Problem Set #7
Posted:
Wednesday, May 2, 2001
Due Date:
Wednesday, May 9, 2001
Please remember to write your TA’s name and section time on the front page or your problem set.
1.
The
Asian miracle (i.e. the very high average growth rates in East Asia during the
last few decades) is mainly due to high investment rates and adoption of
foreign technology.
2.
One
explanation for the Asian financial crisis was the fact that the affected
countries had been borrowing in their own currencies to finance projects whose
returns were fixed in foreign currency.
3.
During
the last 40 years the US federal budget has been mostly in deficit.
4.
Greenspan’s
monetary expansion policy in the 1990s overcame the fiscal restraint of the
structural tax increase, supporting growth while leading to budget surplus.
5.
Investors
should prefer to buy government bonds from countries with the highest nominal
interest rate.
6.
In
mid 1998, the US yield curve was only slightly upward slopping, i.e., the
medium term interest rates were slightly higher than the short term, and the
long term interest rates were slightly higher than the medium term. This was consistent with the hypothesis that
financial markets expected the Fed to increase short-term interest rates.
7.
During
April 2001, the Fed decreased the federal funds interest rate twice, by 0.5
percentage point each time. While the
second decrease was not anticipated by the financial markets, the first was
less than anticipated. The announcement
had the same immediate effect on stock and bond prices.
8.
The
rational expectations assumption implies that consumers take into account the
effect of future fiscal and monetary policies; therefore, neither policy will
have a significant effect on real economic activities.
9.
Since
we are running a budget surplus today, the best advice that you would give
President Bush to avoid the much-feared recession is to increase government
expenditure for retirees.
10.
Alan
Greenspan, experiencing a strong influence over the NASDAQ, has no influence on
the Japanese and German financial markets.
NOTE:
see the April 2001 Economist magazine.
What exchange rate (pesos per $) would make the cost
of a Big Mac the same in dollars in Chile as in the US? Show your calculation.
In quiz 2, we examined the effect of a monetary
contraction (section 3, part 3).
1.
Draw
the path of the nominal interest rate following the money supply contraction
under the assumption of a fixed price level.
2.
Suppose
that the highest point in the interest rate path is reached after one year and
the long run value is reached after three years. Draw the yield curve just
after the reduction in the money supply, one year later, and three years later.
During the 1992 US election campaign, the large
deficit emerged as a major issue. So, when President Clinton won the election,
deficit reduction was one of the first items on the new administration’s
agenda.
1.
Give
three reasons why the deficit was of a major concern.
2.
What
does deficit reduction imply for output in the medium run and long run?
3.
In
the final version passed by the Congress in August 1993, the deficit package
included a reduction of $20 billion in its first year, increasing gradually to
$131 billion four years later. What was the actual budget deficit achieved?