PART A: FISCAL POLICY

The following pictures represent the central government budget balance of three random countries, use them to answer questions 1 and 2.

1. Do you think that country B is incurring in a structural deficit? Justify.
2. Generally speaking, what will happen to the debt of country B during the time period referenced? Justify.

Here is some information about the budget balance of the Mexican government as well as the GDP of the country. Use it to answer questions 3 to 6.

3. In which periods the government run into a deficit?
4. For each period. Calculate the total debt for the government in question.

Assume:
– That surpluses are used to repaying the Debt
– Debt is calculated at the beginning of the year.
– Budget Balances are calculated at the end of the year.
– Debt in 2007 was 340343.79

DEBT (in constant millions of 2010 USD
2007 340343.79 2013
2008 2014
2009 2015
2010 2016
2011 2017
2012

5. Calculate the Debt as a percentage of GDP for the indicated period.

DEBT (as %of GDP)
2007 2013
2008 2014
2009 2015
2010 2016
2011 2017
2012

6. During recessions, governments usually have to run deficits to push the economy forward. In a hypothetical recession at the end of the period studied, is this government going to easily finance an unexpected deficit increase? Justify.

PART B: MONETARY POLICY

The following table presents some data for a fictitious country. Use this data to answer the remaining questions
Year Macro aggregates (numbers at the end of the year) Banking and monetary policy (numbers at the beginning of the year) Fiscal policy (numbers at the beginning of the year)
1. GDP 2. Potential GDP 3. Inflation 4. Unemployment rate 5. Lower limit of the operating band 6. Midpoint of the operating band 7. Upper limit of the operating band 8. Rate at which banks lend money to each other 9. Budget balance of the central government
A B C D
1985 1000 1000 2% 3% 1.75% 2% 2.25% 2.2% -350
1986 1100 1000 2.5% 4% W 2% 2.25% 2.25% -350
1987 900 1000 1% 7% 2.25% 2.5% X 2.7% -500
1988 1050 1000 1.5% 5% Y 2.5% Z 2.6% -600

1. Name all the rates pertaining to monetary policy by typing on the empty spaces A, B, C and D.
2. Complete the missing data of the operating band of the central bank on the empty spaces W,X,Y,Z.
3. What is the number of the column of the data provided that is the main tool used by the central bank to conduct its monetary policy. How a decrease of this number would ultimately affect you? Explain.
4. What do you think is the inflation target for this economy? Explain
5. What is the kind of monetary policy that the central bank performed at the beginning of the year 1987. Was that policy the right answer for the situation in 1986? Explain.
6. If the effects of the policy applied in 1987 took effect on the same year, did the policy of the central bank had the desired effect on the economy? Explain.
7. Was the policy of the central bank conflicting with the fiscal policy of the central government?
8. Using the AS-AD model, illustrate what happened to this economy During the years 1986 to 1987. Here is an illustration of the equilibrium change, you just have to put the AD and AS movements explaining that variation. Make sure your graph is coherent with previous answers.

Little help: Graph with just the equilibriums

Put your graph with the same equilibriums as well as AD and AS curves here:

NOTE BENE: For practical reasons, the vertical axis will illustrate the inflation level instead of a price index, but this change should not affect the normal interpretation of the standard AS-AD model.