Draw on one or more of the notes sets, it probably is off-target.

PART 1:

Using the basic No-Free-Lunch model of note set 3, answer the following four questions as requested.

Fact: The U.S federal government has run very large budget deficits for a number of years.

1. Show graphically what the impact of the increased federal deficits has been on the level of domestic savings in the U.S. economy. Use words to explain your graph.

2. Show how an increase in the federal budget deficit affects the trade deficit - use equations and use words to explain your equations.

3. Suppose that the federal government enacted a tariff to raise the price of imported goods in an attempt to reduce the trade deficit. Would such a policy actually work? Show why or why not using a graphical analysis. Explain your graph using words

4. Explain why the large U.S. federal budget deficits have not caused the U.S. inflation rate to increase? Use equations, sentences and the central bank balance sheet in your answer.

5. Using the Note Set on Money Creation (note set 5) :Explain in detail how the Federal Reserve decreases the supply of money. A full answer will use the Central Bank Balance sheet, words and equations!

PART 2:

A Cocktail Party Economics Lesson

Shortly after graduation from W&M, Christen and George are attending a swanky cocktail party in Georgetown. Among the luminaries at the event is Congressman Dick Cruzeman (I, MA) who is holding forth on his favorite topic: the U.S. trade deficit and China. "Our trade deficit is a big drain on the U.S. economy and I blame the Chinese! If the Chinese would just let the yuan float it would appreciate and level the international trade playing field. And that would go a long way towards wiping out the scourge of our trade deficit with China and restore the health of the American economy!" declares the Congressman. Christen and George, who actually know some economics, politely (but firmly) confront the congressman, saying, "That's nonsense. While it is probably a good idea for the yuan to float, that will do nothing to reduce the U.S. trade deficit with China. Further, a trade deficit per se is not the "scourge' on the U.S. economy that you claim."

Using graphs and equations from note set 10 in particular, explain clearly in complete sentences, why Christen and George are correct in their assessment of the trade deficit.

Is a tax cut, a tax cut?

As currently designed, the tax bill before congress will cut taxes by about $150B per year, and will increase the federal budget deficit by $150B a year, for each of the next ten years. Using note set 19, and applying the Ricardian view of tax liabilities, is this tax cut really a tax cut? Use a present value equation as part of your written explanation.

The China Syndrome?

Using the (a) economic growth accounting framework in note set 4, (b) the two Chinese growth case studies found there, and (c) Paul Krugman's article on the myth of the Asian miracle, as your sole primary sources, assess and explain what key factors will determine whether the Chinese economic growth engine will continue into the future, or will sputter and slow down?