Adjustment Policies Project Assignment

Adjustment Policies Project Assignment

Adjustment Policies Project (HW#7)

Consider the IS-LM-BP framework. (Draw the BP steeper than the LM.)

a) Depict an economy with over-employment and balance of payments surplus.

b) Explain in words how your graph in “a” demonstrates that the economy has an over-employment problem and a surplus in its BOP.

c) Suppose exchange rate policy is not available meaning BP cannot be moved. In a separate second graph redraw “a”, then use fiscal and monetary policies meaning move IS and LM as needed to bring the economy to internal balance meaning full employment and to zero BOP meaning external balance.

d) Explain in words how the two policies that you used in part “c” corrected the two imbalances meaning the two problems that the economy had.

e) Suppose exchange rate policy is available but monetary policy is not available. In a separate third graph redraw “a”, then use exchange rate and fiscal policies as needed to bring the economy to internal balance and to external balance.

f) Explain in words how the two policies that you used in part “e” corrected the two imbalances meaning the two problems that the economy had.

g) Suppose exchange rate policy is available as in e but now fiscal policy is not available. In a separate third graph redraw “a”, then use exchange rate and monetary policies as needed to bring the economy to internal balance and to external balance.

h) Explain in words how the two policies that you used in part “g” corrected the two imbalances meaning the two problems that the economy had.

This assignment constitutes 4% (4 points) of course grade and is due Tuesday April 19th. You may draw the graphs for a, c, e, and g by hand if you prefer, but the answers for parts b, d, f, and h must be typed.

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