Running head: SECOND SEMINAR MACROECONOMICS

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Running head: SECOND SEMINAR MACROECONOMICS

CHAPTER XIV-XV-XVI
1. Advantages of having a monetary policy out of the hands of the government
Rather than having the governments deal with the monetary policy, it may be fixed by a currency
board. This helps to control the inflation by creating a tie in the prices of those tradable goods
that are produced locally and that of the marketable products in the anchor country, suppressing
and finally killing the inertial element of inflation. Secondly, it minimizes the component of
currency risk from local interest rates hence reducing the cost of funds for the private sector and
the government and improving the outlook for financial break through, investment and growth.
Masson & Pattillo (2004).
2. The banking transaction that creates money
Most of the money that circulate in the economy is set up in the form of deposits. The money
that the customers deposit is in turn given out in the form of loans at an interest rate. When the
customer checks his balance over the counter, what appears is just an electronic entry, but the
real money is already circulating and earning interest to the banks. Axilrod, (2011).
3. Sources of reserves at the commercial banks.
Banks get their reserves through deposits. When customers take their money to the bank, the
bank uses these funds to retain its stability. Most of the depositors keep their money in their
accounts for extended periods of time while others deposit in fixed deposit accounts.
4. Difference between the real interest rate determined by the invisible hand, and the
discount rate.
The real interest rate is the nominal interest rate corrected for inflation. It is equal to the nominal
interest rate less the inflation. Since inflation diminishes the value of money over time, It is a

Running head: SECOND SEMINAR MACROECONOMICS

reflection of the actual return on savings or the cost of borrowing. The invisible hand coordinates
savings and investment
The discount rate is the interest rate on the loans that the Fed makes to banks. The Fed
can control the supply of money by altering the discount. An increase in the discount rate
discourage banks from borrowing reserves from the Fed, hence when the discount rate reduces, it
also reduces the amount of reserve in the bank system hence limiting the money supply. On the
other hand, when the discount rate is low, it encourages the banks to borrow money from the Fed
hence increasing their reserves
5. Money multiplier and simple multiplier.
Money multiplier
The phrase money multiplier refers to is the amount of money generated for each reserve dollar.
Reserve is the minimum deposits that Fed requires the banks to hold without lending
Simple multiplier implies that the marginal propensity to consume is below 1. This means that an
autonomous increase in government spending will increase income more than the spending
amount
6. Explain why if the price of the bonds goes down, its interest rate will go up. Under what
business cycle will the Fed lower the price of the bonds? Explain your answer.
If Fed sells bonds, and reduces the money supply by drawing cash from the economy in
exchange for bonds. Therefore, this has a direct effect on money supply. If the Fed buys bonds,
prices are pushed higher, and interest rates decrease; if the Fed sells bonds, it drives prices down,
and rates increase.

Running head: SECOND SEMINAR MACROECONOMICS

When altering the economic policy, Fed uses interest rates. When the economic growth is weak,
and the inflation is low, Fed lowers the interest rates, and if the inflationary pressure is
increasing, the interest rates will raise.
Mutual relationship between stabilization instruments and macroeconomic parameters in
the context of the economic situation of the country
1. How to curb inflation if demand-pull inflation creates it.
Demand pull occurs when there is excessive money available to the public where it is only
available to few people. The few people will chase constant supply of goods; hence, the prices
will be skyrocketed.
The remedies include:

The social programs provided by the government to the people should concentrate on the

poor people equitably without bias

The government should create employment opportunities so as the people can join the

market economy.
The unproductive areas within the economy should be eliminated.
2. Curbing inflation caused by cost-pull inflation
The government should introduce a deflationary fiscal policy where there are higher taxes and
reduced spending. This would, in turn, increase the cost of borrowing and minimize the
consumer spending and investment.
3. Explain which type of inflation is harder to curb
Cost pull inflation is also referred to as the wrong inflation since it results in reduced living
standards. It is the hardest to curb since it results in inflation and a falling output

