This assignment contributes 10% towards your final course grade.
Answer the following five questions. Each question is worth 20 marks. Your answers should average about half a page per question for a total of about three pages, double spaced.
- Explain fully the role played by unplanned investment in inventories in determining equilibrium in the Keynesian model. Use the examples of AD > GDP and AD < GDP to illustrate your answer. Note that in your textbook AD = C + I + G + NX is the same as AE.
- Why are there two measures of GDP? How is the income measure different from the expenditure measure? Why must the two measures, using different data, be equal? Why might they not be equal? Why do we need to compute nominal and real GDP using both measures?
- Real GDP can increase both because an economy has unemployment and because of economic growth. Explain fully the difference between these two ways of increasing GDP. Why does the Keynesian model focus only on increasing GDP by reducing unemployment and not on economic growth?
- Explain fully how the AS/AD model is related to the Keynesian model and how it is different from the Keynesian model.
- Your textbook uses AD in both the Keynesian model and in the AS/AD model. In most other textbooks the authors use AE instead of AD in the Keynesian model. Explain why both AD and AE are equal to C + I + G + NX. Since both are equal to C + I + G + NX, in what ways are they different? Use graphs to illustrate.
Assignment 2 (10%)
This assignment contributes 10% towards your final course grade.
Answer the following five questions. Each question is worth 20 marks. Your answers should average about half a page per question for a total of about three pages, double spaced.
- Explain the difference between currency and bank money. Which institutions in Canada are responsible for producing these two types of money? Explain fully.
- Why is money important for an economy?
- Suppose that the Bank of Canada sells $2 billion of bonds on the open market. Use the Keynesian transmission mechanism to explain fully how this sale will reduce GDP by $40 billion if the money multiplier is 4 and the income multiplier with respect to the money supply is 5.
- Explain fully why the Monetarist School claims that monetary policy is stronger than fiscal policy in stabilizing the economy to reduce recessions and inflations.
- Implementation of monetary policy is fraught with many pitfalls. One important problem is deciding whether the central bank should target the money supply or target the interest rate. Assuming that the goal is to reduce inflation, explain the primary concern with each of these two different targets.
Assignment 3 (10%)
This assignment contributes 10% towards your final course grade.
Answer the following five questions. Each question is worth 20 marks. Your answers should average about half a page per question for a total of about three pages, double spaced.
- Explain fully why an economy can suffer from stagflation. Why is that considered the worst possible macroeconomic problem?
- Compare the use of an expansionary fiscal policy in the basic Keynesian model to the use of this same policy based on the Phillips Curve of Chapter 12.
- Even though the ideas implicit in the Phillips Curve were derived from long-run data from the British economy, it turned out that the trade-off between unemployment and inflation implied by the Phillips Curve was a short-run phenomenon. This implies that using an expansionary fiscal policy produces long-term pain for short-term gain. This was the accepted economic theory in the 1970s. With that in mind, why do you think politicians in most democracies during the 1970s, including Canada and the U.S., opted for the short-term gain despite being aware of the long-term pain?
- Explain why the Monetarist School uses the slogan that inflation is always a “monetary phenomenon.” Can an economy suffer from inflation even if the money supply is not increased? Explain fully.
- Explain fully how an easy money policy can lower the interest rate in the short-run but increase the interest-rate in the long-run. Be sure to distinguish between real and nominal interest rates.
Assignment 4 (10%)
This assignment contributes 10% towards your final course grade.
Answer the following five questions. Each question is worth 20 marks. Your answers should average about half a page per question for a total of about three pages, double spaced.
- What are the three sources of funding a national debt? Why are they all problematic? Why is foreign debt far more problematic for a country than domestic debt?
- Explain fully the concept of “Twin Deficits” and use this concept to explain why the cause of the US trade deficit with China is largely due to American wars across the globe.
- Explain how countries like Greece have largely misused the Keynesian model to “buy” votes and how this has created “sovereign debt” problems. In this regard, why can countries like Greece, or US states like California and cities like Detroit, become bankrupt, but countries like the US and Canada can never be bankrupt from too much debt?
- Why does a flexible exchange rate make monetary policy more effective but fiscal policy less effective?
- Explain the difference between a trade deficit, a current account deficit, and a balance of payments deficit. Explain fully why a current account deficit can be good for a country.
