Economics for International Affairs Assignment
Please answer five out of six questions.
Q1. The Federal Reserve used an expansive monetary policy program called quantitative easing to deal with the financial crisis and provide liquidity in the financial system.
a. Explain what quantitative easing is and the logic behind this policy. Ensure you discuss the channels through which it is expected to affect aggregate demand AND criticisms as to its effectiveness.
b. What would happen if fiscal policy tools were used more aggressively to address the crisis? Discuss the channels through which aggregate demand would be affected if, for instance, government spending on welfare (unemployment insurance, food stamps, etc) and infrastructure were expanded instead. (Hint: discuss the multiplier effects).
Q2 a. Should developing countries attempt to achieve a trade surplus? Why or why not? Think through the question using the concepts of aggregate demand and balance of payments accounts.
b. When is running a trade deficit useful for a developing country? And under what conditions can it become a problem?
Q3 a. England can produce a unit of cloth in 100 hours and wine in 120 hours while Spain can produce a unit of wine in 90 hours and cloth in 80 hours. What will be outcome if the countries start trading according to the theory of comparative advantage? Why? What would be the outcome if we use the theory of absolute advantage? Why?
b. How does standard trade theory (based on comparative advantage) explain the automatic elimination of trade deficits and surpluses? How does this contrast with the view of trade deficits and surpluses under absolute advantage?
Q4. Download the Human Development Report, 2014 from the UNDP's website.
a. Compare Malaysia's human development index (HDI) score and rank with that of Indonesia's for the year 2014 (Table 1 of the Statistical Annex). What are the sources of the differences in their scores in terms of the components of HDI?
b. Compare trends in the HDI for both countries for the period 1980-2013 (Table 2 of the Statistical Annex). Did the gap between the countries increase or decrease over time? Why?
Q5a. What is the financial fragility hypothesis? What are the channels through which it spreads?
b. Explain in brief how the debt crisis in Mexico, Argentina and Brazil in the 1980s might be explained using this hypothesis. (Although you may refer to additional sources, using the assigned reading on the topic in the syllabus will be sufficient).
Q6a. What is the objective of austerity policies and why might they be necessary?
b. Can austerity policies backfire? How so? Make sure to discuss the possible economic and social effects of austerity policies.