If the domestic government of a small open economy reduces government spending, the real exchange rate...

If the domestic government of a small open economy reduces government spending, the real exchange rate will __________ and net exports will ___________

		a. Increase, decrease
		b. Increase, increase
		c. Decrease, increase
		d. decrease

Expert Solution

A reduction in the government spending will shift the reduce the interest rate and that will cause the capital flight from the country. This will depreciate the local currency and exports will rise. The answer is "C", exchange rate decrease and exports will increase.

Rahul Sunny answered 2 years ago

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,...

The government of a small open economy with floating exchange rate system wants to establish a...

The government of a small open economy with floating exchange rate system wants to establish a stronger currency. Suggest both an appropriate monetary policy adjustment and an appropriate fiscal policy adjustment that would allow the economy to move to a higher exchange rate. Explain your answer using Mundell-Fleming model for each policies. b.What are the consequences of these adjustments on domestic output and net exports?

3. The government of a small open economy with floating exchange rate system wants to establish...

3. The government of a small open economy with floating exchange rate system wants to establish a stronger currency. Suggest both an appropriate monetary policy adjustment and an appropriate fiscal policy adjustment that would allow the economy to move to a higher exchange rate. Explain your answer using Mundell-Fleming model for each policies. (3) What are the consequences of these adjustments on domestic output and net exports? (2)

If a small open economy reduces defense spending, what happens to saving, investment, the trade balance,...

If a small open economy reduces defense spending, what happens to saving, investment, the trade balance, the world interest rate, and the exchange rate? Assume that initially saving exceeds investment. I want to see two sets of graphs illustrating the effects, Make sure you explain what is going on!

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...

Consider the following open economy in which the real exchange rate is ﬁxed and equal to...

Consider the following open economy in which the real exchange rate is ﬁxed and equal to one. Saving, investment, government spending, taxes, imports and exports are given by: S = −156+0.18Y I = I and G = G (have a horizontal line at the top of two letters on the right side.) T = T0 +0.1Y Q = q1Y and X = X where T0 is the level of autonomous taxes, and q1 is the marginal propensity to import. Let...

In a small open economy, output (gross domestic product) is $25 billion, government purchases are $6...

In a small open economy, output (gross domestic product) is $25 billion, government purchases are $6 billion, and net factor payments from abroad are zero. Desired consumption and desired investment are related to the world real interest rate in the following manner: World Real Interest Rate Desired Consumption Desired Investment 5% $12 billion $3 billion 4% $13 billion $4 billion 3% $14 billion $5 billion 2% $15 billion $6 billion For each value of the world real interest rate, find...

1.) A small open economy with a floating exchange rate is in recession with balanced trade....

1.) A small open economy with a floating exchange rate is in recession with balanced trade. If policymakers want to reach full employment while maintaining balanced trade, what combination of monetary and fiscal policy should they choose? Use a graph and explain the effects of each policy.

(a) In a small open economy with a floating exchange rate, how does an exogenous increase or decrease in investment effect real interest rate rate in the short run

(a) In a small open economy with a floating exchange rate, how does an exogenous increase or decrease in investment effect real interest rate rate in the short run(b) According to the Mundell-Fleming model, under flexible and fixed exchange rates how will expansionary fiscal policy effect income in the short run(c) (true or false ) Assume two economies are identical in every way except that one has a lower saving rate. According to the Solow growth model, in the steady state...

Suppose you live in a small open economy with flexible prices and a flexible exchange rate....

Suppose you live in a small open economy with flexible prices and a flexible exchange rate. A) Suppose that the world interest rate rises. What is the effect of this change on the exchange rate and investment? B) The citizens of your country like to travel abroad. Would the change in the world interest rates affect their cost of spending abroad? C) Suppose that the introduction of more cash machines (in domestic) reduces demand for money (in domestic). Explain how...

Question