Transcript (G – T) + (X – M)

2005-06 AL ECON II
MOCK EXAM
9-3-2006
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1. B
6. C
11. A
16. B
21. A
26. A
2. B 3. D 4. A 5. D
7. C 8. D 9. B 10.C
12. cancelled 13. A 14.D 15.A
17. A 18. C 19. B 20. D
22. C 23. C 24. C 25. B
27. B 28. A 29. D 30. B
State whether each of the following statements is
true or false. Explain your answer.
An unanticipated inflation will result in a higher rate
of interest. (4 marks)
Nominal
Interest
Rate
名義利率
＝
Real
Interest
Rate
實質利率
＋
Expected
inflation rate
預期通漲率
False. Nominal interest rate is equal to the sum of
desired real interest rate and anticipated inflation rate.
Unanticipated inflation has no influence on the real
interest rate nor the nominal interest rate.
Inflation cannot exist in a
barter economy. (4 marks)
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True. In a barter economy, as there is no
common measure of relative prices, the
general price level cannot be measured.
Moreover, a rise in the relative price of
good X in terms of good Y implies a fall in
the relative price of the good Y in terms of
the good X at the same time. Thus, there
cannot be a general rise in relative prices.
Unemployment rate cannot fall
below the natural rate.
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False. An unanticipated increase in the price
level will lead to money illusion and reduce the
unemployment rate below the natural rate in the
short run. An unexpected accelerating inflation
may sustain the situation continuously. In the
short run
 在短期，名義工資貨幣錯覺
 尋選的邊際成本MC  ，因為放棄的工
資上升
 尋選時間失業率 
Liquidity trap 流動性陷阱
What? 什麼﹖
The situation that the demand for money is perfectly
interest elastic. Investors will keep all their wealth only
in the form of money. 是指貨幣性需求的利率彈性為無
限大 (即完全彈性)。投資者會將其財富全以貨幣形式儲
存，不會購買債券。
When? 何時
When interest rate
falls to a
sufficiently low
level.當利率趺至
一相當低水平
Why? 為什麼﹖
People expect interest rate
to rise and holding incomeearning assets will bring
loss therefore people hold
all wealth in money
人們預期利率將上升，如
現時持有債券，將有資本
損失。
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No. Classical economists focus solely on Mt,
they proclaim the nominal money demand is
mainly a stable function of nominal income
(Md=kPY). In other words, k=1/V is a constant
within a lengthy period.
However, according to Keynesians, Ma is also
significant, Ma has many non-P and non-Y
determinants, Md=kPY, k=1/V must be a variable.
It is because that under liquidity trap, any
increase in the money supply will be absorbed
by the decrease in the income velocity of money,
leaving the price level unaffected. (4 marks)
IS curve is downward sloping 向下傾斜
injection> withdrawal 注入 >流出.
r  I  I >S
Unintended fall in inventories 非預期存貨減少
Firms will increase output 公司增產
Until the goods market equilibrium can be reached,
Y  so that S/Withdrawal . 當收入上升，儲蓄/流出
增加， 投資與儲蓄就會相等，產品市場回覆均衡
Slope of IS curve斜率
1 c
s

b
b
Marginal propensity
to save (s)
邊際儲蓄傾向
Interest elasticity of
investment (b)
投資的利息彈性
1 c
s

