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Theory section:
Question one:
Suppose firms expect future output to be lower and future interest rates to be lower. Given this
information, how will firms alter investment in the current period? Explain. (about 50-100 words)
Question two:
Explain why current consumption is likely to respond less than one for one to changes in current
income. (about 50 words)
Question three:
Explain why the multiplier in an open economy is different from the multiplier in a closed
economy. (about 50 words)
Question Four:
Suppose a country's output is below the policy makers' desired level of output and is experiencing a trade
surplus. Assume that the policy makers' goals are to achieve the desired level of output (i.e., full
employment output) and balanced trade. Given this information, what type of exchange
rate and/or fiscal policy can be used to achieve simultaneously these two goals? Explain. (about 50
words)
Question five:
Explain what can occur to cause an increase in the debt ratio. (about 50-100 words)

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Applied Section one:
The scenario
Scenario
Suppose the New Zealand economy is in recession. The unemployment rate is 7% and
the Reserve Bank of New Zealand (RBNZ) is considering using monetary policy to
expand output. Assume the RBNZ knows, with certainty, that:
i. absent changes in monetary policy, unemployment will still be 7% next year;
ii. the natural rate of unemployment is 5%;
iii. from Okun's law, 1% more output growth for a year leads to a 0.4% reduction in the
unemployment rate.
Also assume the RBNZ can effectively use monetary policy to increase output
growth rates as desired, i.e., the interest rate is sufficiently far away from the zero
lower bound. However, the RBNZ is uncertain about the effect that changes in its
policy rate, the Official Cash Rate (OCR), have on output growth. To inform its
decisions, the monetary policy committee summons the research department to
produce predictions of the one-year response of NZ output growth to a decrease of 1% in the OCR. The
research department, using three different macroeconometric models, presents the
results from three different models:
Model (a): output growth is predicted to increase by 1.0% (moderate monetary
transmission channel)
Model (b): output growth is predicted to increase by 0.6% (weak monetary transmission channel)
Model (c): output growth is predicted to increase by 2.0% (strong monetary transmission channel)
The research department further informs that each model prediction is equally likely,
and that effects for OCR changes different than -1% are proportional to these
predictions, e.g.: a decrease of 2% in the OCR is predicted to increase output growth
by 2% according to model (a), 1.2% according to model (b), and 4% according to
model (c), and so on.
Using the scenario information above answer the following questions.
Note: for the numerical questions, please provide a numerical answer in percentage
points, e.g., 1 for 1%, -2 for -2%, etc.
Question one:
1. What is the output growth rate needed to lower the unemployment rate to the natural rate of
unemployment?
Question two:

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Theory section: Question one: Suppose firms expect future output to be lower and future interest rates to be lower. Given this information, how will firms alter investment in the current period? Explain. (about 50-100 words) Question two: Explain why current consumption is likely to respond less than one for one to changes in current income. (about 50 words) Question three: Explain why the multiplier in an open economy is different from the multiplier in a closed economy. (about 50 words) Question Four: Suppose a country's output is below the policy makers' desired level of output and is experiencing a trade surplus. Assume that the policy makers' goals are to achieve the desired level of output (i.e., full employment output) and balanced trade. Given this information, what type of exchange rate and/or fiscal policy can be used to achieve simultaneously these two goals? Explain. (about 50 words) Question five: Explain what can occur to cause an increase in the debt ratio. (about 50-100 words) Applied Section one: The scenario Scenario Suppose the New Zealand economy is in recession. The unemployment rate is 7% and the Reserve Bank of New Zealand (RBNZ) is considering using monetary policy to expand output. Assume the RBNZ knows, with certainty, that: i. ii. iii. absent changes in monetary policy, unemployment will still be 7% next year; the natural rate of unemployment is 5%; from Okun's law, 1% more output growth for a year leads to a 0.4% reduction in the unemployme ...
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Really great stuff, couldn't ask for more.

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