Question 1

Explain two different types of reasons domestic economic policy goals tend to get more attention than international economic policy goals.

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Question 2

What will be the effect of a contractionary monetary policy on the trade balance?

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Question 3

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.

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Question 4

An earlier chapter discussed the issue of crowding out.Crowding out refers to the idea that a budget deficit will add government borrowing to other demands for loans,driving up the interest rate,which will reduce private investment.How do international considerations (the possibility that the debt is purchased by foreigners)affect this issue? Is it possible to internationalize the debt? Does that mean that crowding out is not a problem in this case?

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Question 5

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.

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Question 6

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.

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Question 7

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.

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Question 8

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?

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Question 9

Define a trade deficit,and explain why there is debate over whether or not a trade deficit should be of concern to policy makers.

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Question 10

Explain the effect of an expansionary monetary policy on the trade balance.

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Question 11

What does internationalizing the debt mean?

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Question 12

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?

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Question 13

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.

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Question 14

What are the benefits and costs of a trade deficit?

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Quiz 36: Macro Policy in a Global Setting