Assume that the world consists of two large open economies _– the U.S. and Europe. Suppose...

Assume that the world consists of two large open economies _– the U.S. and Europe. Suppose that Europe decides to increase net taxes (T) to reduce its budget deficit. Using the large open economy model (LOE), illustrate and explain how this policy will affect the U.S. real interest rate (r), net capital outflows (CF), the real exchange rate ( ), the nominal exchange rate (e), net exports (NX), and investment (I).

Expert Solution

Rahul Sunny answered 2 years ago

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