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Written Assignment 4 14 days

Required Textbook • Principles of Macroeconomics, 5th ed., by N. Gregory Mankiw (Mason, Ohio: Thomson/South-Western, 2008). ISBN-13: 978-0-324-58999-3. Answer all of the following questions. Title your assignment "Written Assignment 4," unless your mentor directs otherwise. This assignment covers text chapters 18 through 23.

1. Explain the relationship among savings, investment, and net capital outflow.

2. Describe the economic logic behind the theory of purchasing-power parity (PPP). What factors might prevent PPP from holding true?

3. Describe supply and demand in the market for loanable funds and the market for foreign currency exchange. How are these markets linked?

4. What is capital flight? When a country experiences capital flight, what is the effect on the country's interest rate and exchange rate?

5. List and explain the three theories for why the short-run aggregate-supply curve is upward sloping.

6. What might shift the aggregate-demand curve to the left? Use the model of aggregate demand and aggregate supply to trace through the short-run and long-run effects of such a shift on output and the price level. Use the following diagram to help explain your answer.

7. Suppose the Fed expands the money supply, but because the public expects this Fed action, it simultaneously raises its expectation of the price level. What will happen to output and the price level in the short run? Compare this result to the outcome if the Fed expanded the money supply but the public didn’t change its expectation of the price level? Use the diagram below to explain your answer.

8. What is the theory of liquidity preference? How does it help explain the downward slope of the aggregate-demand curve?

9. Suppose that survey measures of consumer confidence indicate a wave of pessimism is sweeping the country. If policymakers do nothing, what will happen to aggregate demand? Explain what the Fed should do if it wants to...