Using a flow chart, illustrate the effects of a decrease in government spending (G) in a country with floating exchange rates and highly mobile international capital.
What will be an ideal response?
POSSIBLE RESPONSE: The flow-diagram below shows the effects of this contractionary fiscal policy in a country with floating exchange rates and highly mobile international capital.
*if capital is highly mobile
Initially, with the decrease in government spending, interest rates fall since the government lessens its amount of borrowing. Domestic production and income also fall along with the decrease in government spending. With the fall in interest rates, capital flows out of the nation. With the fall in income level, aggregate demand falls. so the price level also declines. This, along with fall in income improves the current account balance. The domestic currency will depreciate. Because the capital is highly mobile internationally, the capital outflow is larger than the improvement in the current account balance. The currency depreciation discourages imports and encourages exports, so the current account improves. The ultimate effect is that domestic product and income fall, but not by as much as they would fall if the exchange rate did not change.
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Suppose wages in the market for plumbers increase. Some plumbers start taking on extra plumbing jobs while others cut back on the number of hours they work. What could explain this?
What will be an ideal response?
In nations where conventional taxes are difficult to collect, the inflation tax is ________, which tends to ________ the inflation rates of those nations
A) also difficult to collect, aggravate B) also difficult to collect, hold down C) a realistic alternative, aggravate D) a realistic alternative, hold down
When people shop more frequently and transfer money out of their bank account more often in an effort to help avoid the loss in purchasing power of cash, they bear the _____ costs of inflation
a. menu b. shoe-leather c. unit-of-account d. direct
According to the graph shown, if the market goes from equilibrium to having its price set at $10 then:
A. $12 gets transferred from consumer to producer in surplus. B. all producer surplus lost is gained by consumers. C. all consumer surplus lost is gained by producers. D. $12 gets transferred from producer to consumer in surplus.