QUESTION
- Recent trade surpluses in the GCC were associated with greater investment in foreign capital markets. Explain clearly
Pinkberry opening up a store in Bahrain is an example of US ………………….and is likely to increase US …………………
A Change in interest rates affects Aggregate demand such that in one case it causes a shift in the AD curve and a movement along it in another. Explain ( Use diagrams to support your answer)
In an economy, If C= 200, G= 400 & NCO = 100. I is a quarter of G. Find I and Y. Are business opportunities attractive in this economy? Explain
Other things the same, an increase in interest rates would decrease NX. Explain clearly and use diagrams
Other things the same, government budget surpluses and Capital Flight could have the same impact on the real exchange rate. However, the steps that lead to such an impact differ in budget surpluses and capital flight. Explain (Use diagrams)
Could a government achieve a higher real exchange rate through investment tax credits? Explain ( Use diagrams)
- If Actual inflation = expected inflation + unexpected inflation, then the short run unemployment fluctuations/deviations should occur as a result of what type of inflation? Explain clearly.
Hyperinflations benefit debtors. Explain clearly.
- What are some of the problems that arise with deflation? Explain and use diagrams.
What impact will excess reserves have on the price level and unemployment (if any, mention the types of unemployment that are affected)? Explain clearly and use diagrams.
The GCC is an income-tax and a net worth (money holdings) tax free region regardless of the economic cycle it is in. (i.e. A boom vs. a recession ) . T/F discuss carefully.
Expenditure on national defense in Jordan makes up approximately 9% of total GDP expenditures. This represents strong fiscal intervention by the Jordanian government. Assume that the multiplier effect is not allowing aggregate demand in the Jordanian economy to rapidly expand. Why could this be the case?
Under what system is AD more enhanced? Egalitarian or Patriarchal? Explain
The prevalence of same sex relationships can be a threat to population growth hence economic growth if we assume that populations need to grow in order to produce more. T/F Explain.
SOLUTION
Recent trade surpluses in the GCC were associated with greater investment in foreign capital markets.
The trade surplus in GCC was mainly account of the hydrocarbon exports by the region across the world. However GCC countries have made huge investment in Morocco. GCC countries have made investments in such countries which are close to the Arab market. The GCC countries have entered the foreign capital markets of European Union where the demand of oil and hydrocarbon has spurred an increase in price where the trade is done on exchange and oil derivatives. Thus such entry of GCC countries in the foreign capital markets has resulted in trade surplus of GCC countries. Particularly Saudi Arabia has been benefited most from it. Another source of inflow of funds for GCC countries have been the exports in the Asian region, where the demand of oil and Hydrocarbons have been increasing and is expected to be growing at an increasing rate (QNB, 2012).
Pinkberry Store in Bahrain
Pinkberry opening up a store in Bahrain is an example of US expansion in international markets particularly Asian market and is likely to increase US investments in the form of FDI.
A Change in interest rates affects Aggregate demand such that in one case it causes a shift in the AD curve and a movement along it in another.
The interest rate will have two effects on the aggregate demand curve. One of them is direct and the other is indirect. The direct relation of aggregate demand curve with interest rate is that with the change in interest rates the aggregate demand curve will shift. The interest rate will have the impact on the pricing, thus will impact the expenditure in an economy (Nicholson, 2011). The change in price level results in change to aggregate expenditure and thus to the disequilibrium. The movement along the aggregate demand curve is the mechanism to restore the equilibrium. This is the indirect relation wherein interest costs as a result in increased interest rate increase thereby increase the price level and thus the aggregate expenditure will decrease. Under direct relationship the interest rate will impact the capital investment thereby decreasing the aggregate demand as the interest rate increase and thus the aggregate demand curve will shift to the left. This has been shown in the graph below. On the other side as the interest rate decrease the cost of capital investment will decrease thus this will increase the aggregate demand which then moves to the right.
Short Run Aggregate Supply
Price Level
New AD Curve
AD Curve
Real Output
In an economy, If C= 200, G= 400 & NCO = 100. I is a quarter of G. Find I and Y. Are business opportunities attractive in this economy
The equation for National Income is given by
Y=C+I+G+NX
As given above C=200, G=400 and NX=-100. I= G/4 thus I = 100. This is to note that Net Capital Outflow (NCO) has been taken as Net Exports (NX)
From the above information we get Y = 600.
