Question -1: What are government’s fiscal policy options for ending severe demand-pull inflation? Which of these fiscal options do you think might be favored by a person who wants to preserve the size of government? A person who thinks the public sector is too large? How does the “ratchet effect” affect anti-inflationary fiscal policy?
Question-2: What is the basic determinant of (a) the transactions demand and (b) the asset demand for money? Explain how these two demands can be combined graphically to determine total money demand. How is the equilibrium interest rate in the money market determined? Use a graph to show the effect of an increase in the total demand for money on the equilibrium interest rate (no charge in money supply). Use your general knowledge of equilibrium prices to explain why the previous interest rate is no longer sustainable.
Question-3: Why is quota more detrimental to an economy than a tariff that results in the same level of imports as the quota? What is the net outcome of either tariffs or quotas for the world economy?
Question-4: Explain why the U.S. demand for Mexican pesos is downsloping and the supply of pesos to Americans is upsloping. Assuming a system of flexible exchange rates between Mexico and the United States, indicate whether each of the following would cause the Mexican pesos to appreciate or depreciate, other things equal:
- the United States unilaterally reduces tariffs on Mexican products.
- Mexico encounters severe inflation
- deteriorating political relations reduce American tourism in Mexico
- the U.S. economy moves into a severe recession
- the United States engages in a high-interest rate monetary policy
- Mexican producers become more fashionable to U.S. consumers
- the Mexican government encourages U.S. firms to invest in Mexican oil fields
- the rate of productivity growth in the United States diminishes sharply