CHAPTER 16
ANSWERS TO TEXTBOOK PROBLEMS
1. A decline in investment demand decreases the level of aggregate demand for any level of the exchange rate. Thus, a decline in investment demand causes the DD curve to shift to the left.
2. A tariff is a tax on the consumption of imports. The demand for domestic goods, and thus the level of aggregate demand, will be higher for any level of the exchange rate. This is depicted in figure 16-1 as a rightward shift in the output market schedule from DD to D'D'. If the tariff is temporary, this is the only effect and output will rise even though the exchange rate appreciates as the economy moves from point 0 to point 1. If the tariff is permanent, however, the long-run expected exchange rate appreciates, so the asset market schedule shifts to A'A'. The appreciation of the currency is sharper in this case. If output is initially at full employment then there is no change in output due to a permanent tariff.
E A A’ 0 1 2 A D D’ Yf Y A’ D D’ Figure 16-1
3. A temporary fiscal policy shift affects employment and output, even if the government maintains a balanced budget. An intuitive explanation for this relies upon the different propensities to consume of the government and of taxpayers. If the government spends $1 more and finances this spending by taxing the public $1 more, aggregate demand will have risen because the government spends the entire $1 while the public reduces its spending by less than $1 (choosing to reduce its saving as well as its consumption). The ultimate effect on aggregate demand is even larger than this first round difference between government and public spending propensities, since the first round generates subsequent
1 / 8
spending (Of course, currency appreciation still prevents permanent fiscal
shifts from affecting output in our model.)
4. A permanent fall in private aggregate demand causes the DD curve to shift inward and to the left and, because the expected future exchange rate depreciates, the AA curve shifts outward and to the right. These two shifts result in no effect on output, however, for the same reason that a permanent fiscal expansion has no effect on output. The net effect is a depreciation in the nominal exchange rate and, because prices will not change, a corresponding real exchange rate depreciation. A macroeconomic policy response to this event would not be warranted.
EAA’X021ADD’Y A’DD’XFigure 16-2
5. Figure 16-2 can be used to show that any permanent fiscal expansion worsens the current account. In this diagram, the schedule XX represents combinations of the exchange rate and income for which the current account is in balance. Points above and to the left of XX represent current account surplus and points below and to the right represent current account deficit. A permanent fiscal expansion shifts the DD curve to D'D' and, because of the effect on the long run exchange rate, the AA curve shifts to A'A'. The equilibrium point moves from 0, where the current account is in balance, to 1, where there is a current account deficit. If, instead, there was a temporary fiscal expansion of the same size, the AA curve would not shift and the new equilibrium would be at point 2 where there is a current account deficit, although it is smaller than the current account deficit at point 1.
6. A temporary tax cut shifts the DD curve to the right and, in the absence of monetization, has no effect on the AA curve. In figure 16-3, this is depicted as a shift in the DD curve to D'D', with the equilibrium
2 / 8
moving from point 0 to point 1. If the deficit is financed by future monetization, the resulting expected long-run nominal depreciation of the currency causes the AA curve to shift to the right to A'A' which gives us the equilibrium point 2. The net effect on the exchange rate is ambiguous, but output certainly increases more than in the case of a pure fiscal shift.
E A’ A 0 1 A’ D D’ A 2 D D’ Y
Figure 16-3
7. A currency depreciation accompanied by a deterioration in the
current account balance could be caused by factors other than a J-curve. For example, a fall in foreign demand for domestic products worsens the current account and also lowers aggregate demand, depreciating the currency. In terms of figure 16-4, DD and XX undergo equal vertical shifts, to D'D' and X'X', respectively, resulting in a current account deficit as the equilibrium moves from point 0 to point 1. To detect a J-curve, one might check whether the prices of imports in terms of domestic goods rise when the currency is depreciating, offsetting a decline in import volume and a rise in export volume.
3 / 8
EAD’DX’XX’XD’DY10A
Figure 16-4
8. The expansionary money supply announcement causes a
depreciation in the expected long-run exchange rate and shifts the AA curve to the right. This leads to an immediate increase in output and a currency depreciation. The effects of the anticipated policy action thus precede the policy's actual implementation.
EAA’DD’D”0XX2DD”1D’A’YA
Figure 16-5
9. If exchange rate pass-through is incomplete in the short-run then the DD curve becomes steeper; a given appreciation of the exchange rate crowds out less imports because the foreign currency price of these imports falls concurrent with the appreciation of the currency. In this case, a permanent fiscal expansion both shifts out the DD curve and, because of pricing behavior by foreign exporters, makes it steeper. This results in
4 / 8
an increase in output along with a current account deficit, as depicted in figure 16-5 by a shift from DD to D'D' which shifts the equilibrium point from 0 to 1. Over time, as the foreign currency price of imports rise, the slope of the DD returns to its original value, which reduces output and offsets, to some extent, the current account deficit. In the diagram, this is depicted as a movement from point 1 to point 2 with a flattening of the output market curve from D'D' to D\Thus, low government and private savings caused the current account deficit, but incomplete pass-through exacerbated the initial effect on the current account.
10. The DD curve might be negatively sloped in the very short run if
there is a J-curve, though the absolute value of its slope would probably exceed that of AA. This is depicted in figure 16-6. The effects of a temporary fiscal expansion, depicted as a shift in the output market curve to D'D', would not be altered since it would still expand output and appreciate the currency in this case (the equilibrium point moves from 0 to 1).
E D A’ A 2 D’ 0 1 A’ A Y
D D’ Figure 16-6
Monetary expansion, however, while depreciating the currency,
would reduce output in the very short run. This is shown by a shift in the AA curve to A'A' and a movement in the equilibrium point from 0 to 2. Only after some time would the expansionary effect of monetary policy take hold (assuming the domestic price level did not react too quickly).
11. The derivation of the Marshall-Lerner condition uses the
assumption of a balanced current account to substitute EX for (q x
5 / 8
《国际金融》课程学生助学资料
