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In: Economics

a.) Moldavia, an open economy currently in long-run macroeconomic equilibrium, has become concerned about its debt...

a.) Moldavia, an open economy currently in long-run macroeconomic equilibrium, has become concerned about its debt levels and the effects those levels might have on its international financial position. The Moldavian parliament decides to implement austerity measures to bring those debt levels down. Suppose the country cuts government spending to reduce its deficit, and this policy reduces the risk premium on Moldavian assets. Economists also note that in the new long-run equilibrium, the quantity of national savings stays the same. Construct a well-labeled, three-panel diagram (the "trifecta") to analyze the impacts of this policy on the Moldavian economy. The supply curve for loanable funds in Moldavia is upward-sloping; the demand curve for loanable funds in Moldavia is downward-sloping. Specifically, what happens to the following variables in Moldavia as a result of this policy: *The real interest rate *The real exchange rate *The quantity of net exports *The quantity of domestic investment

(i) The fall in the risk premium on Moldavian assets ______ foreigners' demand for Moldavian assets (including Moldavian government bonds), thus ______ bond prices.

A. Decreases ; increasing

B. Increases ; increasing

C. Increases ; decreasing

D. Decreases ; decreasing

Solutions

Expert Solution

Rahul Sunny answered 8 months ago
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