Author Question: Using the DD-AA framework, which one of the following statements is the MOST accurate? A) Only ... (Read 55 times)

karlynnae · **on:** Jun 30, 2018

Using the DD-AA framework, which one of the following statements is the MOST accurate?

A) Only monetary policy can bring the economy to full employment.
B) Only fiscal policy can bring the economy to full employment.
C) Only both monetary and fiscal policies can bring the economy to full employment.
D) Both policies are capable of bringing the economy to full employment and low inflation.
E) Monetary policy by itself or fiscal policy by itself can bring the economy to full employment.

Question 2

Sharp contractions in a country's output and employment invariably result from a crisis in which the country suddenly loses access to all foreign sources of funds. Explain how the current account identity necessitates these contractions.

What will be an ideal response?

akudia · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

E

Answer to Question 2

S - I = CA (Current Account Identity)
Imagine that a country is running a current account deficit (i.e. borrowing from abroad) a certain amount of its GNP when foreign lenders suddenly become scared of default and cut off all new loans. This action causes the current account balance to be at least 0 due to either a rise in saving or a fall in investment (or a combination of both). The required sharp fall in aggregate demand necessarily depresses the country's output dramatically.