3. You are given the following information about an economy. Income: $102 billio

Question

3. You are given the following information about an economy.

Income: $102 billion

Tax: $28 billion

Consumption: $48 billion

Government spending: $138 billion

(a) What is private saving? ($500)

(b) What is public saving? ($500)

(c) What is national saving? ($500)

(d) Based on your answer in part C, is this country running a current account surplus or deficit? (Hint: use algebra in your answer. Assume investment is > 0). ($1,000)

(e) What impact will your answer in part D have on this country’s capital/financial account? ($500)

4. In class, we used the global debt clock to analyze the effects of government debt.

http://www.economist.com/content/global_debt_clock

Click on Japan. Japan has a public debt of over $12 trillion & its public debt as a % of GDP is among the highest rates of any Western nation. Yet Japan government bond yields (the rate at which the government borrows) are less than 1.5% (even lower than America). Why is this case? ($1,000)

5. Assume the initial $/£ exchange rate is equal to 1.50.

a) Assume Americans buy more UK imports. $/£ rises to 1.80. Has USD $ appreciated or depreciated? Illustrate this on the graph below. Place the US $ price of 1£ on the vertical axis; quantity of £ on the horizontal axis. ($1,000)

b) If the Fed Reserve did not want the dollar price of the pound to change, what actions could it take? Illustrate this on the graph below ($1,000)

6. How does China’s trade surplus with America put pressure on it currency (the Yuan or RMB) to rise. How does its central bank prevent the Yuan (RMB) from appreciating? Describe the actions and illustrate on a graph. Place the US $ price of 1 Yuan on the vertical axis; quantity of Yuan on the horizontal axis. ($2,000)

7. Read this article about Germany’s trade surplus.

http://www.brookings.edu/blogs/ben-bernanke/posts/2015/04/03-germany-trade-surplus-problem#.VSGv-yiRQgg.facebook

a) Why has Germany’s trade surplus been increasing in recent years? ($1,000)

b) Why is Germany’s rising trade surplus a problem for the Eurozone & the global economy?

Explanation / Answer

3.

Private Savings = Y - C = 102-48=54

Public Saving= T-G = 28-138 = -110

National Savings =Public Saving + Private Saving = 54-110=-56

Current Account = Savings - Investments = -56-I <0 implies current account deficit.

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