Question

1. At a given exchange rate what does a quota do to desired net exports? As a result of this change which curve in the open-economy model shifts and which direction does it shift?

2. If for some reason U.S. residents increase their purchases of foreign assets, then all else constant which curve in the market for foreign-currency exchange shifts and which direction does it shift? What happens to the exchange rate?

3. Suppose the economy is in long-run equilibrium. Then because of corporate scandal, international tensions, and loss of confidence in policymakers, people become pessimistic regarding the future and retain that level of pessimism for some time. In the short run what happens to the price level and real GDP?

5.There are three factors that help explain the slope of the aggregate demand curve. Which two are less important? Why are they less important?

Thank you!!

Answer 1

1. At given exhange rate , a quota impacts the net export(X-M) negatively. This is because quota causes certain restrictions on the export levels , leading to the fall in export content (x) to fall.

Components of open economy such as saving, capital inflow falls while rate of interest and real interest rates in domestic market also falls.

2.With the more buying of foreign currency, the demand for dollar is falling, also the supply reduces in the domestic currency. This will stablize the exchange rate but the quantity of dollar in economy will surely fall to Q2.

C.In short run the Aggregate demand for the economy falls leading to fall in the price levels. The real gdp or the net output of the economy alse suffers and sees a fall. This can be seen from given diagram:D.The three reasons are:

1.Pigou's wealth effect

2.Keyne's interest rate effect

3.Mundell flemming exchange rate effect.

Keynesian effect is considered the most important effect. This effect states that quantity of money demanded is dependent upon the price level. The rise or fall of quantity of money demanded, the wealth and the exchange rates , both are impacting it.

( which are the other two impacts resulting in downward slopping aggregate demand curve.)