帮忙点拨一二就好

Fiscal policy & Exchange Rates/Trade

Reading: please refer to lecture notes fromWeeks 10 and 11& JM references

Objectives for Tutorial Ten

· Understanding differenteconomic viewpoints on fiscal budget deficits and public debt;

· Understanding how Treasuryconducts expansionary Fiscal Policy;

· How the RBA ensures that theimpact of fiscal policy on bank reserves does not compromise monetary policy.

Questions

1. # (Assignment question) Referto the macroeconomic accounting identities, discussed in L11.

a) Explain briefly why prudent behavior of the privatesector (households and firms) requires that S ≥ I.

b)Joe Hockey, the Australian Treasurer has repeatedlyargued that the Federal Government must ‘live within its means’. Explain whysuch a fiscal strategy is usually inconsistent with prudent private sectorbehavior.

c) If theprivate sector net spends (I>S) in the presence of a government surplus anda zero current account balance, explain what will happen in the long run toaggregate private sector saving and net wealth.

d)Is the scenario described in c) sustainable? Explainedwhat is likely to occur.

2. Considera flexible exchange rate regime. The RBA considers that the $A is over- valuedand is prepared to intervene in the foreign exchange market. This is referredto as a dirty float.

a) Explainwhat action the RBA could take.

b) Couldthe RBA adopt this action on a long term basis?

c) Doesthe RBA have the freedom to engage in this form of intervention on an ongoingbasis, if it considers the $A to be under-valued?

3. Under purchasing power parity (PPP), a homogeneous commodity, such asan Ipad or a Big Mac (or a basket of homogeneous commodities), should cost thesame across countries when the local prices are expressed in a common currency,such as the $US.

a) IfPPP holds, would it be worthwhile buying such items online from a foreignwebsite, when they are readily available in Australia?

In late July 2013 the exchange ratewas $0.90US = $1A. The price of a Big Mac was $A5.035 in Australia and $US4.56in the USA.

b) Isthere PPP for a Big Mac in the two countries? Explain.

c) Isthe $A over- or under-valued, taking into account the official exchange ratereported above?

4.Greece, Spain and Portugal, which are peripheral countries in the Eurozone, havebeen under severe pressure to adopt fiscal austerity measures and run budgetsurpluses. Private sector expenditures (consumption and investment) aresubdued. The current account to GDP ratios of these countries are nowapproximately 0, after being in severe deficit, but this is mainly due to aslump in imports, from lower levels of domestic economic activity, rather thanimproved competitiveness.

a) Howcould these countries attempt to achieve increases in expenditure ondomestically produced goods and services to raise GDP and employment? Hint:raise net exports – but how?

b) Whymight this strategy threaten current consumption and investment in thesecountries? Hint: check what is meant by debt deflation.

c) Intra-Eurozonetrade as measured by total exports represents about 70% of total exports fromEurozone countries. Would the policies adopted in a) to raise net exports inthe three countries have a favourable impact on all Eurozone countries?

End of Tutorial Exercise Set 10 (Week 12)