1.) Why does a temporary increase in government spending cause the current account to fall by...

1.) Why does a temporary increase in government spending cause the current account to fall by a smaller amount than does a permanent increase in government spending? Explain with reference to a DD-AA graph with an XX line included.

(Hint: Draw an XX line which shows every combination of E and Y at which the current account is balanced, i.e. X = IM and NX = 0. Assume we start at an equilibrium E and Y on that line. Now, make the necessary changes in DD and/or AA due to the fiscal expansion to show where the equilibrium ends up relative to that XX line.)

2.) Suppose the Fed engages in contractionary monetary policy. Assume that contracts fix the volume of goods traded for at least a year.

Draw the J-curve which shows what will happen over time.

Expert Solution

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Rahul Sunny answered 2 years ago

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