instead, make sure you explain the problems associated with measuring the unemployment rate.

9. A country operates under a flexible exchange rate system and is experiencing a deficit in its Current (trade) Account. Ignoring all other Balance of Payments categories, what should be the net effect of the trade deficit on the country's Capital Account? Explain.

10. Explain why, at one point in time, a Keynesian approach to managing the macro-economy might be appropriate while, at another point in time, a Classical approach might be more likely to produce a superior outcome. Make sure the outcome you address includes inflation and employment issues.
11.

What are the advantages and limitations of International Trade
b. What are the effects on international trade on the U.S. economy?
c. Explain how changes in fiscal and monetary policies affect exchange rate.

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1. What is the impact of a trade deficit on the exchange rate value of the dollar? Make sure you explain how transactions in the foreign exchange market (as a result of the trade deficit) result in price pressures placed on this change exchange rate.

A trade deficit results when a country imports more than it exports. It trades its currency for foreign currency as it pays for the imports. Because other countries need relatively fewer dollars to pay for imports from the US, the foreign currency market experiences an increase in dollars relative to other currencies. This drives down the price of dollars relative to other currencies, causing the exchange rate to fall.

2. Address the economic motivations underlying international trade. Under what circumstances would two countries have no incentives to trade?

International trade has long been accepted as the means by which economic growth can be maximized. Comparative advantage dictates that free trade is always in the best interest of everyone. Each country specializes in the goods it can produce most efficiently, and thus gains when it trades with other nations that have specialized in other goods. Two countries have no incentive to trade only when they can both produce the same goods with the same efficiently. If one country is able to produce anything more efficiently than the other, trade will be beneficial.

3. Provide an actual (real-world) example that could be used to demonstrate the price inelasticity of demand for a given good. Be sure to provide a quantitative definition of price inelastic demand as well as support for the real-world example you provide.

We say that demand is price inelastic when the quantity demanded changes by less than the percentage change in price. For example, if a 10% increase in price caused only a 1% change in quantity purchased, it would be inelastic.

Elasticity is affected by percentage of income spent on a particular good, whether it is essential, and whether there are substitutes for it. For example, teenagers have a much higher price elasticity of demand for cigarettes than do adults. Teenagers in general have much lower incomes than adults. They are usually attending school and so can work only part-time at most. Even if they drop out of school, their wages will be much lower that those of a college educated adult.

4. What is the purpose of anti-trust legislation? In your answer, be sure to include explicit benefits that can be realized by consumers as a consequence of the enforcement of this legislation. What are some potential costs (to consumers)?

Anti-trust legislation is designed to keep one company from controlling a market. When this occurs, the company often
reducing the quantity produced below what's socially optimal. In a competitive market, the socially efficient amount of each good is produced when firms equate marginal revenue with price. This is the socially efficient amount of each good, where social happiness is maximized. Using resources to produce any other type of good would create a less desirable outcome. When output of this most desired good is restricted, the price increases as consumers bid against each other. In this way the monopoly exploits the market mechanism.

Government regulation has been effective in breaking up and regulating monopolies. There are formulas that can be applied to tell regulators how concentrated a market has become. It can then determine rather a merger should occur, for example. In this way it can prevent monopolies from forming in the first place. If a monopoly exists, the government has to be careful not to cause undo hardship on consumers by breaking it up. If the monopoly is a natural one, then prices may actually increase if it is broken up. Natural monopolies are those industries in which efficiency increases with additional customers or area of service, such as utilities or telecommunications. Because the infrastructure is a major expense, but each additional customer costs little to service, it makes sense for one company to service everyone. Companies in these industries tend to merge because of the cost savings that can be realized from doing so. Because the industry tends toward one large seller, it is call a "natural" monopoly. This is opposed to a monopoly that exists because a company has engaged in unethical practices to rid itself of competitors. Clearly the government needs to break up unnatural monopolies. Because natural monopolies are often present in industries that are vital to communities, such as utilities and communications, they need to be regulated rather than broken apart. The government needs to ensure that they don't leave certain less profitable areas without service and that public receives necessary services at a reasonable price. Because monopolies can be efficient through economies of scale, sometimes breaking them up results in a decline in overall welfare.

5. Explain the Keynesian perspective with respect to deficit spending by the federal government. ...

Solution Summary

Trade deficits, anti-trust legislation, deficit spending, etc.

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