Question 1 a) Using graphs and explaining the mechanisms, determine the equilibrium in an open economy...

Question 1

a) Using graphs and explaining the mechanisms, determine the equilibrium in an open economy using the model of the market of loanable funds and foreign currency exchange. Discuss how the interest rate, r, and the exchange rate, e, are determined.

b) In the above, what happens when the government runs a budget deficit?

c) In question (a), what happens if the government decides to implement an import quota? Briefly explain why a government would implement such a trade policy.

d) Explain, using graphs, how the political instability in Mexico in 1994 lead to capital flights

Expert Solution

Rahul Sunny answered 8 months ago

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