I have a few questions on here I don't think it would be more than two pages max but I could be wrong
Microsoft Word - E736_AA_4.docx BusinessConditionsAnalysis ECON736 Analytical Assignment #4 Professor Yamin Ahmad Instructions: There are four questions in this analytical assignment. Each question is worth the same ‐10 points. You should answer all four. Please be concise in your answers. Answer ONLY what the question asks, as points are not awarded for verbosity! You should limit your answers to each question to a single page. In terms of a general hint to try and maximize points, try to relate the context of the questions to any of the models that we have studied in lectures. Where appropriate, use graphs and equations to help elucidate your answer! You may use your lecture notes and the textbook. You may not work on this assignment with anyone else. Your submission must be put into the appropriate submission folder by the assignment deadline indicated within Canvas. Please include and sign the agreement below when turning in the assignment into the Canvas submission folder. Agreement: All of the work on this exam has been done independently by myself, without consulting any other students in this class or faculty in other classes. As presented in class, the essays may be done with a referral to formulae, but all of the written material in the essay is original, “synthetic” independent work, with no copying of published or unpublished material. I attest that this assignment has not been copied or distributed in any part or form. Name (Please Print): _________________________________ Student Id#: ____________________ Signature: ____________________________________ Date: __________________________ [For electronic submissions, please put your initials in the signature space above to indicate acquiescence to the agreement above.] Econ736AnalyticalAssignment#4 1. (10 points) What are the key channels by which fiscal policy affects output in a closed versus open economy? Using the models studied in class, discuss what is meant by “crowding out”, and how the crowding out effect works in an open economy. How does this effect differ to the way it works in a closed economy? To what extent does the efficacy of fiscal policy (i.e. in affecting output) depend on the type of exchange rate regime? 2. (10 points) In the data, the trade deficit appears to be procyclical (‐ take this as a statement of fact). Define what is meant by a trade deficit and by the trade deficit exhibiting procyclical behavior. Using one of the open economy models studied, use a diagram to outline a possible explanation for the procyclical behavior of the trade deficit. Note: you may include a brief explanation to accompany your diagram to detail the mechanism by which we are able to obtain a procyclical trade deficit. 3. (10 points) France and Poland each have one worker whose monthly linear Production Possibility Frontier indicates the following production possibilities: Poland France Computers (C) 24 6 Grain (G) 4 3 a) (1pt) France’s opportunity cost of G in terms of units of C equals ______ ? b) (1pt) Poland’s opportunity cost of G in terms of units of C equals ______ ? For the following parts, please complete the questions by filling in the blank, and responding to remainder of the question: c) (2 pt) Poland’s comparative advantage is in ______ because: d) (3pt) If France and Poland decide to trade, _________ will be the exporter of G while ______ will be the importer because: e) (3 pts) If the economies choose to trade, the world relative price of goods must be ________ in order for trade to be mutually beneficial, because: 4. (10 points) In the following problem, assume that the UK currency is the pound sterling (PST) and the currency in the rest of the Europe is the euro (EUR). Suppose that the PST appreciates relative to the EUR. Econ736AnalyticalAssignment#4 For the following parts, please indicate what happens to the variables below by stating whether they: increase, decrease, or stays the same, along with a single sentence as explanation for why. You will not receive any credit without providing an explanation. a. (1 pt each) In the UK: ‐ How would the export demand change? Why? ‐ How would the import demand change? Why? ‐ How would net exports change? Why? b. (1 pt each) In the rest of Europe: ‐ How would export demand change? Why? ‐ How would import demand change? Why? ‐ How would net exports change? Why? c. (4 pts) Suppose that the central bank in the UK (The Bank of England) decides to raise interest rates because it is worried about high inflation. As a result, interest rates in the UK become higher than interest rates in the REST OF EUROPE. This acts as an incentive for EUROPEAN investors to increase the amount of funds they invest in British (UK) interest bearing assets. In order to increase their purchases of those UK assets, which are priced in PST, EUROPEAN investors have to convert EUR into PST. This conversion, in turn, increases the demand for PST. Based on the above information, please explain: i) (1pt) Given that interest rates in the UK are now different than that in Europe, what equation/condition may be used to explain this behavior of the (nominal) exchange rate. (Note: you just need to state the name of the equation or condition that may be used). ii) (1 pt) what will happen to the EUR‐‐‐‐PST exchange rate. In other words, will the increased demand for PST, make PST gain value (appreciate) or lose value (depreciate) against the EUR? (Please indicate your answer by picking one of the following: Appreciate/Depreciate/Stay the same. iii) (2 pts) Why? Please give a brief explanation using what you chose in part c (i).