978-1259663048 Chapter 36 Solutions Manual

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CHAPTER 36: MACRO POLICY IN A GLOBAL SETTING

Questions and Exercises

1. Whether it’s better to have a high or low exchange rate depends on domestic and

international goals. A high exchange rate for the dollar makes foreign currencies

2. Having a trade deficit means a country is consuming more than it is producing,

which can be good. But it also means paying for the deficit by selling assets, on

3. A country cannot target both interest rates and exchange rates because targeting

4. If Japan and China ran an expansionary monetary policy, it would increase

5. A contractionary fiscal policy by Japan and China would decrease Japanese and

6. Increased money → increased income → increased imports → increased trade

7. a. An increase in the trade deficit is probably due to expansionary fiscal or monetary

b. Fiscal policy. If interest rates have risen steadily along with a rise in the exchange

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b. This would tend to slow inflation, after an initial burst due to the effect of a fall in

c. I suspect that the country’s government would not be happy about the proposal

9. The first advice I would give would be to explain that at most, I can talk about

a. We would suggest a contractionary fiscal policy, which lowers inflation and the

b. These goals are difficult to achieve simultaneously. While one could use a

c. An expansionary monetary policy will reduce interest rates and reduce

d. This combination of goals is difficult to achieve. Expansionary fiscal policy will

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10. The answer to this question hinges on what is meant by “justified.” If that means

that the United States is complaining about the actual negative consequences it

11. a. If the recession was caused by a fall in domestic expenditures, we would expect

b. The G-8 countries were trying to get Japan to boost its economy by increasing

12. a. One would expect less stabilization, because economic conditions in one country

b. This would increase the possibility of a global recession whenever one country

c. Answers on this can differ; an expected answer is that one will need coordinated

13. To finance its debt the domestic government has to sell more bonds. Because

foreigners also demand these bonds (demand is greater), the government doesn’t

14. The costs of internationalizing the debt are that interest and profits must be paid

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15. a. Currency stabilization is limited through direct purchases because a country must

b. Its other options are to use monetary and fiscal policy or trade policy.

16. There is strong political pressure to manage the exchange rate because the

exchange rate affects investors, firms and consumers in an economy. Investors

17. a. The United States had a strong competitive position and a trade surplus even

b. Foreign individuals and countries had an enormous demand for U.S. assets, which

c. The trade deficit is presenting a challenge because it means U.S. firms are not

18. If the U.S. economy were to collapse, U.S. imports would decline, depressing

Questions from Alternative Perspectives

1. Austrian

Governments in developing countries tend to be even more problematic and

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2. Religious

a. This is a judgment question and judgments differ. Some religiously oriented

b. The Bible does not explicitly prohibit borrowing—that is, living beyond one’s

c. An argument can be made that the U.S. international debt is going to undermine

3. Institutionalist

a. Private savings, government savings, and international savings (which is the

b. The international capital inflows were financing both the U.S. private borrowing

c. The international capital inflows reduced the degree of crowding out that would

4. Post-Keynesian

a. This is a judgment question and judgments differ. Most Post-Keynesians agree

b. This is a judgment question and judgments differ. Many economists agree that the

5. Radical

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Issues to Ponder

1. This question requires student research. At the time that this was written, the

dollar had fallen against the yen. This makes U.S. exports cheaper to the

2. This question requires student research. At the time that this was written, the U.S.

trade deficit was higher than historical values even though it fell after the

3. If the financial and capital account were balanced and remained balanced, the

exchange rate for a country that gained a comparative advantage in most goods

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