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Internaitonal macroeconomics: forecast project

During the second stage of the aggregate supply, the number of goods being infused in the market is still increasing but on a depleting rate. Consequently, the short run effects of stage two of aggregate supply to the real GDP is positive [up]. On the other hand, government spending is a component in determining the GDP of certain countries and have a direct relationship with each other, thus, the short run effects of a decrease in the government spending to real GDP is also negative [down].

With the fixed exchange rate regime, it is being expected that the real GDP of that specific country would be unchanged in the short run period. Answer #2 Since the production of goods still increases under the second stage of the aggregate supply, then, it is expected that the price of these goods in the market should decrease the price level of the said commodity. As for the effects of fixed exchange rate regime to the price level of the goods in the market, domestic price level tends to decrease as the government shifts to fixed exchange rate regime.

On the other hand, the short run effect of government spending would create a pressure for the prices of domestic products to decrease [down]. Answer #3 The short run effect of the second stage of aggregate supply on employment rate would have be a positive one [up] since output during the stage two of the aggregate supply, companies would think that they can still further increase their production and one way to increase the production level of one firm is to hire additional workers on the production area.

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On the other hand, the short run effect of the fixed exchange rate regime to the employment rate is positive [up] since domestic investors would start to establish their business, especially the export firms, in the market due to the fact that there is already less uncertainty available in the market having fixed exchange rate in the economy. With the establishment of export firms in the market, there would be now more job opportunities available in the market thus increasing the employment rate.

Alternatively, the decrease in the government spending would decrease the employment rate since if the government cut their spending; they tend to hang up some of their projects in the economy thus closing job opportunities to the labor force. Answer #4 The short run effects of the decrease in the government spending would also decrease [down] the real interest rate since it would increase the national savings of the country. On the other hand, the fixed exchange rate regime of the government would surely lower down the real interest rate [downs] to attract more investors to put up their business in the local market.

As for the effect of a decrease in the government spending, it is expected that real interest rate would increase to prevent the outflow of capital from lending the money to the public. The central bank increases their interest rate from borrowing to discourage the private financial institutions to borrow to them. Answer #5 In the short run, nominal interest rate would be left unchanged even if the economy is performing under the second stage of aggregate supply. The reason behind this scenario is due to the fact that inflation is still not included in the nominal interest rate as compared to real interest rate.

The fixed exchange rate regime of the government would have a positive impact [up] on the nominal interest rates since even if the central bank increase the nominal interest rate foreign investors would still borrow money to the central bank or any financial institution since there exists less investment uncertainties in fixed exchange rate regime. With the decision of the government to cut their spending, nominal interest rate would surely increase their nominal interest rate to prevent the outflow of money from the government side to the economy.

During this period, the government leaves all to the private financial institution the “duty” of handling the financial market. Answer #6 During the short run period, the second stage performance of the economy would have no effect [unchanged] to the exchange rate of the economy. Moreover, under the fixed exchange rate regime, exchange rate would have to remain on its original level [unchanged] (Krugman, 2002). On the other hand, the decrease in the government spending would have to increase the exchange rate to cover up the negative effects of the said decrease in the government spending in the money market.

Answer #7 With the economy in the second stage of the aggregate supply, then, there is a room for the economy to make export if there is a surplus in the market. Since one of the components of current account is the balance of trade- export minus imports, then, the second stage of aggregate supply has a positive effect on the current account [up]. Furthermore, fixed exchange rate regime would also increase the current account [up] due to the improvement of net exports due to the influx of foreign direct investments in the economy.

As for the decrease in the government spending, it is expected that the current account would decrease [down] since the country could only export limited goods to other countries given the cutting of spending of the government. Answer #8 The second stage of the aggregate supply would have no effect on the capital account of the country in the short run. Maybe, there is an indirect relationship between capital account and the stages of aggregate supply; but with regards to a direct relationship there is none.

On the other hand, fixed exchange rate regime would have negative effects on the capital account of the country since most of the money supply of the economy is being spent in maintaining the exchange rate into a specific level. Furthermore, the decrease in the government spending would also have a negative effect on the capital account in the short run period since the government, during this period, is not willing to spend money just to defend their currency from appreciating or depreciating since the country is under budget constraint that is why they want to cut their spending. Answer #9.

There is no profound relationship between the second stage of aggregate supply and reserve account; therefore, reserve account would be left unchanged regardless of any changes in the second stage of aggregate supply. On the other hand, if the country is under the fixed exchange rate regime, it is expected that reserve account would decrease since the government will use their reserves to defend their currency from fluctuating. As for the case of the decrease of government spending, the said action of the government would surely have no effect on the reserve account assuming that the country is under the flexible exchange rate regime.

Answer #10 The short run effects of the second stage of aggregate supply on unemployment rate would be a negative one [down] since there should be more available job opportunity in the economy under the second stage of aggregate supply. Moreover, the short run effect of fixed exchange rate to unemployment rate should also be a negative one since under this exchange regime, foreign direct investment is very rampant giving job opportunities to the labor force; thus negatively affecting [down] the unemployment rate.

The decrease in the government spending would increase [up] the unemployment rate due to the postponement of some of the government projects in the economy that gives job vacancies to most of the laborers especially in the construction sector of the government.

References Krugman, P. (2002). Exchange Rates. Retrieved November 23, 2007, from http://www. econlib. org/library/Enc/ExchangeRates. html.

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