The business opportunities in the economy are attractive as it can be seen that as the government investment increase there will be an increase in private investors. Thus it can be said that the government is investing in developing basic infrastructure which is attracting the investors and thereby increasing the national income.
Other things the same, an increase in interest rates would decrease NX.
An increase in the interest rate decreases the exchange rate of the country. This is to say that the interest rate has negative relation with exchange rate. Thus as the interest rate increases the exchange rate of a country decreases (DeLong, 2011). The exchange rate has positive relation with the net exports. As the exchange rate increase the net exports will increase. Thus it can be said that as the interest rate increase the net exports will decrease. This is due to the fact that increasing interest rates will attract investors so as to earn higher returns by incorporating more assets based on the currency of the country. Thereby reducing the value of foreign currency, this will impact the export to the foreign country as the buying power will reduce.
The relation between interest rate and net exports has been shown below in the graph.
Exchange Rate Exchange Rate
Interest Rate Net Export
Other things the same, government budget surpluses and Capital Flight could have the same impact on the real exchange rate. However, the steps that lead to such an impact differ in budget surpluses and capital flight.
If there is situation of government budget surplus will result in excess flow of capital in the country thus may result in increased inflation as the demand for capital is reduced because of budget surplus. The rise in inflation rate will cause the reduced demand thereby reducing the real exchange rate.
In case of Capital flight which is the movement of investors from one country to another thereby reducing the investments in the base country will increase the demand for foreign exchange to maintain the required reserves. This will result in increase in value thereby rise in real exchange rate for the foreign country and reduced value of currency of the base country.
Could a government achieve a higher real exchange rate through investment tax credits?
The Investment tax credit is the subsidy or rebate given by the government. This will result in more investments in the country, thereby boosting investors across the world to invest so that more profits can be earned by getting the investment tax credits. In such a scenario the there will be capital inflow in the country and thus increasing the supply of foreign exchange in the country. This will result in reduced demand of the foreign exchange and may result in inflation because of the huge inflow of capital thereby higher real exchange rate is achieved.
If Actual inflation = expected inflation + unexpected inflation, then the short run unemployment fluctuations/deviations should occur as a result of what type of inflation?
If unexpected inflation is the part of actual inflation there will be reduction in spending there by in other words there will be saving so that the benefit of inflation is there. This reduced spending will result in reduced income thus there will be laying off. This unemployment will be there if the unexpected inflation is positive thereby adding to the inflation.
Hyperinflations benefit debtors.
Hyperinflation may benefit debtors as the inflation is increased the real exchange rate may be reduced. Thus during hyperinflation the number remains the same but the actual value is less. Thus any debtor will pay less than the actual value during hyperinflation. This is because hyperinflation reflects the market and not the debt of the individuals in the market. Thus the inflation reduces the value of debt as determined by the market.
What are some of the problems that arise with deflation? .
The consumers at the time of deflation are likely to spend less as there is incentive for saving as deflation will result in reduced prices in future which will have positive effect on spending (Econ, 2003). But it has some negative effects. It will cause negative multiplier effect, which is, there will be less demand in the market resulting in the laying off of workers, which will lead to unemployment which result in even lesser demand. This is called deflationary spiral. Another effect of deflation is on the repayment by the borrowers. This is because of the reduced income but fixed debts that have to be paid.
What impact will excess reserves have on the price level and unemployment (if any, mention the types of unemployment that are affected
Excess reserves will result in inflation as the demand will reduce in the economy. Thus the inflation will result in increased prices and less spending by the consumers. In such a situation where the consumer is spending less will result in reduced income. The reduction in income will motivate the producer to reduce costs which will be by laying off thereby resulting in unemployment.
The GCC is an income-tax and a net worth (money holdings) tax free region regardless of the economic cycle it is in. (i.e. A boom vs. a recession ) .
The GCC being a tax free region may be a boom as it will boost investment in the region thereby increasing the business opportunities in the region. Thus such regions are a boom to the economy. This is a boom in case of GCC as it is having resources that can be utilized to attract investors and the potential to be a good market. However the tax free region will result in reduced income for the government. Thus the government may be incapable to create suitable infrastructure and facilities to attract investors. This was the case when Dubai had failed to pay off debts a few years ago. Thus in order that such situation does not arise, suitable sources of income for the government should be developed before the tax free zone is declared.
