Suppose That Ex Is The Exchange Rate Between The US Dollar

Suppose That Ex Is The Exchange Rate Between The Us Dollar And The C

Suppose that ex is the exchange rate between the U.S. dollar and the Chinese yuan in that ex indicates the number of yuan that can be purchased with one dollar. The demand for dollars, denoted, D$, is given by the equation D$=2,800 – 200ex. The supply of dollars denoted, S$, is given by the equation S$=400 +100ex. a. Calculate the demand for dollars and supply of dollars at exchange rates between 0 and 12 in increments of one. b. Graph the demand for dollars and supply of dollars against the exchange rate.

What is the value of the equilibrium exchange rate? value of equilibrium exchange rate= 8 and currency traded= 800 ex D S c. Suppose the demand for dollars increases by 300 billion at each exchange rate. Explain if the increase in demand results from a large purchase by the Chinese of a new American-made airplane or a large purchase by Americans of new lower priced Chinese-made high definition televisions. Calculate the new demand for dollars at each exchange rate and graph the new demand curve. What is the new equilibrium exchange rate, given the original supply of dollars? ex rate=9 and currency traded=1300 large purchase by the Chinese of a new American-made airplane will increase demand for dollars ex D S newD d. Suppose the supply of dollars increases by 600 billion at each exchange rate. Explain if the increase in supply results from a large purchase by the Chinese of a new American-made airplane or a large purchase by Americans of new lower priced Chinese-made high definition televisions. Calculate the new supply of dollars at each exchange rate and graph the new supply curve. What is the new equilibrium exchange rate, given the original demand for dollars? ex rate= 7 and curr traded=1700 (assuming demand has also risen) supply rises due to large purchase by Americans of new lower priced Chinese-made high definition televisions. this is because Americans want to buy Chinese yuan to pay for the Chinese TVs. to buy yuan they have to supply $. ex D S newD new s Assume Yn = 11,600, t=0.2, and G = 2,610. a) Conmpute the amount of taxes at natural real GDP. Answer : Tax (T) at natural level = 0.211600 = 2320 b) Explain why there is a natural employment deficit. Compute the amount of the natural employment deficit in terms of both billions of dollars and as a percent of natural real GDP. Answer : Since tax revenue at natural level is less than the government expenditure, we have natural employment deficit. Amount of natural employment deficit = G-T = = $290 billions % of natural employment deficit = (290/11600)100= 2.5% c) Suppose that the goal of fiscal policymakers is to reduce the size of the natural employment deficit to 1 percent of natural real GDP. Compute what the size of the natural employment deficit must be in terms of billions of dollars in order for fiscal policymakers to achieve their goal. Answer : The size of natural employment deficit must be $116 billion (=116001%) for this is to be 1% of natural real GDP. d) Given no change in the tax rate, compute by how much fiscal policymakers must cut government spending in order to accomplish their goal. Answer : The actual natural employment deficit (we have) = $290 billion and we want it to be $116 billion. So to accomplice this goal i.e. for budget deficit (G-T) to be $116 billion, the government expenditure must fall by $174 billion (=). e) Given no change in government spending, compute by how much fiscal policymakers must increase the tax rate in order to accomplish their goal. Answer : We know for natural employment deficit (G-T) to be 1% of natural real GDP, the deficit must fall by $174 billion (=). So for deficit to fall by $174 billion, the total tax collection must increase by $174 billion i.e. the total tax collection should be $2494 billion (=2320+174). Suppose tax rate be ‘t’ We want total tax at natural level to be equal to $2494 billion i.e. 11600t = 2494, implies tax rate t = 0.215 or 21.5% f) Given the objective of fiscal policymakers, explain what action monetary policymakers must take for the actions of fiscal policymakers to have no effect on real income. Answer : The monetary policymakers must follow expansionary monetary policy for the actions of fiscal policymakers to have no effect on real income. The policy followed by government here is contractionary in nature and hence the monetary policymakers would be required to conduct an expansionary monetary policy g) Suppose that private saving increases as the interest rate increases. Given the fiscal-monetary policy mix describe in parts c-f, explain whether national saving increases by an amount that is larger than, equal to, or less than, the decrease in the natural employment deficit. Answer : When monetary policymakers would follow expansionary policy, the interest rates are likely to fall. With fall in interest rate, private saving would fall whereas with the government actions, public saving (T-G) would rise. We know national saving is defined as the sum of private saving and public saving. Since private saving is falling whereas public saving would rise, the national saving is likely to increase by an amount less than the decrease in the natural employment deficit. QUESTION 2 (NEEDS ATTENTION)

Paper For Above instruction

The initial problem involves analyzing exchange rates between the US dollar and the Chinese yuan, where ex indicates how many yuan can be purchased with one dollar. The demand for dollars (D$) depends inversely on the exchange rate, calculated as D$=2,800 – 200ex, while the supply (S$) increases with ex, shown as S$=400 + 100ex. Graphing these at exchange rates from 0 to 12 reveals the market equilibrium where demand equals supply, approximately at an exchange rate of 8. This equilibrium corresponds to about 800 units of currency traded, indicating a balanced market for dollars against yuan at this rate.

When demand shifts upward by 300 billion — perhaps due to Americans purchasing cheaper Chinese goods like high-definition televisions — the new demand curve indicates increased need for dollars at each exchange rate. The adjusted demand function becomes D$=3,100 – 200ex. This results in a new equilibrium at an exchange rate of approximately 9, where currency traded rises to about 1,300 units. Such a shift reflects increased U.S. purchases of Chinese goods, necessitating more yuan being exchanged for dollars.

Similarly, an increase in dollar supply by 600 billion — perhaps from Americans buying more Chinese TVs — shifts the supply curve rightward: S$=1,000 + 100ex. The new equilibrium in this scenario falls to an exchange rate of about 7, with trades rising to roughly 1,700 units, demonstrating the effects of increased supply on the currency value. Americans’ demand for yuan leaves them supplying more dollars, affecting the exchange rate accordingly.

On the fiscal side, with a national income of Yn=11,600, a tax rate t=0.2, and government expenditure G= 2,610, calculating taxes at natural GDP yields T=0.2*11,600= 2,320. The federal deficit emerges because G exceeds T by $290 billion. This deficit, about 2.5% of the natural GDP, indicates a natural employment gap rooted in fiscal imbalance. To reduce this deficit to 1% of GDP, down to $116 billion, policymakers must cut government spending by approximately $174 billion or increase taxes to about 21.5%, reflecting a combination of fiscal adjustments.

To neutralize the impact of fiscal policies on real income, monetary policymakers should adopt expansionary strategies, such as lowering interest rates. This approach counteracts reductions in private saving caused by lower interest rates or austerity measures, maintaining overall economic equilibrium. As private saving tends to decline when interest rates fall, and public saving increases with increased taxes or reduced government spending, total national saving might still increase less than the reduction in the natural employment deficit, especially given the opposing movements in private and public savings.

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