Impact of Monetary and fiscal Policy in a global economy: by Wav0pVC3

VIEWS: 5 PAGES: 4

									      How monetary and fiscal policies affect exchange rates
Changes in a nation’s monetary and fiscal policies affect its exchange rates and its
balance of trade through the interest rate, income and price level. Changes in the value of
a country’s currency may affect the balance of trade and aggregate demand. The value of
real output and price levels may also be affected. Domestic policies influence currency
values, and currency values influence domestic policies. The complexity of the
connection leads to careful evaluation of any change in domestic policy goals. Policy
makers can not ignore the international affects of changes in monetary and fiscal policies.

A series of situations is presented below. In each case:
        Evaluate the expected effects on exchange rates in the US and the other country.
Use the currency graphs provided to reflect changes in the currency values.
        Analyze the impact of the currency changes on the US economy as it applies to
net exports, balance of trade, aggregate demand and price levels. Work out the situations
in the short run only.

   1. The US government initiates a personal income tax reduction plan, leaving every
      tax-paying American with more disposable income.

       A. What will happen as a result to trade between the United States and Taiwan?

  Price of
  US                                   US price
  dollars in                           for
  Taiwan                               Taiwan
  dollars                              dollars




                Quantity of US                     Quantity of
                dollars                            Taiwan Dollars

       B. What happens to the US dollar?

       C. What happens to the Taiwanese dollar?

       D As a result of fisal policy,
              (i). US aggregate demand shifts

               (ii.) Price levels in the US

               (iii.) US imports ________________. Why

               (iv) US exports _________________. Why
2. Japan’s fiscal policies lead to an increase in Japan’s real GDP.
       A. What will happen as a result to trade between the United States and Japan?

  Yen price
  for                                  US price
  dollars                              for yen




                Quantity of US                      Quantity of Yen
                dollars

       B. In the first graph, what happens to the US dollar?

       C. In the second graph, what happens to the Japanese Yen?

       D. As a result of the changing value of the US dollar,
              (i.) US exports _________________. Why?

               (ii.) US imports ________________. Why?

               (iii.) US aggregate demand shifts ________.

               (iv.) Price levels in the US _________.

3. The US federal budget deficit increases, which causes increases in the interest rate.
(Assume trade with Great Britain.)
       A. What will happen as a result to trade between the US and Great Britain?

  Pound
  price for                            US price
  dollars                              for
                                       pounds




                Quantity of US                      Quantity of
                dollars                             Pounds

       B. In the first graph, what happens to the US dollar?

       C. In the second graph, what happens to the British Pound?

       D. As a result of the changing value of the US dollar,
              (i.) US exports _________________. Why?

               (ii.) US imports ________________. Why?

               (iii.) US aggregate demand shifts ________.
               (iv.) Price levels in the US _________.

4. Europe’s interest rates are increasing, while the US interest rate remains relatively
constant.
       A. What will happen as a result to trade between the US and Europe?

  Euro
  price for                            US price
  dollars                              for Euros




                 Quantity of US                      Quantity of
                 dollars                             Euros

       B. In the first graph, what happens to the US dollar?

       C. In the second graph, what happens to the European euro?

       D. As a result of the changing value of the US dollar,
              (i.) US exports _________________. Why?

               (ii.) US imports ________________. Why?

               (iii.) US aggregate demand shifts ________.

               (iv.) Price levels in the US _________.

5. There is a rapid increase in the Canadian price level while the US price level remains
relatively constant.

       A. What will happen as a result to trade between the US and Canada?

  Canadian
  dollar                               US price
  price for                            for
  US                                   Canadian
  dollars                              dollars




                 Quantity of US                      Quantity of
                 dollars                             Canadian dollars

       B. In the first graph, what happens to the US dollar?

       C. In the second graph, what happens to the Canadian dollar?

       D. As a result of the changing value of the US dollar,
(i.) US exports _________________. Why?

(ii.) US imports ________________. Why?

(iii.) US aggregate demand shifts ________.

(iv.) Price levels in the US _________.

								
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