Running head: EXAM 3
Question 1: a. To attack the problem of inflation I would increase federal funds rate using it as important tool of monetary policy to overcome inflation. Important tools of fiscal policy to fight inflation are raising taxes and cutting government expenditures.
b. I selected those tools just because of their usefulness. The solution should work well. Increasing federal funds rate means raising interest on bank loans used in operations between different banks. That helps to withdrawn more money from the circulation. Introduction of high taxes will reduce currency outside the national treasury.
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c. The key economic variables will also be influenced. Real Gross Domestic Product (GDP) will suffer losses as cutting government expenditures will interfere with the investment. The level of unemployment will be higher after the decrease of inflation as less money may be paid. The interest rates become lower and the exchange rates become higher when the inflation rate decreases.
Question 2: a. In case of recession, the state should use such tool of monetary policy as expand the stock of money. The important tools of fiscal policy in this case are increasing federal spending.
b. These tools are important because increasing federal spending motivates the economy. Expansion of stock of money will broaden consumer spending and financing business.
c. All the actions help to overcome the recession. The Stock returns will become more predictable, the level of unemployment and GDP will increase, and the interest rates will be higher while the exchange rates will become lower.
Question 3: a. 4 key supply side growth factors are state of the art, the prices of resources, the amount of tax, and the number of manufacturers. If these factors influence GDP, the capital expenditures will increase. The development of technology results into increasing of rates of resource productivity. Therefore, interest is also rising. The price on resources affects the product costs and supply side. In the period of slow growth or no growth future in case of high prices and little money, the production of goods would be in crisis. During crisis, the government may increase the taxation rates and the prices on goods in order to protect them from destruction. The number of manufacturers will result in exhaustion of cheap resources.
Question 4: a. 1. Petroleum of higher quality may be used to increase growth rate to at least 4%.
2. The economic will be growing as the petroleum will be more expensive and the taxation rate will be higher.
3. For this, the state should increase government expenditures on the resources for petroleum production.
4. The wages for employees and taxes on the products should be increased. Therefore, the prices on petroleum will be higher. Federal spending will increase.
5. To attack the problem I selected making the taxes and the interest rate higher.
b. Changing the wages for employees, taxes, interest rate.
d. Therefore, GDP will increase, the level of unemployment will be lower, the interest rate will become higher, exchange rate will increase, and the stock returns will be more or less predictable.
Question 5: a. It is better to improve a quality of workers than get more employees.
b. The government should invest more money in working equipment of higher quality, and increase workers salaries.
c. Therefore, the prices on goods will be higher, the taxes should be higher, and the workers will get a higher salary and the cost of revenues will be justified. The treasury will be replenished through taxes.
d. GDP will increase, the level of unemployment will be higher, the interest rate will become higher, and exchange rate will increase.
Question 6: a. Argentina, Ecuador, Egypt, Pakistan, Venezuela, Belize, Cuba, Cyprus, Greece, Jamaica, and Ukraine have been in danger of defaulting on their national debt. The possible implications on defaulting the debt are high rates of investments in some branches that resulted in money losses, difficult political situation with other countries, decreased interest rates in countrys resources and products by other states etc.
b. Solutions may be extending the fields of interest and investing in them, establishing diplomatic relationships with other interested countries.
Question 7: The National Debt is the amount of money borrowed to USA by other countries. It should be paid off.
a. The advantage of paying it off is that there will be no debt owed by the USA. The disadvantage is that there will be fewer finances in the treasury to invest in profitable fields. I would use running budget savings approach to the elimination of the national debt.
b. There is no alternative.
d. GDP decreases, unemployment increases, market stock returns become more predictable, the interest rates lower.
Question 8: The transaction demand for money is demand for money daily, for example to buy some eggs, or to have your car washed. The asset demand for money is the money used for investment. Some people may use money for goods and things the other people invest in.
Question 9: a. Money creation is the increasing of money supply or printing money. The commercial banks purchase and sell different financial bills, bonds etc. Money may be destructed electronically with the help of security purchasing.
b. The Federal Reserve will address the issue of recession through the monetary policy tools such as raising rates of interest by instruction, decreasing the monetary basis, and increasing reserve ratios. GDP will increase, unemployment will increase, and the rates of interest will increase while the exchange rates will decrease.
Question 10: The functions of the Federal Reserve System are:
1. providing supervision and examining of the member banks;
2. providing sorting checks and payments from deposits in financial institutions;
3. currency circulation;
4. maintenance of reserve accounts;
5. fiscal agents for the U.S. government.