Suppose the government of a small open economy engages in contractionary fiscal policy (raise income taxes)...

Suppose the government of a small open economy engages in contractionary fiscal policy (raise income taxes) in order to slow down economic activity. Use the long-run model of a small open economy to graphically illustrate the impact of this contractionary fiscal policy on the real interest rate and the trade balance. Assume the country starts from a position of trade balance, i.e., exports equal imports. Be sure to label: (i) the axes; (ii) the curves; (iii) the initial equilibrium values; (iv) the direction the curves shift; and (v) the new long-run equilibrium values.

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Rahul Sunny answered 1 year ago

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