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The recent growth of the US energy sector has been staggering. In XXXXXXXXXX% of US energy was imported, but now the figure is approaching 30%. Two very different US policies proposed by the Trump...

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The recent growth of the US energy sector has been staggering. In XXXXXXXXXX% of US energy was imported, but now the figure is approaching 30%. Two very different US policies proposed by the Trump administration - an aggressive fiscal expansion and a releasing of energy exports from environmental controls - have very similar macroeconomic effects. This question is about the inter-relationships between these policies and any environmental policies remaining in place.

Q2. Using the Mundell-Fleming model of lecture 6 show the short run and long run impact of a US fiscal expansion (hint: you do not need to consider the inflationary impact - you can assume trade flows adjust before inflationary pressure emerges). Make sure you write out the national income identity with the long run effects underneath.

Q3. Using the Mundell-Fleming model of lecture 6 show the short run and long run impact of an autonomous increase in US energy exports due to the abandoning of many environmental regulations on energy exploration and exporting (hint: you do not need to consider the inflationary impact - you can assume trade flows adjust before inflationary pressure emerges). Make sure you write out the national income identity with the long run effects underneath.

Q4. Carefully compare the long run equilibria of Q2 and Q3. In each case, describe any crowding out that is occurring.

 

Answered Same DayOct 02, 2019

Solution

David answered on Nov 25 2019
60 Votes
Q2. Using the Mundell-Fleming model of lecture 6 show the short run and long run impact of a US fiscal expansion (hint: you do not need to consider the inflationary impact - you can assume trade flows adjust before inflationary pressure emerges). Make sure you write out the national income identity with the long run effects underneath.
Ans. FISCAL POLICY under PERFECT CAPITAL MOBILITY and FLEXIBLE EXCHANGE RATE.
Suppose there is an expansionary fiscal policy , say G increases , then the IS curve shifts to the right. This leads to an increase in 'r' as well as 'Y'. There arises a BoP surplus which leads to an Excess Supply of FER implying an Appreciation of exchange rate. Hence, the IS curve shifts back to it's original position.
The result of this is that 'r' and 'Y' remains the same while 'G' increases and 'E' falls.
Same case but under FIXED EXCHANGE RATE
As G increases, IS curve shifts to the right , both r and Y increases , there is capital inflow implying BoP Surplus and Excess Supply of FER but here Appreciation cannot happen so Central Bank buys the excess FER this leads to an increase in the Money Supply and LM shifts rightward till BP=0. This is under Sterilization.
Thus the comparison of Short and Long Run shows that under Short run , 'r' , 'Y' , 'G' , all increases , while under Long Run , 'r' remains the same, 'Y' , 'G' and FER increases , and E remains the same.
Note : Fiscal components are the following : C , I , G , X , M.
Whether you increase G or X , it will shift the IS curve to the right.
Now when there is Imperfect Capital Mobility , situation changes which is shown below :
As G increases, IS...
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