ECON 4423 University of California Economics Discussion Questions
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ECON 4423 Spring 22
Assignment 3
Question 1. As an analyst for ECON 4423 Consulting Inc., you have been asked to predict
the behavior of key macroeconomic variables for different scenarios on the state of policy
between the US and Europe. Using all the appropriate diagrams, your analysis must
describe the behavior of the American money and output markets, as well as the foreign
exchange market. To perform this task, you must assume that prices are sticky: fixed in the
short-run and flexible in the long-run. Also assume that the exchange rate is freely floating.
The scenarios are:
a) A temporary restrictive monetary policy in the United States.
b) A temporary restrictive fiscal policy in the United States.
Question 2. The Central Bank of the Bahamas pegs the Bahamian Dollar to the United
States Dollar at a price of 1 BSD per USD. As an analyst for ECON 4423 Consulting Inc., you
have been asked to predict the behavior of key macroeconomic variables in the Bahamas
for different policy scenarios. Using all the appropriate diagrams, your analysis must
describe the Bahamian money and output markets, as well as the foreign exchange market.
To perform this task, you must assume that prices are sticky: fixed in the short-run and
flexible in the long-run. The scenarios are:
a) A temporary restrictive monetary policy in the Bahamas.
b) A temporary restrictive fiscal policy in the Bahamas.
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Question 3. Consider the following example of an economy whose population wishes to
smooth consumption. In this economy, output Q (GDP) is generated by a tree that bears
fruits. That is, the economy produces fruits, and consumers consume fruits. To start with,
assume that the tree produces Q = $200 billion worth of fruits every year (in real terms).
This economy does not have a need for investment and does not have a government (GNE =
C and I = G = 0). Also assume that intial wealth is zero and that the world real rate of
interest is r=0.04 (or 4 %). For each of the following scenario, find the numerical values of
consumption, the trade balance, net factor income from abroad, and external wealth for
every period. In addition, compare your answer for this open economy to your answer for a
closed economy. The scenarios are
a) No shocks.
b) Current shock: Assume that at time 0, the economy is hit with a temporary
income shock where GDP rises to Q0=$330 billion but future GDP remains at
Q=$200 billion.
c) Future shock: Assume that initial GDP remains at Q0=$200 billion but all future
GDP rise to Q=$330 billion.
d) Permanent shock: Assume that initial and all future GDP rise to Q0=Q=$330
billion.
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