Assignment: Macroeconomic Principles
1) The short-term interest rate on Sylvania's silvo currency is 1.0% while the short-term interest rate on Freedonia's freedo currency is 9.0%. In the spot market, one silvo buys two freedos. If interest rate parity holds, how many freedos can we expect to buy with one silvo 12 months from today?
The 12-month futures contract for silvos is trading at US$0.7400; the same contract on freedos is trading at US$0.3425. If you cover a currency carry trade position with futures, is there an opportunity to profit? If so, exclusive of leverage and transactions costs, what is your annual rate of return? Show how you arrived at your answer.
2) You are given the following information about an economy: 1) at full employment, the unemployment rate is 5% and real output is $1 trillion; and 2) the following table applies:
|
State:
|
1
|
2
|
3
|
|
Inflation rate:
|
6%
|
2.5%
|
1%
|
|
Unemployment rate:
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3.5%
|
5.0%
|
7.5%
|
|
Real output:
|
$1,030 billion
|
$1,000 billion
|
$950 billion
|
Assuming the price level in Period 0 was 150, graphically show the economy's long-run and short-run Phillips Curves and corresponding long-run and short-run aggregate supply curves in Period 1. Also, please label the axes for full credit.
3) You are given information about an economy that, at equilibrium expenditures, the following table applies
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State:
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1
|
2
|
3
|
|
Price level:
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159.0
|
153.75
|
151.5
|
|
Real output:
|
$950 billion
|
$1,000 billion
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$1,030 billion
|
Further, assume that the slope of the AE curves is 0.5. Graphically depict this situation in the Aggregate Expenditure model and, then, derive three points on the AD curve. Also, please label both the axes and all three of your AE curves for full credit.
4) Write a short essay contrasting the types of fiscal policy you would recommend in each of the following situations:
1. The economy appears to be on the precipice of a deep recession and policy makers need to boost aggregate demand (AD) as quickly and cheaply as possible.
2. The economy's long-run economic growth rate has slowed to an anemic level and policy makers need to revive growth by shifting LRAS to the right.
Justify your answers by mentioning such topics as automatic stabilizers, infrastructure, education, tax rates, consumption v. investment, marginal propensities to consume for various income brackets, the values of relevant multipliers, and give some examples.