Macroeconomics Assignment: Currency and Fiscal Policy

This macroeconomics assignment provides detailed solutions to questions related to currency exchange rates, fiscal policy, and monetary policy. The assignment explores the Czech Republic's decision to abandon the Koruna-Euro peg, analyzing the reasons and consequences of this move. It also investigates the impact of pegging the Peso to the USD on Mexico's economic growth. Furthermore, the assignment delves into the effects of currency fluctuations on companies with international revenues and debts, such as Pfizer. It also examines the factors contributing to the US trade deficit and the potential effects of Federal Reserve interest rate decisions. Finally, the assignment analyzes the application of fiscal and monetary policies in response to economic recession, considering the impact on government surpluses.

Running head: MACROECONOMICS
Macroeconomics
Name of the Student:
Name of the University:
Authors Note:

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Contents
Answer 1:.........................................................................................................................................2
Answer 2:.........................................................................................................................................2
Answer 3:.........................................................................................................................................3
Answer 4:.........................................................................................................................................4
Answer 5:.........................................................................................................................................5
Answer 6:.........................................................................................................................................6
References:......................................................................................................................................8

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Answer 1:
Part a:
False.
Part b:
The reason for abandoning the Koruna-Euro peg was to ensure that the inflation does not exceed
the target. Hence, there was no concern of growing unemployment in Czech Republic. Thus, the
reason for abandoning the Koruna-Euro pegging is to keep the inflation within control.
Part c:
False.
Part d:
In fact the abandoning of Koruna-Euro pegging has sharply increased the value of Koruna. This
is because of appreciation in the value of Koruna against Euro due to abandoning of Koruna-
Euro pegging.
Answer 2:
Part a:
Decrease.
Part b:
In the short run the economic growth in Mexico would decrease. This is because USD is a much
stronger currency than Peso. Hence, in the short run the economic growth in the country would

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be adversely affected however, in the long run the global recognition and strength in trade would
affect the economic growth positively.
Part c:
Yes.
Part d:
The Brazilian currency, i.e. Brazilian Real has experienced highest decline out of the all
countries given in the graph. Thus, the importers would prefer importing from Brazilian
exporters as this would favor their payment position requiring payment of less US dollar against
the export dues from Brazil. Hence, in the long run the Brazilian exporters would be competitive.
Answer 3:
Part a:
True.
Part b:
In case the Pfizer has most of its revenue abroad and expenditures in the US then obviously, the
weakening of US dollar will have positive impact on its operating performance. This is because
the amount of revenue denominated in other currencies will increase in value when converted to
US dollar and since the payment is already in US dollar it is already lower in terms other
currency.
Part c:
False.

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Part d:
In case Pfizer has significant debt denominated in foreign currency then it would not experience
any green with the weakening of US dollar. This is because weakening of US dollar would result
in payment of higher amount of US dollar to repay the debt denominated in foreign currency
along with interest.
Part e:
False.
Part f:
If international firms are competition along with Pfizer in US market then weakening of US
dollar will benefit the competitors more than Pfizer. Hence, Pfizer is certainly not competing
with international firms in US if it has experienced green subsequent to the weakening of US
dollar against other currencies (brash, 2018).
Answer 4:
Part a:
False.
Part b:
If rest of the world would have less productivity growth then the America’s trade deficit would
not have increased under the current president Donald Trump. Hence, the productivity of rest of
the world is certainly not lower.
Part c:

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True.
Part d:
Increase in trade deficit would obviously indicate increase in its borrowing. Further decrease in
tax rate is also possible as the trade deficit increase can also be due to decrease in tax rate. The
decline in spending is certainly one of the reasons for the US to experience higher trade deficit.
Answer 5:
Part a:
Lower likelihood.
Part b:
Since, the existing situation is improving as the global economy is regaining hence, the
likelihood of the FED increasing the interest rates in next meeting is very low. In fact if anything
FED may decide to reduce the interest rates.
Part c:
The dollar will appreciate.
Part d:
The dollar will appreciate because of FED decision to reduce interest rates. Reduction in interest
rates would result in lower interest on borrowing thus, the depreciation in value of currency will
also be less resulting in appreciation in the value of US dollar.

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Part e:
The dollar appreciated.
Part f:
The positive indication of global economy revival along with FED next meeting the effects on
the US economy is expected to be positive. Also considering that US dollar is unofficial
international trade currency, the global economic revival bound to have positive impact on the
currency.
Answer 6:
Part a:
Contractionary fiscal policy.
Part b:
An economy is said to be under recession when it experiences two consecutive quarters with
negative growth in its gross domestic product. With contraction in gross domestic product in
Mexico the fiscal policy will be contractionary (Ryoo & Skott, 2018).
Part c:
The surplus decrease.
Part d:
The surplus will decrease due to obvious reason of contractionary fiscal policy and recession in
the economy.

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Part e:
Expansionary monetary policy.
Part f:
The revision in GDP growth and with the objective of improving the economy the most suitable
monetary policy will be expansionary.
Part g:
The surplus increase.
Part h:
For obvious reason of expansionary monetary policy and growth in GDP the surplus of Mexico
would increase.

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References:
Brash, D. (2017). Monetary and Fiscal Policy: How an Agreed Inflation Target Affects Fiscal
Policy. Economic Papers: A Journal Of Applied Economics And Policy, 33(3), 15-17. doi:
10.1111/j.1759-3441.2011.00097.x
Ryoo, S., & Skott, P. (2018). Fiscal and Monetary Policy Rules in an Unstable
Economy. Metroeconomica, 70(5), 500-548. doi: 10.1111/meca.12139