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ECON 205: Current Macroeconomic Situation US

ECON 205: Current Macroeconomic Situation US

What is the “current macroeconomic situation” in the U.S. (e.g. is the U.S. economy currently concerned about unemployment, inflation, recession, etc.)? What fiscal policies and monetary policies would be appropriate at this time?  For the US economy, find the data for 2018 & 2019 for the following Macroeconomic variables: CPI, GDP and its components. blank

  1. By what rate did CPI, GDP, grow? Which years showed relatively higher growth in GDP and income/economic activity and why. [20 marks: 400 words]
  2. Examine both long-term and short-term changes in gross domestic product, or GDP, Growth and recession, Unemployment, Inflationary pressures using the AD/AS model. [25 marks: 500 words]
  3. If Malaysian foreign wealth holders decided that the United States was the safest place to invest their savings, what would the effect be on the economy here? Show graphically using the IS/LM model and also incorporate BP curve. [15 marks: 300 words]
  4. What policies can be adopted to counter the adverse effects in question (c) above? Explain your answer with diagrams. [20 marks: 400 words]
  5. Suppose nothing is done to counter the concerns boom shock in question (c). Explain the impact of this inaction on the US economy in the long‐run when nothing is done to counter the shock. Explain your answer with diagrams. [20 marks: 400 words]

Suggested answer From Lecturer

By what rate did CPI, GDP, grow? Which years showed relatively higher growth in GDP and income/economic activity and why. [20 marks: 400 words]

  1. Definition of CPI and GDP

Explain in detail the current CPI, GDP data and explain the differences in 2018 and 1st quarter of 2019.

Personal consumption expenditure (PCE) contributed 1.66 percentage points to growth. Fixed investment contributed 0.54 percentage points to growth.

Government spending and investment

Provide complete data to explain and the reasoning

The CPI and the GDP price index and implicit price deflator: consumers, businesses, government, and foreigners, but not importers.

the formulas used to calculate

should also compare growth by year to the unemployment rate by year and inflation by year.

Trump Tax plan should be considered

Points to look for: Economic Growth, Domestic Demand, Consumption, Investment, Exports, Imports, Industrial Production, Retail Sales, Unemployment Rate, Fiscal Balance (% of GDP), Inflation Rate (CPI, annual variation ), Inflation (PPI, annual variation ), Policy Interest Rate (%), Stock Market, Current Account (% of GDP), Current Account Balance (USD bn), Trade Balance (USD billion)

  1. Examine both long-term and short-term changes in gross domestic product, or GDP, Growth and recession, Unemployment, Inflationary pressures using the AD/AS model

 [25 marks: 500 words]blankExamine both long-term and short-term changes in gross domestic product using the AD/AS model.

AD/AS diagram, long-run economic growth due to productivity increases over time is represented by a gradual rightward shift of aggregate supply.

factors that determine the speed of this long-term economic growth rate—like investment in physical and human capital, technology, and whether an economy can take advantage of catch-up growth

The AD/AS framework implies two ways that inflationary pressures may arise. One possible trigger is if aggregate demand continues to shift to the right when the economy is already at or near potential GDP and full employment, thus pushing the macroeconomic equilibrium into the steep portion of the aggregate supply curve.

How do changes by consumers and firms affect AD?

The aggregate demand curve shifts to the right as the components of aggregate demand consumption spending, investment spending, government spending, and spending on exports minus imports rise

AD components can change because of different personal choices like those resulting from consumer or business confidence or from policy choices like changes in government spending and taxes.

If the AD curve shifts to the right, then the equilibrium quantity of output and the price level will rise.

Whether equilibrium output changes relatively more than the price level or whether the price level changes relatively more than output is determined by where the AD curve intersects with the AS curve.

  1. If foreign wealth holders decided that the United States was the safest place to invest their savings, what would the effect be on the economy here? Show graphically using the IS/LM model and also incorporate BP curve. [15 marks: 300 words] 

If consumers/firms feel less confident about the future, they may invest less regardless of the interest rate.  This will cause a decrease in investment (IS shifts left).

Investments include financial market and other forms of income earning assets Multiplier effect of less investment

Capital outflow exerts pressure on macroeconomic dimensions within a nation and discouraging both foreign and domestic investment

Income

Consumption

Real GDP (tends to fall)

Employment

Exchange rate – exchange rate will fall

Balance of Payments – debit on financial account

Confidence – if big outflows it can cause a negative spiral of declining confidence.

Government debt – it can be more difficult to finance government borrowing from overseas investors.

Identify and to explain the shifts of the curves

  1. What policies can be adopted to counter the adverse effects in question (c) above? Explain your answer with diagrams. [20 marks: 400 words]

The main danger posed by large capital inflows is that they may destabilize macroeconomic management.

to allow a nominal appreciation of the currency

to buy up reserves (e.g. by holding the exchange rate fixed) and allow the money supply to expand in consequence (i.e. to engage in unsterilized intervention)

to liberalize restrictions on imports of goods and services

to buy up reserves but sterilize the intervention by selling an equal value of domestic-currency denominated bonds

to increase the reserve ratio applying to bank deposits

to switch government-controlled deposits (e.g. deposits in the postal savings system) from the commercial banks to the central bank

to widen the band of permissible exchange rate fluctuations

to pursue a contractionary fiscal & monetary policy

to improve the mobilization of private savings

to eliminate any remaining subsidies to inward investment, such as free deposit insurance

to impose or increase controls on capital inflows

to relax controls on capital outflows.

  1. Suppose nothing is done to counter the concerns boom shock in question (c). Explain the impact of this inaction on the US economy in the long‐run when nothing is done to counter the shock. Explain your answer with diagrams. [20 marks: 400 words]

may destabilize macroeconomic management.

appreciation of the real exchange rate that causes “Dutch disease”

spill over to increase domestic demand

Consumption can be expected to boom

lead to a speculative bubble in the stock market.

loss of local control over economic decision-making

exploitation of local resources.

could spark an increase in capital market volatility

could pose a risk to financial stability

disorderly market price adjustments

foreign investments in mature economies can be perceived to be a threat to free market forces

A temporary real appreciation that the public expects to be temporary is unlikely to have major effects on investment, which is presumptively governed by long-run expectations;

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