1 - Explain the effects of inflation, interest rates, exchanges rates and consum

Question

1 - Explain the effects of inflation, interest rates, exchanges rates and consumer demand on international trade and the economy in terms of trade deficits and surpluses. Include consideration of open economies versus closed economies.

2 - Explain how trade policy and budget deficits can impact the health of an economy. Include consideration of capital flight.

3 - Who are the poorest 4 groups in the U.S. and what are the social ills they are likely to experience? Describe 5 policies that are designed to help the poor and discuss the problem with high marginal tax rates.

4 - Discuss the government and the central bank’s approaches to tackling inflationary and recessionary events in the economy. In addition, discuss whether or not the central bank should aim to have zero inflation? Lastly, should the central bank be governed based on mandated rules or the discretionary expertise of its leadership?

Explanation / Answer

In open economy with inflation trade defecit would be high . This is because due to high inflation the goods of one country will be uncompetitive . Due to uncompetitiveness imports will be high and exports would be low . In closed economy due to high inflation defecit would be high but less in comparison to open economy.

With competitive exchange rate international trade between countries would be based on power cost of production i.e firm with lower cost of production will export . Thus country with lower cost of production has trade surplus and country with comparatively high cost of production has trade defecit.

Country with high demand wil have high trade defecit because domestic production couldn't meet the demand of domestic population. Country with lower demand will have trade surplus as it will export more and consume less.

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