ECON102_Online Review of Final Exam Qs: Q1: You will need to read the transcript of the testimony given by the Fed Chair and find key points on his speech given about the current state of the economy and strategic monetary policy actions with your observation. Q2a should be straight forward. There are couple of steps to take in Q2. The interest rate difference you already know between UK and US, but if you transfer US$ to UK, you need convert that into British IB in current exchange rate. Then with UK interest rate you need you get total value after a year and convert back in speculated exchange rate. Find the rate of return after bringing money back and compare with .5% return. Based on that answer if you lost money or made money by investing in UK. 2b. find the exchange rate that would make breakeven by setting the equation for break- even condition. Q3. Start with the objective of the Fed to using the Federal fund Rate as an effective policy tool target. Then highlight the circumstances of uncertainty emerged out of covid-19 crisis causing severe decline in employment and economic growth. Also read some of the related news articles by google search and you tubing. Q4. A. This is similar situation of QE the Fed used in 2009 as extraordinary measure to boost the economy, now why they are doing that again? The reason is obvious –to save the economy from depression. However, the danger of excessive money supply (what is the danger?) still remains that you need to explain. Q4b. You need to talk about one of the M. Policy targets in controlling short term interest by the Fed. Q5a. talks about given economic conditions, what should be the policy prescription for $value. Well the Fed has to look at inflation rate, unemployment rate and interest rate situation current vs expected state of economy in the fall of 2020 and act accordingly. Since US$ exchange rate is predominantly determined by D and S changes in foreign exchange mkt, the Fed usually doesn’t want to mess around to manipulate the exchange rates under normal state of the economy. Having said that, it is imperative for the Fed to leave the exchange rate alone when the economy is at full employment, with stable price expectations to rise in near future. But it is different when the economy is severe recession.
Keep that in mind that manipulating currency value has consequences in both export, import, and inflation. Therefore, appreciation or depreciation of US$ by the Fed is tricky. 5B. You will have to use your answer in 5A to illustrate in the AD-AS diagram for this question. 6. a. Let us talk about the concept first before we look at the Qs asked. Budget deficit = G-T>0 meaning G is higher than Tax revenue every year – a chronic situation for US govt. The accumulated yearly budget deficits make the public debt = $20T. Plus $2.7bTrillion for COVID-19 recovery. Now, higher G and lower T makes the budget deficit worse, but it helps the economy grow faster recover quickly. The crux of the Keynesian economics. Also, it is very easy for the US govt to borrow money of any amount, 10b, 20b a day, at a very low yield (price is high due to high demand from investors). So, financing the budget deficit is very easy and that also makes the Wall Street firms (all investment bankers) and foreign govt investors happy. It creates millions of jobs in the Wall Street and other sectors. Now get back to the Q what happens in the SR (Q6a) if G falls and tax increases on the aggregate demand and on GDP growth and employment. 6b. Then what would be the LR implications. For LR implications, you may want to read the section called crowding out effect for increasing US public debt. Also there are many articles published you can search in online library sources and other websites.