1. The united states is suffering from a high rate of unemployment.
a. Identify two fiscal policy actions that Congress might initiate to solve the problem.
b. Using a correctly labeled AD/AS graph, show and explain how the policies you identified in (a) will affect each of the following in the short-run.
i. aggregate demand
ii. output and employment
iii. price level
c. Explain how the policies you identified in part (a) will impact real interest rates in the short-run.
d. If the interest rate effect you identified in part (b) continues in the long run, explain how economic growth will be impacted.
2. U.S. international transactions are recorded in the balance of payments.
a. Identify if each of the following transactions would be recorded as an increase or decrease in the balance of payments current or financial account for the United States.
i. A wealthy entrepreneur purchases a new car directly from British Motor Works.
ii. A U.S. manufacturer purchases recording equipment from Germany.
b. How would an increase in U.S. price level impact the current account? Explain.
c. How would the change in the current account identified in part (b) impact the international value of the dollar? Explain.
3. Assume that the United States trades exclusively with Mexico and that the exchange rate between the U.S. and the Mexico is flexible.
a. Assume the Americans desire more goods that are made in the Mexico. Show and explain how this change in demand will affect each of the following:
i. The demand for U.S. dollars
ii. The international value of the U.S. dollar
b. Now, assume that there is an increase in real interest rates in the Mexico, but not in the United States. Show and explain how this increase in interest rates will affect each of the following:
i. The international value of the U.S. dollar
ii. The quantity of U.S. dollars supplied in the foreign exchange market.