Running head: SECOND SEMINAR MACROECONOMICS

4. If there is a high deficit in the budget and the economy is experiencing a light recession,
the most appropriate policy is the restrictive fiscal policy. When the government has a
high spending and reduced taxes, the government fund will be inclined towards a deficit.
The government will then borrow money to deal with the excess spending about revenue.
The government should reduce its expenditure and increases taxes, which will then shift
the budget toward a surplus. This will then minimize the governments outstanding debt.
The Shifts toward budget surpluses and reduced borrowing are indicative of restrictive
fiscal policy.
5. If the economy is suffering a deep recession, fiscal policy is the most preferable. Fiscal
policy reduces unemployment by increasing aggregate demand and the economic growth
rate. The government needs to pursue an expansionary fiscal policy which involves
reducing taxes and increasing government spending. Keynes advocated for expansionary
fiscal policy in times of deep recession. He argues that during a recession, resources, i.e.,
both labor and capital remain idle, hence and calls for the intervention of the government
to create demand and reduce the unemployment
6. In your opinion, does the implementation of contractionary fiscal and monetary policies
foster growth? Explain your answer.
Yes. The primary objective of the contractionary fiscal policy is to minimize inflation.
Therefore, a reduction in government spending or an increase in taxes is implemented that
leads to decreasing inflation. However, it can also stimulate the rate of unemployment. In
other words, fiscal policy that leads to increased aggregate demand through increasing the
government spending is typically called expansionary. By contrast, fiscal policy should
always be contractionary if it minimizes the demand through reduced spending.

Running head: SECOND SEMINAR MACROECONOMICS

7. The implementation of expansionary fiscal and monetary policies may be considered to
be austerity measures because they are aimed at extending the supply of money to
promote economic growth and curb inflation. Expansionary fiscal policy supports tax
reduction and increased government spending with the focus of increasing the money
available to the economy
These can be regarded as countercyclical since they aim at reducing spending and increasing
taxes in times of boom and growing spending/cutting taxes during a recession.
8. Conditions where the devaluation of currency will necessarily lead to inflation.
devaluation will probably cause inflationary pressures because of the increased import
prices and high demand for exports. However, the overall impact depends on the state of
the economy and other factors affecting inflation.

Mutual international relationships among countries stabilization instruments and

macroeconomic parameters
1. Economic situations where will a country favor free trade without or very few tariffs?
A state will apparently promote free trade during times of high unemployment level since it is the
best in economic growth and creation of employment
2. Enemy to free trade
WTO while purporting to promote free trade, it is its principal enemy. Just like all other
bureaucracies, WTO mainly deals with advancing its power and hence cannot make international
trade an avenue for the promotion of labor rights. The main idea of the free trade becomes the
victim here
3. The concept of current account

Running head: SECOND SEMINAR MACROECONOMICS

This is given by the difference between the nations savings and its investment. The current
account is a great indicator of the economy's health. When the current account is positive, it
indicates that the nation is a net lender to the other countries. On the other hand, a negative
current account balance shows that the country is a net borrower from other nations.
The main components of current account include; trade in goods, trade in services, Investment
incomes, and net transfers
4. If the country devalues its currency, it may face some negative consequences. Wen the
imports become more expensive, the domestic small industries feel safe. However, higher
exports may increase aggregate demand leading to inflation
5. If a countrys exports are lower than its imports, national saving must, of course, be the
investment. Here, the country is a net borrower since national saving is not enough to
finance all the local investment, and so the extra investment must be financed by
borrowing from other countries. Mishkin & Savastano, M. A. (2001)

6.

According to the data presented in the PowerPoint presentation, which is the most likely
combination of deficits and surpluses between the budget and the current account as
percentages of GDP?

7. How the reduction in the GDP growth in China reduces Brazils and Australias exports.,
I think if the Chinas GDP reduces, the commodity prices and in turn a reduction in the

Running head: SECOND SEMINAR MACROECONOMICS

current account balances of these three countries since they are large exporters. This will
help minimize the worldwide the imbalances
8. Explain how the reduction in the US GDP growth biggest importer in the world
affects exports from China and Europe, and consequently reduces growth in the latter
countries. De la Torre et al (2007)
There exists a close relationship between imports and economic growth. When the
economic growth in the US is stable, China and Europe are able to export their products and
hence their economy also nourishes. The opposite is true, the same nations must suffer a
blow in times of slow growth in the U.S. a slow growth in America implies a reduced
demand for imports hence the countries that export to the U.S also suffer a problem in
economic growth

Running head: SECOND SEMINAR MACROECONOMICS

References
Axilrod, S. H. (2011). Inside the Fed: monetary policy and its management, Martin through
Greenspan to Bernanke. MIT Press.
De la Torre, A., Gozzi, J. C., & Schmukler, S. L. (2007). Financial development: Maturing and
emerging policy issues. The World Bank Research Observer, 22(1), 67-102.
Masson, P. R., & Pattillo, C. A. (2004). The monetary geography of Africa. Brookings Institution
Press.
Mishkin, F. S., & Savastano, M. A. (2001). Monetary policy strategies for Latin
America. Journal of Development Economics, 66(2), 415-444.