1.Stagflation was a serious problem in the US in the 1970s and we illustrated this in the class on short-term fluctuations. The term was also used to describe the state of the US economy in late 2021.

a. What is stagflation?

b. You are an economic advisor to the President and the President asks you to devise a set of fiscal and monetary policies to cure stagflation. What would be your response? Explain how your policies would affect AS and AD.

2. The US is running a large trade deficit (more than $900bn trade deficit in goods in 2019; and more than $675bn in goods and services).

a. What is a trade deficit?

b. How can a flexible exchange rate help a country reduce its trade deficit?

c. Explain why, even with a flexible exchange rate, the trade deficit might not be completely eliminated.

3. The result of the growing trade deficit between the US & China was the accumulation of enormous amounts of $-denominated reserves by China. Recently, however, Chinese officials have been calling for a global reserve currency to replace the $. This was a response to the US policy of "quantitative easing" implemented after the Great Recession caused by the subprime mortgage crisis.

a. What is "quantitative easing"?

b. Why did/does the US employ this policy?

c. Why are Chinese officials worried about it?

4. Suppose a country pegs its currency to the US dollar:

a. What happens to the country's real exchange rate if it experiences higher rates of inflation than the US and what is its effect on export competitiveness?

b. What happens to the country's nominal exchange rate vs. the US dollar, and vs. other currencies, if the US raises its interest rates?

c. As a result of the above developments (higher inflation and/or the US raising its interest rate), the country's currency is the subject of a speculative attack - a massive selloff of the currency. How can the government respond to maintain the peg?

d. If the country uses monetary policy to defend the peg, explain what might be the drawbacks of this.