Expenditure on national defense in Jordan makes up approximately 9% of total GDP expenditures. This represents strong fiscal intervention by the Jordanian government. Assume that the multiplier effect is not allowing aggregate demand in the Jordanian economy to rapidly expand. Why could this be the case?
The aggregate demand is dependent on the consumption, Investment by public, spending by government and the net exports. The government is investing heavily in defense. However still the aggregate demand is not expanding heavily this could be due to interference by government so that the investment by public is on lower side. This is to say that the government is trying to have full control. Thus lesser investment by the public will not raise the aggregate demand. Another reason may be the reduced consumption.
Aggregate Demand under Egalitarian or Patriarchal
Egalitarian is an approach to main equality in the society where as Patriarchal is more on the secular side. Thus under patriarchal system the demand in the market is not manipulated or in other words it is derived as per the prevailing market conditions whereas under the Egalitarian the Aggregate demand is maintained by altering the factors that affect the aggregate demand like interest rates. Thus the Aggregate Demand is more enhanced under Patriarchal system as under Egalitarian the actual aggregate demand is suppressed or the aggregate is not determined correctly whereas under Patriarchal system the aggregate demand is determined by the factors prevailing in the economy rather than manipulating or adjusting factors of economy to maintain the aggregate demand .
The prevalence of same sex relationships can be a threat to population growth hence economic growth if we assume that populations need to grow in order to produce more.
Same sex relationships can be a threat to population growth and hence economic growth. This is true up to certain extent but suitable measures can be taken in order to overcome the issue. If the same sex relationships are made legal it will result in less reproduction, thus the population will reduce. Thus the same sex relationship if allowed should be capped with adoption of one child at least. That is such families are bound to adopt children. Thus in this way the cycle of reproduction will not be stopped and the growth in the population could be normalized.
References
Kydland, Finn, and Edward Prescott (1982): “Time to Build and Aggregate Fluctuations,”Econometrica, 50(6), 1345-1370.
Yongsung Chang, Sun-Bin Kimy. (2011). The Price of Egalitarianism. The B.E. Journal of Macroeconomics. 11 (1), 2-10.
Chang, Roberto, and Andres Velasco (2000). “Liquidity Crises in Emerging Markets: Theory and Policy”, NBER Macroeconomics Annual 1999, vol. 14, MIT Press, 11-58.
J. Lee, P. Scaramozzino. (2007). Yongsung Chang, Sun-Bin Kimy. (2011). The Price of Egalitarianism. The B.E. Journal of Macroeconomics. 11 (1), 2-10. . Available: http://www.cefims.ac.uk/documents/research-73.pdf. Last accessed 19th Apr 2012.
Tobin, J. and Buiter, W. 1976. Long-run effects of fiscal and monetary policy on aggregate demand. In Monetarism, ed. J. Stein. Amsterdam: North-Holland
Dr. Econ. (2003). What is deflation, what are the risks of deflation, and how can the Fed combat deflation. Available:
http://www.frbsf.org/education/activities/drecon/2003/0305.html. Last accessed 19th Apr 2012.
http://www.AmosWEB.com, AmosWEB LLC, 2000-2012. [Accessed: April 19, 2012].
J. Bradford DeLong. (2011). Investment, Net Exports, and Interest Rates. Available: http://econ161.berkeley.edu/. Last accessed 19th Apr 2012.
Joseph Nicholson. (2011). Interest Rate Effect on Aggregate Demand. Available: http://www.ehow.com/about_5125402_interest-rate-effect-aggregate-demand.html. Last accessed 19th Apr 2012.
Moign Khawaja. (2012). GCC trade surplus biggest in the world. Available: http://arabiangazette.com/gcc-trade-surplus-biggest
QnB. (2012). GCC trade hits new records as Asia rises in prominence. Available: http://www.qnb.com.qa/qnbint/inner.jsp?pagetype=news&page=QNBConvNewsRoom&lang=en&id=1332400967225. Last accessed 19th Apr 2012.
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