Name Score 100 Macroeconomics Problem Set 4 Due Monday March 30 by 10 00 am Please type your answers to multiple choice questions in the following table For the short answer questions please type the answers in the spaces provided below each question Save the file with the name aaa bbb PS4 doc where aaa is your first name and bbb is your last name Submit the file by emailing it to MSPEMacro gmail com Please include Problem Set 4 in the subject line of your email Late submissions will lose all points for the problem set Answer Form for Multiple Choice Questions Question 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Answer Part A Multiple Choice Questions Choose only one most satisfactory answer for each question 5 points each The following three questions are based on the article Central banks Don t give up published by The Economist on June 30 2012 They can be viewed through UIUC Library Online Resources For your convenience these articles are copied below 1 The article Central banks Don t give up mentions that as US and EU economies slowed down in 2012 long term bond yields hit record lows From this observation we can infer that a the LM curves of these two economies must have been shifting upward and their IS curves must have remained unchanged b the LM curves of these two economies must have been shifting upward and their IS curves must have been shifting downward c the either the LM curves of these two economies must have been rotating downward or their IS curves must have been shifting to the left or both d both the LM and IS curves of these two economies must have been shifting upward 2 According to the article Central banks Don t give up one camp led by some prominent economists argues that central banks are not doing enough They suggest that central banks should be targeting temporarily higher inflation The idea is that such a policy would be mainly a a b c d shifting the LM curve downward shifting the IS curve upward shifting the LM curve upward shifting the IS curve downward would be raising output with shifting the LM and IS curves 3 According to the article Central banks Don t give up which of the following is a key reason the critics of central bank activism worried that loose monetary policy was becoming increasingly dangerous Macroeconomics Problem Set 4 1 a Loose monetary policy had allowed governments to avoid addressing their fiscal problems e Loose monetary policy had blurred the line between illiquidity and insolvency of firms f Loose monetary policy had blurred the line between illiquidity and insolvency of governments g Loose monetary policy had allowed politicians to deal with unsustainable promises and debts 4 In 2009 the U S aggregate real income Y dropped sharply We want to figure out what factors may have caused the decline Assume that the markets for money and for goods and services were both in equilibrium at all times We know that the LM curve shifted downward due to a large increase in money supply Which one of the following factors could have caused the decrease in income in that situation a e f g h A temporary increase in the domestic nominal interest rate A temporary decrease in net taxes An increase in the expected return on investment A temporary decrease in the domestic price level A temporary decline in private consumption due to the decline in real wealth 5 The Central Bank of Thailand has decided to increase the country s money supply temporarily during the current year In the short run when prices are sticky but the exchange rate is allowed to vary in a flexible way this policy will a i j k l raise the equilibrium aggregate real income in Thailand cause a depreciation of the nominal exchange rate in Thailand cause a decline in the interest rates in Thailand all of the above only a and c 6 The government of Korea wants to raise the value of the country s currency and increase domestic income of the economy in the short run Which combination of the following short term policies can definitely yield the desired result a m n o p Increase money supply and keep government expenditure unchanged Increase money supply and reduce government expenditure Increase both money supply and government expenditure Increase government expenditure and keep money supply unchanged Reduce both money supply and government expenditure 7 The debt crisis in the EU has led to a decline of the real incomes in Europe this year Assume that the decline is temporary and that the nominal interest rate in Europe have remained unchanged The price levels in the EU and the US are sticky What impact this event is likely to have on the value of euro vis vis the US dollar a b a b The euro must have appreciated The euro must have depreciated The euro must remained unchanged The appreciated or depreciation of the euro cannot be predicted Macroeconomics Problem Set 4 2 8 Suppose the real exchange rate between Korean and Taiwanese economics is expected to remain constant at its current rate Assuming that the interest parity condition holds a q r s the Korean and Taiwanese risk free nominal interest rates must be equal to each other the Korean and Taiwanese risk free real interest rates must be equal to each other the risk free nominal interest rate in Korea must exceed the one in Taiwan the risk free real interest rate in Taiwan must exceed the one in Korea 9 Panama has maintained a fixed exchange rate vis vis the US dollar This year the president is up for reelection and the government has increased its expenditure to stimulate to economy If the exchange rate peg is credible and the government has kept the movement of capital across the country s borders free which of the following statements is true about money supply growth in Panama this year a b c d Money supply must have declined Money supply must have stayed constant Money supply must have increased Money supply may have declined or increased 10 In the above question suppose people come to believe that the Panamanian currency balboa will depreciate against the dollar next year If the government maintains the peg for now and the interest parity condition holds we must observe a b c d a rise in the interest rates in Panama a decline in the interest rates in Panama no change in the interest rates in Panama a rise or a decline in the interest rates in Panama 11 Assume that Colombia allows capital and goods to move freely across its borders and that its central bank follows a fixed exchange rate policy vis vis the US dollar Take the