Macro12 - Essay Example

Macro 12 Lesson 12: Inflation vs. Unemployment Did Reaganomics work? Justify your answer. Reaganomics did work in expanding the economic growth in the country. Even though it did create short term deficits but it is good for the average consumer. The cut in taxes allows the labor force to expand which then allow for the government to increase its tax bases, thus not majorly impacting taxes in the country. At the same time, it allows the average person to enjoy a better salary and thus more money in the pockets of these people.

They thus spend more and directly increase the GDP of the country. In the period when this strategy was implemented, US did enjoy a period of sustained economic growth. Show graphically the effects on the macro economy of a sharp rise in OPEC oil prices in A. the short run. B. the long run. How do you account for the differences in your answers to parts A and B? In the short run, a sharp increase in price leads to a sharp decrease in supply. When supply of oil decreases, it decreases supply of other products in the market which eventually negatively impacts the output or GDP drastically.

In the long run, the impact on the supply is lessened. The output and GDP still decrease but not at a drastic pace. Contrast rational expectations and adaptive expectations views of the Phillips Curve. As per the rational expectations view of the Philips Curve, the curve shifts rapidly as economic policy changes which is affected by the aggregate demand. This does not impact the unemployment rate in the country but the inflation rate increases. On the other hand, as per the adaptive expectations view, a change in policy would result in a fall in employment rate.

A rise in inflation and GDP would also be noted. What is stagflation? Use the Phillips curve to illustrate your answer. Stagflation is a period when the countrys inflation is rising but the output is decreasing. The decreasing output then results in an increase in unemployment. The decreasing GDP usually decreases as a result of increase in general price of commodities and increase in business costs. The Phillips curve does not accept the above explanation. According to the Philips curve, when employment rate decrease, the wage of the labor increase directly.

This can be illustrated through the following graph. Lesson 13: International Trade Assuming a system of flexible exchange rates between Mexico and the United States, indicate whether each of the following would cause the Mexican peso to appreciate or depreciate, other things equal A. Mexico encounters severe inflation When Mexico encounters severe inflation, the value of the Peso would depreciate. This is because during inflation, the prices of good increase even though the value remains the same.

Also the price of the dollar during exchange rate would increase causing the Peso to depreciate. B. The U.S. economy moves into a severe recession If the US economy moves into a severe recession, the value of the dollar would eventually fall down. Since the Mexican Peso is tied with the US dollar, it is expected that the price of the Peso would increase in case of flexible exchange rates. C. Interest rates in the U.S. increase If interest rates in the US would increase, the value of the Peso would depreciate.

This is because Mexico has borrowed a large sum of money from US. They pay back these loans on the US interest rates. If interest rates would increase, the figure of the loans would directly increase. This would mean that the value of Peso would depreciate. D. Drug violence along the border reduces American tourism in Mexico Drug violence along the border would reduce American Tourism in Mexico along with it, it would reduce the value of Peso. This is because the Mexican economy gains money from American tourism.

With the decrease in American tourism, the amount of dollar inflow into the country would decrease causing the Peso to fall in value. Suppose a shirt marketed by Celio of Paris sells for 220 francs. If the current exchange rate is 5.5 francs/$, what is the price of the shirt in dollars? 5.5 francs= 1 dollar 1 franc= 1/5.5 dollars 220 francs= 1/5.5 *220 dollars= 40 dollars The price of the shirt would be 40 dollars. If the franc depreciates 9% from its previous dollar value, what will happen to the dollar price of the shirt (Be specific and show your work)?

If the franc depreciates 9% from its previous dollar value, the new exchange rate would be increase 5.5*9%=0.495 5.5+.495=5.995 The price of the shirt would now be 1/5.005*220= 36.70 dollars What effects will the depreciation in question #3 have on the equilibrium GDPs of France and the United States, ceteris paribus? Why? In the case of depreciation, the prices of US products would increase and the price of products imported from France would increase. If all other things remain the same, this means that US would enjoy from an increase in export value.

This would reflect in an increase in GDP of US. On the other hand, the GDP of France would fall since the value of imports would increase and that of exports would decrease. The equilibrium GDP would shift in the favor of US.