Jovania Andrade

Principles of Macroeconomic

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Nurul Aman

 

                                    Final
Exam

 

2) 1
year later GBP / USD = 1.55

Interest Rate in England = 2%

100,000,000 * 1.68 = 168,000,000

! year return = 168,000,000 * 1.02 =
171360000

USD conversion after 1 year = 171360000 /
1.55 = 110554838.71

Return on Investment = 110554838.71 /
100,000,000

= 1.1055

( 1.1055 – 1 ) * 100 = 10.55%

Return on investment is 10.55%

B) CFO must have expected GBP to
appreciate as there is a difference in interest rates. Interest rate parity
states that the difference in interest rates will be equal to forward and spot
exchange rate.

( 1.02 / 1.005 ) = 1.01492

This turns out to be 1.5% roughly.

Now we should plus this into exchange rate
differential

1.68 / 1.01492 = 1.6553

Expected GBP / USD rate was 1.6553

 

3) The time referenced above, the 2008
financial crisis situation, is a phase of financial crisis where the situation
of depression took over the economy so that business runs into a complete
downfall. Within this time period, the economy faces all the depression related
factors such as low-income level, high unemployment, high inflation level, low
savings and so low investment level etc. Periodically it is needed to increase
the money funding in result to increase the investment in the economy. This is
because, according to the Keynesian theory, the increase in investment level
will increase the national income and the rate of employment in order to
increase the aggregate demand to draw a trajectory of pulling the economy out
of this depressionary situation. The traditional open market operation of
purchasing the Treasury bills is a slow process, where the money supply in the
economy increases in a step-wise manner. But the time we are looking into and
analyzing needed a much rapid expansion of money supply and so the Fed decided
to go out of their comfort zone, from 2008-2009, to adopt the expansionary
direct lending policy to increase the fund needed to expand the investment in
the economy. In doing so, led the aggregate demand to rise and helps pulling
the economy out of the dangerous situation.

4) Banks are being flooded with deposits due
to various measures that were taken. On the surface, two repercussions appear
to be evidently present: one is that it may be a signal that despite all the
actions, the Fed has been unable to raise the demand for liquidity, and the
second is the increase in the deposit may fuel inflation. Although the repercussions
are a probability that may take place, there are some other aspects that need
to be need to be considered. As a consequence of increased deposits with the
banks, the lenders may want to decrease the rate of interest which effectively
is releasing more money into the system and into the hands of the general
public. This in turn raises the buying power of the individual, increasing the
demand for goods and services. In case the produce of goods and services are
short of the demand, this may give ruse to inflationary pressures. A clear and
well thought out strategy here shall be the catalyst for other aspects of the
economy as well like employment levels etc.

5) Given the current condition of the US
economy, we believe that the US policy makers would prefer to see the USD to
decline in value. A strong dollar makes US goods expensive so that net exports
fall which implies trade deficit and worsening of balance of payment. When the
US dollar makes domestic producers losing money in reduced exports, domestic
firms might locate themselves out in other nations so there will be a job loss
as well. In terms of AD-AS, this implies a reduction in net exports and so AD
shifts left, reducing price and RGDP.

 

 

 

 

                  

 

 

 

A weak dollar makes US goods cheaper so
that net exports rise which implies trade surplus and improvement in balance of
payment. When the US dollar makes domestic producers earning more money by
increasing exports, domestic firms might expand while for domestic consumers, a
weak USD implies expensive foreign goods in terms of imports. In terms of
AD-AS, this implies a rise in net exports and so AD shifts right, increasing
price and RGDP.

 

6)

1-year US treasury securities yield = 0.28%

2-year US treasury securities yield = 0.69%

Expectations of 1-year yields, 1 year from now is calculation
below using expectation theory

1-year yields, 1 year from now = (1+ 0.69%) ^2 / 1+ 0.028% – 1

                         
                       =
(1.013847 / 1.0028) – 1

                                               
= 1.10%

Hence, Expectations of 1-year yields, 1 year from now is 1.10%

 

7)  A Balanced Budget Amendment is highly
ill-advised to address the nation’s long-term fiscal problems. The argument
against is that it would cause economic harm and raise a host of problems for
social security and other federal vital functions, which would result in some
serious risks rising such as capping weak economies into recession, and making
it longer and deeper. Instead of allowing the automatic stabilizers like low
tax collection and other benefits to cushion an economy, the amendment would
force policyholders to reduce spending and increase tax or both. This will
weaken the economy and would lead to higher deficits.

B) Not all
deficit budgets are bad, in fact recent deficits accelerated recovery from the
recession, but long-term deficits of the present magnitude are harmful. This
would increase indebtedness to foreigners which is risky and expensive. Today
the United States is the second largest net debtor in the world. If foreigners
lose confidence, their investment in the country would diminish bringing down
the value of dollars, and raise the prices for imported goods. Ultimately, this
could increase interest rates and also lead to a further financial crisis.