Final Exam. Principles of Macroeconomics

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  1. Carefully explain the difference between discretionary and nondiscretionary fiscal policies. Now suppose the economy is functioning within acceptable levels of inflation and unemployment rates but the short-run equilibrium position is far removed from potential GDP, would there be a need for the federal government to deploy discretionary fiscal policies?
  • The unemployment rate in the economy is now lower than full employment unemployment rate (about the same as frictional unemployment). However, the current inflation rate is also very low (it stands at 2.5%). What is your best approximation of where the short-run equilibrium is in relation to potential GDP? If you are the chief economic adviser to the president, is there a reason to worry? Does this situation indicate that nondiscretionary fiscal policies are properly set? Explain.
  • Under what conditions would you conclude that federal fiscal policies are contradictory to the Federal Reserve Bank’s monetary policies? What would the indications be? Would this situation indicate that both governing bodies are intentionally at odd?
  • The economy of Guban is a simple one. The spending habit of consumers reflect a culture of “conspicuous consumption” where the need to prove you are successful compels you to spend more than your annual income by borrowing to sustain this habit. This means that aggregate savings in the economy is very low. The marginal propensity to consume (MPC) is estimated to be 80%. Approximately 90% of consumed goods in the economy is imported.
  • If policy makers want the economy to develop and industrialize, what steps should they take to make this possible?
  • If one of the steps they want to implement is to attract foreign direct investment into the economy, what must they first put in place to make the economy attractive to foreign investors?
  • Now suppose the country becomes attractive to foreign investors, and within six months two billion dollars are invested in the economy, what impact would this have on the economy’s GDP?
  • If the federal government raises taxes in order to discourage current consumption habit, what effect would this have on the GDP multiplier?
  • If Congress passes a law that requires the federal government to have a balanced budget every year, does this affect nondiscretionary fiscal policy?

Note: Do not assume that I know what you intend to say ….explain your answers clearly. There is no need to panic; be calm, think of what we have discussed in class, and give me your best effort.