Case Analysis 4
Read the CASE ANALYSIS: The Limits to Macroeconomic Policy (page 261).
Write a 5 page paper (1500 or more words) in APA format in response to the questions: a. Provide an overview of this case analysis; summarize the key points. b. Explain why a currency devaluation, whether intentional or not, would be a problem. c. Consider the question: Does this mean that developing countries cannot use expansionary macroeconomic policies? Provide an answer to this question.
Below is a recommended outline. 2. Cover page (See APA Sample paper) 3. Introduction a. A thesis statement b. Purpose of paper c. Overview of paper 4. Body (Cite sources using in-text citations.) a. Provide an overview of this case analysis; summarize the key points. b. Explain why a currency devaluation, whether intentional or not, would be a problem. c. Consider the question: Does this mean that developing countries cannot use expansionary macroeconomic policies? Provide an answer to this question. 5. Conclusion – Summary of main points a. Lessons Learned and Recommendations 6. References – List the references you cited in the text of your paper according to APA format.
(Note: Do not include references that are not cited in the text of your paper)
Chapter 11 An Introduction to Open Economy Macroeconomics 261
The Limits to Macroeconomic Policy
In 1900,Argentina was among the richest countries in the world.Its good fortune
was not to last, however, and by mid-century its per capita income had fallen
behind.Although it still had the highest per capita income in Latin America, the
gap with western Europe and North America was substantial,and it was not get-
ting smaller when it was hit by the Latin American debt crisis and the Lost
Decade of the 1980s (see Chapter 15). The debt crisis was vicious and hard to
shake off.In 1989,seven years after it began,Argentina was still caught in it,and
its GDP fell 7 percent while inflation hit 3,080 percent.Politicians tried a variety
of experiments to get out of the recession and hyperinflation, but none of them
led to sustained growth or brought down the inflation rate. In 1991, a radical
experiment was tried. The country fixed its currency to the dollar at a 1:1 rate
and dramatically restricted the creation of new money. For every new Argentinegroups are considered unemployed. In addition, there are always a number of
people who have voluntarily quit their jobs to look for better ones, and people
who lack the job skills they need to find a job.
In a strong economy, unemployment may temporarily fall to a very low level,
but this tends to resolve itself. Initially, employers may grab whoever is available
to fill their job vacancies, but as the pool of the unemployed dries up, they raise
wages and look for ways to get by with fewer workers.Ultimately,this returns the
unemployment rate to its normal level. Conversely, in a weak economy unem-
ployed workers put downward pressure on wages, which ultimately resolves the
problem of unemployment, since employers hire more workers when wages fall.
The most controversial issue is how long these changes might take. Some
observers believe they happen fast, while others are skeptical, particularly about
the speed at which wages fall.In one sense,the debate over the amount of time it
takes an economy to reach its long-run equilibrium at full employment is a debate
over the meaning of the long run.Is it two years,five years,or ten?
In Chapter 10, we saw that in the long run, purchasing power parity deter-
mines exchange rates. Fiscal and monetary policy may cause deviations from
purchasing power parity, but in the long run, a combination of exchange rate
changes and changes in domestic prices will restore balance to the purchasing
power of national currencies.
The current account must also tend toward balance in the long run.No nation
can run deficits forever,nor can it run surpluses forever.Since deficits are equiv-
alent to foreign borrowing and surpluses equivalent to foreign lending,there are
limits in each direction. The limits are not well defined, however, and countries
such as the United States have been able to run enormous deficits for long peri-
ods,while countries such as Japan have run surpluses.