Consider a small open economy where workers care about their real consumption wage. Assume, in addition,...

Consider a small open economy where workers care about their real consumption wage. Assume, in addition, that the Marshall-Lerner condition holds. This economy starts at the longrun equilibrium and suddenly experiences the following shock. Households get easier access to mortgages and, as a result, the savings rate falls in this economy. What will be the effect of this shock on the medium run equilibrium in this economy? Describe the changes in the equilibrium employment, RER, Trade Balance and real consumption wage. Draw the appropriate diagrams and briefly explain your reasoning. [Word limit = 250 words]

Expert Solution

Rahul Sunny answered 2 years ago

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