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Use the DD-AA model to analyze the effects this measure would have on the economy. Analyze both temporary and permanent tariffs.
Why does the constitutional amendment imply that the government can no longer use fiscal policy to affect employment and output?
Suppose there is a permanent fall in private aggregate demand for a country's output. What government policy response would you recommend?
How does a permanent cut in taxes affect the current account? What about a permanent increase in government spending?
If a government initially has a balanced budget but then cuts taxes. Why would you still expect the tax cut to cause a currency appreciation?
What other macroeconomic change might bring about a currency depreciation coupled with a deterioration of the current account, even if there is no J-curve?
How would you draw the DD-AA diagram when the current account's response to exchange rate changes follows a J-curve?
What does the Marshall-Lerner condition look like if the country whose real exchange rate changes does not start out with a current account of zero?
Suppose that interest parity does not hold exactly, but that the true relationship. Evaluate the policy's output effects in this situation.
How are the central bank's transactions in the foreign exchange market reflected in the balance of payments accounts?
How does fiscal expansion affect a country's current account under a fixed exchange rate?
How might devaluation affect national saving and domestic investment?
What would happen if all countries in the world simultaneously tried to improve employment and the balance of payments by imposing tariffs?
Why would the international monetary adjustment mechanism have been symmetric or asymmetric?
Show that ESF interventions are automatically sterilized and thus do not alter money supplies. How do ESF operations affect the foreign exchange risk premium?
What is the effect on its foreign reserve holdings? On its money supply? Can it offset either of these effects through domestic open-market operations?
Analyze a transitory increase in the foreign interest rate, R*. Under which type of exchange rate is there a smaller effect on output-fixed or floating?
If the foreign inflation rate rises permanently, would you expect a floating exchange rate to insulate the domestic economy in the short run?
How would you analyze the use of monetary and fiscal policy to maintain internal and external balance under a floating exchange rate?
How would you expect the use of monetary expansion alone to affect the U.S. economy in the short and long runs?
What about monetary expansion? Would your answer change if you thought different German and Japanese policies might facilitate different U.S. policies?
Develop an analysis like the one in the appendix to show the consequences of different policy choices.
Why might EMS provisions for the extension of central bank credits from strong- to weak-currency members have increased the stability of EMS exchange rates?
What would have been the maximum possible difference between the interest rates on six-month lira and DM deposits? On three-month deposits?
What would have been the implications for the credibility of the current lira/DM exchange parity?