Question

The Kingdom of Wrigley is an archipelago in the South Pacific. The economy is based on

fishing and agriculture, and currently imports more than it exports. The economy is doing well

right now, but not great, and the banking system is stable yet fragile. The central bank is not

independent and follows the instructions of The King.

The King, wanting new economic ideas, and having been told you took a macroeconomics class

before moving to the Kingdom, invites you to the palace to meet with his son, the Crown

Prince, and also the Finance Minister. The Crown Prince has a number of questions for you:

[Be sure to include what questions you would ask the Crown Prince.]

1. How specifically can we use fiscal policy to improve our economy? What should our

goals be? Should we have any concerns?

2. How specifically can we use monetary policy to improve our economy? What should our

goals be? Can the monetary policy be used to stabilize the economy?

3. The Prince and the Finance Minister are planning on splitting the responsibilities of fiscal

and monetary policy, with the Prince focusing on the more important one, which one

would you recommend the Prince oversee himself and why?

4. The Prince would like to use the expenditure method to calculate the Kingdom’s GDP,

explain how that works to him, and recommend what he should focus on to grow the

economy.

5. Are there any specific strategies we might employ to grow the economy, and if yes,

which one is best for us?

6. Our small army and navy are effective, but what should we be prepared to do

economically if we feel an invasion by a foreign power is imminent and we might have to

increase military spending? What options do we have? Which would you recommend

and why?

7. Both men harbor great confusion with regard to the different economic multipliers.

Without using too much math, explain the multipliers to them in a manner they can

understand. What do they illustrate and are they important? Why or why not?

8. The Crown Prince believes the economy is operating at near full efficiency in its current

state. Is cutting taxes a good idea for stimulating the economy? Why or why not? If not,

what should he do to grow the economy?

9. One of the islands in the Kingdom is very poor on the aggregate and seems stuck.

Explain why that might be. What might the Prince do to improve the economy of that

island?

10. The Crown Prince is aware that the United States employs a Fed Rule when setting

interest rates. Explain how that is used and what it illustrates. Can that help him make

decisions? Would it change during a pandemic?

11. Are there criteria that we can use to evaluate our economic policies? Can you give us

any examples?

12. We currently import more than we export. Is a tariff on imports a good idea? Are there

any other trading strategies we might explore? What should we focus on?

Answer 1

A) fiscal policy plays very important role in development of any country. In this case I will suggest prince to maximize government investment to other sectors, since economy is totally dependent on fishing that why they need to diverse their resources.

2) money supply should be balanced . Govt should charge minimum tax on consumption of domestic produced goods so that their BOP also improves. Subsidy should be given on investment. Exchange rate should be controlled.

3)fiscal policy because by minor manipulation govt can alter complete figure of economy directly that why it is more effective.

4) consumption + investment + net export + government expenditure.

They should try to maximize government expenditure.