Chapter 3 Macroeconomic Policy in an Open Economy
Exercises
1.True/False questions
TFTFT FTTT
2.Essay questions
(1)
a.Periodic cause (short run):
Flourish income, investment increase import increase trade deficit export increase
c.Systematic cause:
Economic structure, exchange structure, finance structure and others
d.Monetary cause:
Long-term inflation trade deficit
(2)
The objectives can be divided into two parts: internal balance objectives and external balance objectives.
Internal balance objectives consist of real-income goals (that is to achieve the highest possible growth in its citizens’ livings standards), employment goals (that is to reduce the size and volatility of workers unemployment rates)and inflation goals (that is maintain low inflation and to limit inflation volatility).
External balance objectives consist of two parts, which is balance of payment and stability of exchange rate.
The instruments that the government can use are need-adjustment policies, supply-adjustment policies and financing policies.
Need-adjustment policies include expenditure-adjustment policies which effect the volume of total need, expenditure-adjustment policies which effects the frame of expenditure and directly control policies.
Supply-adjustment policies include industrial policies (which focus on industrial structure), technological policies (which focus on development of technology and management)and Institutional innovation.
Financing policies are about the use of Official reserves.
(3)
The Tinbergen Rule states that for every policy target, there must be at least one policy tool.If there are several policy goals to be achieved, there must be at least the same number of the policy tools, and all of the policy tools should be independent of each other.
(4)
a.Exchange rate system has an important effect on the effect of fiscal and monetary policy in an open economy.
b.Fiscal policy is more effective than monetary policy under the fixed exchange rate system.
c.Monetary policy is more effective than fiscal policy under the floating exchange rate system.
d.The effectiveness of fiscal and monetary policy is related to capital mobility.
(5)
a central bank policy of altering domestic credit in an equal and opposite direction relative to any variation in foreign exchange reserves so as to prevent the monetary base from changing.
(6)
a.It mainly refers to trade restrictions and foreign exchange control.
b.Direct control policy uses methods such as price control, administrative approval, tariff to control trade in goods and service, capital flow, currency exchange and the level of exchange rate.So the economic policy objectives can be reached.
(7)
—The Marshall-Lerner condition
—Interaction of stocks and flow
—Neglect of long-run constraints
—Wealth effects
—Neglect of supply-side factors
—Treatment of capital flows
—Exchange-rate expectations
—Flexibility of policy instruments