Please answer the following 5 questions:
Inflation, the Price Level, and the Macroeconomy
1.Discuss the following argument: “Since inflation reduces one’s purchasing power, the government and the central bank should not set a 2-3 per cent inflation target over the course of a typical business cycle; instead, they should prescribe and adhere to a 0 per cent inflation target.” (Max. 400 words)
Saving, Investment, and the Loanable Funds Market
2.Why is the United States, with the world’s largest economy, borrowing heavily on international capital markets, rather than lending, as would seem more natural? What implications do the U.S. trade deficit and the United States’ reliance on foreign credit have for the performance of the U.S. economy? (Max. 400 words)
Money, Asset Markets, and the Financial System
3.According to Bloomberg News, 11 January 2012, “Banks are hoarding the European Central Bank’s record 489-billion euro injection into the banking system, thwarting attempts by policy makers to avert a credit crunch. Banks have used the funds to increase reserves rather than make loans.” Why would banks keep the increase in funds as reserves rather than lending them? If the banks had lent the funds, how would the European money supply and interest rates have changed? (Max. 400 words)
International Trade, Capital Flows, and the Open Economy
4.The Australian Prime Minister is considering placing a tariff on the import of Japanese luxury cars. Discuss the economics and politics of such a policy. In particular, how would the policy affect the Australian trade deficit? How would it affect the exchange rate? Who would be hurt by such a policy? Who would benefit? (Max. 400 words)
Capital Accumulation and Comparative Economic Growth
5.Devoting a larger share of national output to investment would help restore rapid productivity growth and rising living standards.” So you agree with this claim? Explain. (Max. 400 words)
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