Question

5. 10] A recent issue of the Economist magazine reports that the Netherlands has a current account surplus of 10.1% of GDP a. [5 points] What would you expect to be true regarding investors' perceptions of the attractiveness of investing in assets in the Netherlands relative to assets in other countries? Please select one response and explain in 1-2 sentences. More attractive Less attractive Similar attractiveness b. [5 points] Over the past decade, there have been repeated calls by policy-makers to reduce "global imbalances" (current account deficits and current account surpluses). Assume the Netherlands reduced its current account surplus. What would you expect to happen to private investment in the Netherlands as a result? Please explain in 1-2 sentences. 6. 1301 Trade in Africa Source: https://www.cconomist.com/finance-and- economics/2017/12/07/african-countries-are-building-a-giant- African countries are building a giant free-trade area They have long traded with the world, now they want to trade with each other Dec 7th 2017 KAMPALA "AFRICA must unite, wrote Kwame Nkrumah, Ghana's first president, in 1963, lamenting that African countries sold raw materials to their former colonisers rather than trading among themselves. His pan-African dream never became reality. Even today, African countries still trade twice as much with Europe as they do with each other. But that spirit of unity now animates a push for a Continental Free-Trade Area (CFTA), involving all 55 countries in the region. Negotiations began in 2015, aimed at forming the CFTA by the end of this year. In contrast to the WTO, African trade talks are making progress." The chart below shows average educational attainment for men aged 15-49 in 2015. The chart shows considerable variation in educational attainment across African countries. (A map of Africa with country names is included for your reference.) Source: https://www.nature.com/articles/nature25761 Atrica

Answer 1

Answer 1

(a) As both Core and Headline inflation for Sweden are lower than their target, monetary authorities should increase money supply by cutting interest rate. As the money supply increases, aggregate demand (AD) would increase due to more money in hands of people. In short run, aggregate supply (AS) would remain constant, so there would be price increase - inflation.

(b) For Brazil, both headline and core inflation are above their target. With an intention to curb the inflation, monetary policy authorities should suck the liquidity by increasing the interest rate. This results in less money in hand of people and inflation will be controlled.

(c) Yen will appreciate.

Chinese inflation is lower than the targeted inflation and hence the monetary authority should decrease the interest rate. This results in outflow of the capital from Chinese market resulting in RMB depreciating.

In case of Japan, headline inflation is above the target and so they need to increase the interest rate to curb the money supply. In the process, there will be inflow of foreign capital into Japanese economy due to elevated interest rate resulting in appreciation of Japanese Yen.

Answer 2:

(a) GDP growth rate will decrease.

As fiscal authorities successfully reduce the budget deficit, they have reduced the fiscal expenditure. So G in Y = C+I+G+X-M is going down. Less government expenditure also results in lower employment resulting less income in hands of people resulting in lowered consumption and hence in short run GDP will decrease.