Assume That the Government Has a Target Value, X, for the Current

question 69

Essay

Assume that the government has a target value, X, for the current account surplus.
(a)What is the goal of external balance?
(b)Assume that we are dealing with only the short run, what are the values of P and P∗?
(c)Given fixed P and P*, what would happen if E rises?
(d)Given P and P*, what would happen if T decreases, i.e., an expansionary fiscal policy?
(e)Given P and P*, what would happen if G increases, i.e., an expansionary fiscal policy?
(f)Given all of the above, what is the relation between the exchange rate, E, and fiscal ease, i.e., an increase in G or a reduction in T?
(g)Assume that the economy is in external balance. What will happen if the government maintains its current account at X, but devaluates the domestic currency?
(h)Assume that the economy is at external balance. What will happen if the government raises E?
(i)Assume that the economy is at external balance. What will happen if the government lowers E?

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Definitions:

Temporary Differences

Temporary differences are differences between the carrying amount of an asset or liability in the balance sheet and its tax base, leading to deferred tax assets or liabilities.

Taxable Income

Taxable income is the amount of income used to calculate how much tax an individual or a company owes to the government in a given tax year.

Pretax Financial Income

Income of a company calculated before taxes are deducted, often compared to taxable income for tax planning.

Deferred Tax Asset

A tax benefit that arises from temporary differences between the tax and accounting treatment of assets and liabilities, to be utilized in future periods.