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Chapter 19: Macroeconomic Policy Around the World

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Chapter 19: Macroeconomic Policy Around the World

11 problems · 0 figures

19-1 §19.1 source ↗

Using the data in Table 19.3, rank the seven regions of the world according to GDP and then according to GDP per capita.
Table 19.3 GDP and Population of Seven Regions of the World in the book ↗
Population (in millions) GDP Per Capita GDP = Population × Per Capita GDP (in millions)
East Asia and Pacific 2,006 $5,536 $10,450,032
South Asia 1,671 $1,482 $2,288,812
Sub-Saharan Africa 936.1 $1,657 $1,287,650
Latin America and Caribbean 588 $9,536 $5,339,390
Middle East and North Africa 345.4 $3,456 $1,541,900
Europe and Central Asia 272.2 $7,118 $1,862,384

Answer

The answers are shown in the following two tables.

Region GDP (in millions)
East Asia $10,450,032
Latin America $5,339,390
South Asia $2,288,812
Europe and Central Asia $1,862,384
Middle East and North Africa $1,541,900
Sub-Saharan Africa $1,287,650
Region GDP Per Capita (in millions)
East Asia $5,246
Latin America $1,388
South Asia $1,415
Europe and Central Asia $9,190
Middle East and North Africa $4,535
Sub-Saharan Africa $6,847

East Asia appears to be the largest economy on GDP basis, but on a per capita basis it drops to third, after Europe and Central Asia and Sub-Saharan Africa.

19-2 §19.1 source ↗

What are the drawbacks to analyzing the global economy on a regional basis?

Answer

A region can have some of high-income countries and some of the low-income countries. Aggregating per capita real GDP will vary widely across countries within a region, so aggregating data for a region has little meaning. For example, if you were to compare per capital real GDP for the United States, Canada, Haiti, and Honduras, it looks much different than if you looked at the same data for North America as a whole. Thus, regional comparisons are broad-based and may not adequately capture an individual country’s economic attributes.

19-3 §19.2 source ↗

Create a table that identifies the macroeconomic policies for a high-income country, a middle-income country, and a low-income country.

Answer

The following table provides a summary of possible answers.

High-Income
Countries		 Middle-Income
Countries		 Low-Income
Countries

• Foster a more educated workforce

• Create, invest in, and apply new
technologies

• Adopt fiscal policies focused on
investment, including investment in
human capital, in technology,
and in physical plant and equipment

• Create stable and market-oriented
economic climate

• Use monetary policy to keep inflation
low and stable

• Minimize the risk of exchange rate
fluctuations, while also encouraging
domestic and international competition

• Invest in technology, human
capital, and physical capital

• Provide incentives of a market-
oriented economic context

• Work to reduce government
economic controls on market
activities

• Deregulate the banking and
financial sector

• Reduce protectionist policies

• Eradicate poverty and extreme
hunger

• Achieve universal primary
education

• Promote gender equality

• Reduce child mortality rates

• Improve maternal health

• Combat HIV/AIDS, malaria,
and other diseases

• Ensure environmental
sustainability

• Develop global partnerships
for development

19-4 §19.2 source ↗

Use the data in the text to contrast the policy prescriptions of the high-income, middle-income, and low-income countries.

Answer

Low-income countries must adopt government policies that are market-oriented and that educate the workforce and population. After this is done, low-income countries should focus on eradicating other social ills that inhibit their growth. The economically challenged are stuck in poverty traps. They need to focus more on health and education and create a stable macroeconomic and political environment. This will attract foreign aid and foreign investment. Middle-income countries strive for increases in physical capital and innovation, while higher-income countries must work to maintain their economies through innovation and technology.

19-5 §19.3 source ↗

What are the different policy tools for dealing with cyclical unemployment?

Answer

If there is a recession and unemployment increases, we can call on an expansionary fiscal policy (lower taxes or increased government spending) or an expansionary monetary policy (increase the money supply and lower interest rates). Both policies stimulate output and decrease unemployment.

19-6 §19.3 source ↗

Explain how the natural rate of unemployment may be higher in low-income countries.

Answer

Aside from a high natural rate of unemployment due to government regulations, subsistence households may be counted as not working.

19-7 §19.4 source ↗

How does indexing wage contracts to inflation help workers?

Answer

Indexing wage contracts means wages rise when prices rise. This means what you can buy with your wages, your standard of living, remains the same. When wages are not indexed, or rise with inflation, your standard of living falls.

19-8 §19.4 source ↗

Use the AD/AS model to show how increases in government spending can lead to more inflation.

Answer

An increase in government spending shifts the AD curve to the right, raising both income and price levels.

19-9 §19.4 source ↗

Show, using the AD/AS model, how governments can use monetary policy to decrease the price level.

Answer

A decrease in the money supply will shift the AD curve leftward and reduce income and price levels. Banks will have less money to lend. Interest rates will increase, affecting consumption and investment, which are both key determinants of aggregate demand.

19-10 §19.5 source ↗

What do international flows of capital have to do with trade imbalances?

Answer

Given the high level of activity in international financial markets, it is typically believed that financial flows across borders are the real reason for trade imbalances. For example, the United States had an enormous trade deficit in the late 1990s and early 2000s because it was attracting vast inflows of foreign capital. Smaller countries that have attracted such inflows of international capital worry that if the inflows suddenly turn to outflows, the resulting decline in their currency could collapse their banking system and bring on a deep recession.

19-11 §19.5 source ↗

Use the demand-and-supply of foreign currency graph to determine what would happen to a small, open economy that experienced capital outflows.

Answer

The demand for the country’s currency would decrease, lowering the exchange rate.

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Problems and answers are adapted from Principles of Macroeconomics 3e by Steven A. Greenlaw, David Shapiro and Daniel MacDonald, OpenStax, and are used under the CC BY-NC-SA 4.0 licence. Access for free at https://openstax.org/books/principles-macroeconomics-3e/pages/1-introduction. Illustrations: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license. This adaptation is released under the same licence, is non-commercial, and is neither affiliated with nor endorsed by OpenStax or Rice University.