International Monetary Economics

1.(20 points) You are the economic advisor to your country’s leader. Your government has a huge budget deficit. What fiscal policy would you advise to reduce the deficit? What will be the effect of this policy on the exchange rate and output? Use the DD/AA model to explain and graph your answers.

2. (20 points) You are now the head of the Central Bank of your country. In response to changes in output and exchange rate in Question 1, what monetary policy would you pursue to stabilize output? Use the DD/AA model to explain and graph your answers.

3. (20 points) China is a major importer of commodities (oil, timber, etc.) from Canada. The Chinese economy’s growth rate has declined from 10% to 6%. What will be the effect the slowing Chinese economy on the economy of Canada and the Canadian dollar? Use the DD/AA model to explain and graph your answers.

4. (20 points) What can the Central Bank of Canada do to offset the effects of the slowing Chinese economy on the Canadian economy? Use the DD/AA model to explain and graph your answers. What fiscal policy would you recommend? Use the DD/AA model to explain and graph your answers. Which policy will have a larger effect on GDP?

5. (20 points) Suppose the government imposes a temporary tariff on all imports. Use the DD/AA model to analyze the effects this measure would have on the economy? What if the tariffs are permanent?