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]

Solutions

Expert Solution

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Assume that in a small open economy with full employment, consumption depends only on disposable income.

The Open Economy ModelAssume that in a small open economy with full employment, consumption depends only on disposable income. National saving is 300, investment is given by I = 400 – 20r, where r is the real interest rate in percent, and the world interest rate is 10 percent.If government spending rises by 100, does investment change? What is the level of investment after the change?Does the trade balance change if G rises by 100? If it changes, does it...

Consider a two-period, small, open, endowment economy without investment and government expenditures, but with durable consumption...

Consider a two-period, small, open, endowment economy without investment and government expenditures, but with durable consumption goods. Purchases of durable consumption goods in period 1, denoted C1, continue to provide utility in period 2. The utility of households in period 2 depends on purchases of durable consumption goods in period 2 , denoted C2, and on the un-depreciated stock of durables purchased in period 1. Durable consumption goods are assumed to depreciate at the rate δ ∈ [0, 1]. Household...

Assume that in a small open economy where full employment always prevails, national saving is 250....

Assume that in a small open economy where full employment always prevails, national saving is 250. a. If domestic investment is given by I = 650 – 22 r, where r is the real interest rate, what would the equilibrium "r" be if the economy were closed? b. If the economy is open and the world interest rate is 11 percent, what will investment be? c. Using your answer from part b., what is the current account surplus/deficit ?...

Suppose there is an exogenous decrease in consumption,. Use the small open economy model to answer...

Suppose there is an exogenous decrease in consumption,. Use the small open economy model to answer the following: 1. How does this shock affect national saving? Explain. 2. Does this shock affect net capital outflows? Explain why or why not. 3. What happens to the value of the domestic currency in the foreign exchange market? Why does the value of the domestic currency change? 4. Will net exports change? Why or why not? 5. Will domestic investment change? Why or...

Consider an economy where an agent produces a consumption good with labor.

Consider an economy where an agent produces a consumption good with labor. The agent has the following preferences: u(c, l) = √c+ α√l where c is consumption, I is leisure, and a is a parameter. An agent splits her time between labor and leisure such that n +l= 1 where n is how much she works. Prices for the consumption good is p and labor is w. The agent works at a competitive firm (i.e. zero-profit) which transforms labor using the technology y =F(N)...

Consider the following open economy (Home economy). The real exchange rate is fixed and equal to...

Consider the following open economy (Home economy). The real exchange rate is fixed and equal to one. Saving, investment, government spending, taxes, imports and exports are given by: S = -60 + 0.18Y I = I G = G T = T0 + 0.1Y Q = 0.1Y X = 0.1Y* where T0 is the level of autonomous taxes, and an asterisk is used to designate variables related to the foreign economy. Assume Foreign economy has the same equations as Home...

Assume that the real wage in an economy is held above equilibrium. a. Graphically illustrate how...

Assume that the real wage in an economy is held above equilibrium. a. Graphically illustrate how an increase in technology that raises the demand for labor will cha number of unemployed workers. Be sure to label the axes and the quantities of labor hired and after the technological progress. b. Explain in words what happens to the number of unemployed as a result of this change.

a. In a small open economy, the domestic real interest rate can be higher than the...

a. In a small open economy, the domestic real interest rate can be higher than the world real interest rate. Answer true, false, or uncertain. Please briefly explain your answer. b.Consider a country that is initially in steady state. According to the Solow–Swan model, if the technology parameter A increases but the saving rate falls, then the per capita capital stock increases and the country moves to a new, higher steady state level of per capita income. Answer true, false,...

Consider an open economy with a reasonable level of government debt in proportion of the real...

Consider an open economy with a reasonable level of government debt in proportion of the real GDP. Explain what would be an optimal fiscal policy strategy in an interval of time composed by phases of expansion and contraction of the GDP. What would change if the level of government debt was excessively high?

Consider the DD-AA small open economy model a. Assume imperfect asset substitutability. The interest parity condition...

Consider the DD-AA small open economy model a. Assume imperfect asset substitutability. The interest parity condition now equalizes the domestic return to the foreign return plus the expected dollar depreciation and a risk premium. Suppose there is a permanent rise in domestic government spending, what is the impact of this on output?

Subjects