b
b
Determinants of slope
of IS curve 決定因素
Value
數值
Slope
斜率
Shape
外形
Marginal propensity to
save (s)
邊際儲蓄傾向
Interest elasticity of
investment (b)
投資的利息彈性
Higher
較高
Greater
steeper
較大
Higher
Smaller
較高
較小
較斜
more gentle
較平坦
IS曲線與財政政策的效能
The effect of the IS curve and the
reffectiveness of fiscal policy
LM
IS2’
IS1’
IS1
0
IS2
Y
More gentle IS- less effective 較斜的IS曲線會更有效
Greater rEI (b) (Greater crowding out) 較大的投資的利息彈性
b
G Y   Mt   Md>Ms  r  I 
Greater b , smaller Y
Not due to higher mps, smaller mps means
greater multiplier , a greater shift of IS
curve, which make fiscal policy more
effective.
•如果IS曲線的斜率較低高是因為較小的
邊際儲蓄傾向(s)，財政政策會有效，因
為支出乘數會較大，IS曲線的幅度較大
。
Derive the function of private saving.
Under what condition is private saving
equal to private investment?
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- In equilibrium, withdrawal = injection.
SP+ T + M = I + G + X
(1marks)
SP= I + (G – T) + (X – M)
- If private saving is equal to private investment,
SP= I
(G – T) + (X – M) = 0
X–M=T–G
Trade balance = Fiscal balance
In equilibrium, aggregate supply equals aggregate
demand. If resources saved by households are
consumed by firms, then resources saved by the
public sector (=T - G) have to be consumed by the
foreign sector as net exports (= X - M).
Derive the function of public saving.
Discuss the relation between fiscal deficit
and trade deficit.
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In equilibrium, withdrawal = injection.
SP+ T + M = I + G + X
(T – G) = Public saving (SG) = (I – SP) + (X – M)
From the above relation, we can derive that
(G – T) = Fiscal deficit (-SG) = (SP- I) + (M – X)
In equilibrium, aggregate supply equals aggregate
demand. If there exists fiscal deficit, the resources
have to be supplied by the private sector and / or
the foreign sector, by issuing internal debt (SP- I)
and / or external debt (and hence the economy has
net imports, M – X). If SP= I, the whole fiscal deficit
has to be financed by external debt and hence
fiscal deficit equals trade deficit.
Derive the function of national saving. If
national saving equals private investment,
what are the balance of current account
and capital account respectively?
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By definition, SN = SP+ SG= [I + (G – T) + (X – M)] +
(T – G)
by definition, SN= I + (X – M)
If national saving equals private investment, (X – M)
= 0. In other words, the current account (CA) is
balanced.
In equilibrium, the sum of current account balance
(CA) and the capital account balance (KA) is equal
to zero. If the current account is balanced, the
capital account must also be balanced.
Mathematically, CA + KA = 0
CA = X – M
= -KA
=0
Interest rate in
HK 港元利率
<
Interest rate in US
美元利率
Capital outflows from HK to US 港元資金外流
Demand for US$ 對美元的需求
Market Rate 市場匯率
Licensed Bank buy US$ from Exchange Fund and
sell it to the market for the HK$ arbitrage 持牌銀行
由外匯基金買入美元及出售予市場
Supply of HK$ 港元供給
Interest rate of HK$ 港元利率
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Under the linked exchange rate system,
the country with a higher inflation rate will
import more and export less. Money
supply and the price level of the smaller
country (the price-taker) will change until
its inflation rate comes close to that of the
larger country.
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However, the interest rates in Hong Kong are not
exactly equal to those in the U.S. because:
Capital flow between countries involves
transaction costs and hence a positive interest rate
differential remains. The differential is to cover the
transaction costs involved.)
From time to time, people may speculate that the
HK dollar will appreciate or depreciate against the
US dollar. If many people speculate that the HK
dollar will appreciate, they will buy HK dollars and
sell US dollars at present. The excess supply of
the US dollar will increase the pressure for the HK
dollar to appreciate. (2marks)
To safeguard the linked rate, the Hong Kong
government may deliberately create an interest rate
differential. By reducing the interest return of HK
dollar deposits, the inflow of US dollars is
discouraged. (2marks)
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However, the inflation rate in Hong Kong is not
exactly equal to that in the U.S. because:
Transportation and transaction costs and
protectionist measures hinder international
trade Hence a price differential caused by the
different inflation rates may sustain. (3marks)
Besides exports and imports, inflation rate of a
country is determined by the price level of many
other goods. Hence the difference in inflation
rates may not bring a consequential transaction
of exports and imports to equalize the two
inflation rates. (3marks)